When the shareholders or partners of a business fight, that dispute can unfold in various ways. When there’s an imbalance in control of the company (i.e. when one party to the dispute represents a majority interest in the business and the other party has a minority stake) the resulting situation can be a squeeze out or freeze out. A squeeze in this context is when the majority party tries to coerce the minority party into giving up their share of the company, their stock or their partnership interest. The end goal for the squeezing party is to push the opposite party in the dispute out of the business.
There are several strategies the majority party can employ in a squeeze. Much of them come back to the majority’s chief advantage in the dispute, namely that they hold a majority interest. While corporate law is not without protections for minority shareholders, these safeguards are weaker than in other areas of law. This is not to say the rule of the majority is absolute in corporate law, nor that minority shareholders have no recourse when they find themselves the target of a squeeze. But it means that minority shareholders and partners need to be on guard and take an active role in resisting an attempt to squeeze them out of the business.
Many possible methods of squeeze play are indirect. Two of the most common such examples are when the majority tries to deny the minority party the benefits of their stake in the business, thus hopefully lessening the value of that stake in their eyes and encouraging them to take a buyout, or to simply exclude that minority shareholder or partner from involvement in the business. The majority can, for example, decide not to issue dividends. They could also not hire the minority party for any positions with the company. The majority party might also exclude the minority from meetings and discussions about the future of the business. If their stake isn’t providing them any benefit and if they don’t feel connected to the business, the minority party may be more inclined to go their separate way.
These sorts of decisions typically fall to the officers of the company and so there’s not much room for reply on the part of the minority shareholder. Not at face value, any rate. But minority shareholders are not without options. The Business Corporation Act delineates shareholder rights and these rights apply to majority and minority shareholders alike. In the example of a minority party who has been excluded from company meetings, if that shareholder asked for financial information about the company and that request was ignored or denied — in the interest of excluding the minority party from the operation of the business — that minority shareholder now has a case against the majority. Because the BCA makes it clear that shareholders have the right to review the books and records of the company.
One of the more technically involved methods of squeeze is a freeze out by merger. This is when the majority party incorporates or organizes a new entity. merges it with the original company, and uses the reorganization of the merger process to try to push the minority party out. We will cover freeze out mergers in greater depth in a future post.
However the squeeze unfolds, if it leads to litigation two concerns are going to be paramount: whether or not the squeeze party’s rights as a shareholder or partner have been violated and whether or not the squeeze is in the best interest of the business itself. Both concerns will have much influence over whether or not the courts are inclined to view a squeeze as minority oppression.
Of course every case is unique and may well hinge upon the minutiae particular to it. Any party involved in a dispute among shareholders or partners is well advised to seek experienced counsel to ensure they achieve the best possible outcome.
You are welcome to contact Horowitz Law Offices at (312) 787-5533 or firstname.lastname@example.org