It’s not a term of art, but a useful phrase in explaining this part of our practice is “we handle business divorces.” Most people aren’t familiar with oppression of minority shareholders, squeeze outs, partner disputes, and so on, but just about everyone knows what a divorce is. A squeeze out is a lot like a divorce. It’s the end of a partnership. And just like a divorce, though there is no reason in principle it can’t be a civil and straightforward affair, it very often isn’t.
At core, a freeze out or squeeze is when shareholders or partners are in a dispute and a majority party tries to push the minority party out of the business. The squeezing or freezing from which the terms arise refers to the action of the majority party trying to exert influence on the minority. Sources will differ on just what kinds of actions qualify as squeezing and which as freezing and the situations themselves can get fairly complicated. The core, fortunately, is fairly straightforward.
It starts with a dispute between shareholders or partners. That could be anything. Maybe the shareholders disagree about the direction of the business. Maybe the disagreement is personal. Divorce, falling out, economic downturn–the list of possible causes is virtually endless. Ultimately the source of the dispute doesn’t matter very much. What counts is what happens next.
In civil law, a variety of protections are in place around minority interests. In business law, by contrast, the power of the majority is not nearly so restrained. The law is in general less concerned with protecting the interest of minority parties in the corporate arena. This does not mean, however, that a majority party among shareholders can do whatever they please. Far from it. All shareholders have rights. In Illinois, those rights are primarily laid out in the Illinois Business Corporation Act, typically shortened to BCA. Whether those rights have been violated is often one of the key questions in a shareholder dispute.
Here’s an example. One of the softer means of squeezing someone out of a business is denying them opportunities to be involved in the running of that business. That means not hiring them for positions, excluding them from shareholder meetings, things like that. Maybe if they don’t feel like they’re part of the company, they won’t consider holding their interest worthwhile and they’ll be motivated to sell. But let’s say the shareholder being squeezed hasn’t been to a board meeting in a while and asks for information on the company. If the squeezing majority doesn’t honor that request, they’ve got a problem. Because the BCA makes it clear that shareholders have the right to review the books and records of the company, to look under the hood, as it were, of the business in which they own a stake.
To be clear, the act of squeezing or freezing a shareholder out of a business is not necessarily in itself legally objectionable. Especially in cases where the departure of that shareholder is in the best interests of the company, applying pressure to persuade them to sell their shares is more likely to be viewed favorably by the courts. What matters in a given dispute are the particulars. Is a minority shareholder being squeeze, or are they being oppressed? Are their rights as a shareholder being violated? Is the squeezing party acting out of the best interests of the company or are they looking to enrich themselves? It’s these details, these fine points, on which the whole case will pivot. In the coming weeks, future blog posts will investigate and explore those details, the myriad particulars of squeeze outs and freeze outs. Of course no blog post can ever describe every situation and each dispute is ultimately unique. The surest way to secure the best outcome for yourself in any shareholder or partner dispute is to retain experience counsel to represent you.