Squeeze Out In Business (Explained: All You Need To Know)

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What Is Squeeze Out

In stocks, squeeze out is a term used to refer to the forced sale of shares by minority shareholders in a company.

In other words, a company can “squeeze out” a minority shareholder by forcing the minority shareholder to sell its shares in exchange for fair cash compensation.

The objective here is for the majority shareholders in a company to effectively eliminate certain minority shareholders so they can exert greater control over the company.

Generally, squeeze out operations are performed using mergers and acquisitions tactics.

First, the majority shareholders in a company will form a new corporation that they own and control.

Then, the newly formed corporation will submit a tender offer to the existing shareholder at an amount just above the stock’s fair market value.

Shareholders will then either tender their shares or not.

To the extent the tender offer is successful, the acquiring company may decide to merge its assets with the existing corporation.

Ultimately, shareholders that do not tender their shares will effectively lose their minority position in the company as the company will no longer have any assets or operations.

The net result is that the minority shareholders are “squeezed out” of the company.

Keep reading as I will further break down the meaning of squeeze out and see how it can be done.

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Squeeze Out Process

The squeeze out technique is generally used by shareholders or groups of shareholders holding a majority position in a company looking to gain more control by forcing minority shareholders to sell their shares.

The most common technique used to squeeze minority shareholders out of a company is through a squeeze out merger. 

Let’s look at the different steps in proceeding with a squeeze out merger.

The first step is for the majority shareholders to create a new company that they fully own and control.

The next step is for the newly formed corporation to submit a tender offer to purchase the shares of the existing corporation.

For the transaction to be legal, the tender offer must be at fair value. 

As such, the tender offer will be just above the existing company’s fair market value.

If the tender offer goes through, the newly created corporation will acquire a controlling interest in the target company.

The acquirer will then merge the assets of the target into the acquiring corporation effectively gutting out the original corporation.

Shareholders that tender their shares receive an amount slightly above the stock price and non-tendering shareholders will lose their shares as the company will cease to exist.

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Squeeze Out Legality

Squeeze out tactics should be handled carefully as regulators tend to closely assess the circumstances of the transaction to determine its legality.

In the context of squeeze out mergers, very often, you’ll have the same company directors and officers representing simultaneously the bidder and the acquirer.

Although the law does not automatically consider this scenario illegal, company directors and officers are required to ensure they always act in the best interest of the shareholders they represent.

So if they are representing shareholders with competing interests, they must ensure that they act fairly and do not violate their fiduciary duty.

Although squeeze out tactics are criticized and perceived negatively, to the extent companies treat minority shareholders fairly and offer fair compensation, the courts will allow the transaction to go through.

In the United States, squeeze out operations are governed by the applicable state laws.

For example, in the state of Delaware, the law permits a parent company owning 90% or more of the shares of a subsidiary to buy out the minority shareholders by paying them a fair cash consideration without obtaining the minority shareholder’s consent.

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Squeeze Out Provisions

Considering squeeze out operations can be legally challenged by minority shareholders or heavily scrutinized by regulators, companies may include squeeze out provisions in their corporate charter as a safety measure.

In essence, companies include squeeze out rights in their charter allowing them to acquire shares of minority shareholders for cash should the company receive a tender offer.

In this context, company directors will have the ability to base their actions and decisions on the rights afforded to them by the company charter, which is well-known to all shareholders.

To the extent minority shareholders challenge the company’s decision to buy them out, the company directors can demonstrate that they exercised pre-defined legal rights in their charter.

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Squeeze Out FAQ

What does squeeze out mean?

In business, squeeze out is a term used to refer to different tactics used by companies to force minority shareholders to sell their shares.

Very often, squeeze out tactics are used in the context of M&A transactions where the majority shareholders form a new corporation, submit a tender offer to buy the shares of the existing corporation, pay fair cash consideration to minority shareholders, and merge the existing corporation’s assets into the new one.

What is the purpose of a squeeze out?

The main purpose of a squeeze out is for the majority shareholders in a company to gain further control by buying out the minority shareholders.

Although squeeze out operations are not well perceived and are criticized by many, to the extent minority shareholders are paid fair compensation, the operation will be considered as lawful.

As such, the minority shareholders will not have any recourse against the company.

What are examples of squeeze out tactics?

Squeeze out tactics can be performed in different ways.

One example is for a company to terminate a minority shareholder’s employment in the company.

Alternatively, a company may choose not to declare any dividends to the extent a certain minority shareholder owns shares in the company.

Another technique is a squeeze out merger where a new company is formed by the majority shareholders who tend to submit a tender offer to buy out the minority shareholders in the target.

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Takeaways 

So there you have it folks!

What does squeeze out mean in business?

In a nutshell, squeeze out refers to the forced sale of shares by minority shareholders in a company in exchange for fair cash consideration.

The objective is for a company to put pressure on minority shareholders so they ultimately sell their shares.

There are many ways companies can squeeze out minority shareholders such as terminating a minority shareholder’s employment agreement, failing to pay dividends, or through a squeeze out merger.

To the extent minority shareholders are paid fair compensation, the transaction will be considered lawful.

However, company directors and officers must ensure they act fairly to avoid violating their fiduciary duties.

Now that you know what squeeze out means and how it works, good luck with your research!

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