The previous posts in this series have primarily looked at squeeze play and similar situations through the eyes of the majority.  Various scenarios have been framed in the context of strategies the majority may employ to the squeeze the minority out of their shares, and the avenues of remedy for the minority have been presented as risks to be planned for and avoided.  For this final installment, the focus will now shift to the other side of squeeze outs, to the minority and how they may attempt to resist the majority’s push.

As previously stated, the laws governing corporate conduct are not nearly so concerned with sparing the minority from oppression by the majority as, for example, constitutional law is.  Whereas the laws governing conduct between citizens are designed to balance majority rule with protection for the minority, in general corporate law is not concerned.  There are three main avenue by which a minority shareholder may mount a legal case against a squeeze out.

The squeezee can attempt to show that the majority have acted illegally.  Majority rule obviously does not permit a shareholder to violate federal or state laws.  If the minority can demonstrate that the majority have committed fraud, perjury or otherwise broken the law, the grounds are set for court intervention into the company, almost certainly derailing the attempted squeeze out.

The concept of fairness is another recourse for the minority.  Although not nearly as strictly or clearly defined as illegal action, accusations of unfairness can nevertheless still be a potent recourse for the oppressed minority.  A group of shareholders who, through a merger, were forced to sell off their shares in a company could argue that because of the price they were given for those shares, they had been dealt with unfairly.  Their years of service to the company entitled them to a fair price.  The argument could also superseded mere considerations of price and instead focus on fair recompense for their years of service to their company. Such an argument’s weakness lies in the difficulty in pinning down just where the line lies between what is fair and unfair and deciding onto which side of that line a given action falls.

The most common and likely the most course of defense for a minority shareholder being squeezed is to seek to prove the majority have violated their fiduciary duty.  Fiduciary, the obligation to act in someone else’s best interest, means in a corporate setting that the directors and officers of a company are expected and bound to act in the best interests of the business and of its shareholders.  No matter what else, the oppressed minority remain shareholders and as such their wellbeing carries some weight.  The minority will try to prove the majority have acted out of consideration for the wellbeing of their own personal finances, rather than the corporate good.  Conversely, the majority may try to demonstrate how the minority are a detriment to overall good of the business, a drain or hindrance to the corporate enterprise.

Generally speaking, the advantage lies with the majority.  As stated before and many times over, majority rule is rule number one.  The minority in any type of squeeze out is, of course, not without options and there is no reason a minority shareholder must necessarily simply accept being squeezed out without retaliation.  The courts have the power, given sufficient evidence, to intervene and override any type of squeeze play.  Still, any oppressed minority shareholder should know that so long as the squeeze play does not violate any laws, does not treat the minority in a manner the courts deem as unfair, and does not constitute a violation of the majority’s fiduciary duty, the minority’s resistance to being squeezed will ultimately not prevail.

For more information on squeeze outs or other corporate disputes, contact the Chicago corporate attorneys at Horowitz and Weinstein.

Legal Disclaimer

The principle of majority rule guides the day to day existence of any corporation.  When conflicts arise between shareholders, barring a breach of fiduciary or the commitment of a crime, the majority will win out.  If a company’s directors want to merge with a former competitor and the majority of its shareholders agree, assuming the merger is approved by regulatory agencies, the merger will go through no matter how fervent or vocal the opposition to the merger.  Deadlock is a situation in which a corporation becomes stuck, when either a majority or greater number of required votes, as provided for by the company’s bylaws, cannot be reached, or when a decision cannot be reached regarding the election of new directors.  When corporate deadlock reaches a point where its paralysis is deemed to be detrimental to the company and its shareholders, the courts have authority to intervene to resolve the deadlock.  The rules for this intervention vary by state.

In the State of Illinois, one of two conditions must be met for a court to intervene to breakup corporate deadlock.  Either the directors are deadlocked by an even split over an issue, or by the inability to acquire the necessary votes to move forward or the shareholders have for two annual meetings failed to elect new directors after the terms of the previous directors have expired.  In either case the law further stipulates that the existence of deadlock alone is not enough to justify court intervention.  The deadlock must be also be causing demonstrable harm to wellbeing of the company and its shareholders.  If one of these conditions is met, the courts are empowered several options by which they may seek to end the deadlock.  These rules of intervention also apply, it should be noted, when the court is coming to the defense of an oppressed shareholder, or when it is deemed the corporation or its directors have acted illegally.

Once Illinois courts have grounds for intervention they wield tremendous power.  The court may remove or appoint officers and directors and they can also appoint interim directors to serve until the situation is resolved.  They may rewrite corporate bylaws or amend corporate charters.  They may override the actions of any officer or director.  They can cause the payment of dividends, award damages, arrange terms for one shareholder to buy the shares of another, submit the corporation to some form of official dispute mediation, or they can even cause the corporation to dissolve, although this final option is reserved as a last resort solution.  Generally a period of court intervention concludes with a new cycle of elections to appoint the board of directors.

For further information, contact Horowitz and Weinstein.

Next installment: Resisting the Squeeze

Legal Disclaimer

Withholding of benefits and corporate restructuring are the two main categories of squeeze out corporate disputes.  A third category exists more or less encapsulating all the additional and ancillary techniques by which the majority can gain control of the minority’s shares.  These are most often used in addition to other squeeze techniques.  They are rarely sufficient on their own to get a minority shareholder to sell.

Subterfuge tends to play a key roll in any squeeze out.  If a minority shareholder is unaware that the majority is seeking to squeeze them out they are less likely to make preparations to resist such an attempt.  Rules vary by state, but directors are not always required to notify all shareholders when they hold meetings.  Even if notification is given, the meeting could be held at a time or place inconvenient for the minority shareholder.  Squeezing the minority out of their shares is made easier when the minority is not able to voice their opposition.  This can likewise be accomplished by modifying corporate voting rules.  Typically a minority with sufficient votes will have some representation on the board of directors.  Modification to the voting rules can deny the minority this power and a minority without representation on the board of directors becomes much less able to resist squeeze play.

Denying dividends is a common squeeze tactic.  Less common but very effective in the right situations is the threat of paying large dividends.  This is most potent when the minority is in a higher income tax bracket than the majority.  Large dividends to everyone will represent a greater loss in taxes to the minority in the higher bracket and this may be sufficient motivation to convince them to sell their shares.

A generally effective tactic, however it plays out specifically, is to wear out the minority shareholder, to erode their will to resist. This can be accomplished by dragging out legal processes, through overt hostility and disrespect, or by concealed or deceptive dealing.

No matter the tactic the chief risks remains a breach of fiduciary duty, the obligation of directors to act in the interest of the business, of the shareholders.  Fraud is also a concern, especially in situations where information is intentionally withheld.

For more information on squeeze outs or other corporate disputes, contact Horowitz and Weinstein.

Next installment: Corporate Deadlock and Court Intervention

Legal Disclaimer

Whenever the majority tries to acquire the share of the minority against their will, a squeeze out occurs.  A variety of squeeze out techniques resolve the corporate dispute and accomplish the removal of the minority through changes in corporate structure.  As compared to the methods presented in my last installment, “The Siege”(with link to preceding post), squeeze outs based around restructuring rather than trying to  persuade or coerce most often put the minority shareholder in the position where there is no other choice but to sell.  In general, the squeeze out techniques described in this post all take advantage of the authority state and federal statutes grant to directors and majority shareholders during mergers, processes of amending corporate charters, and other restructuring processes.

When two companies merge, the board of directors of each company wield considerable control over the particulars of the resulting entity.  In the process of reorganizing their company, the majority can effectively force minority shareholders to sell their shares.  Most states grant to the directors organizing a merger the authority to force dissenting shareholders to accept buyout agreements.  A less direct but still viable option is to set up the conversion of shares from the parent company to the merged company at terms that are unfavorable to the shareholder, thus further encouraging a sale of shares.  Some states require that all mergers have a demonstrable business purpose to be approved, while others will not find fault with the majority shareholder who incorporates a new company just so it can merge with the old company and squeeze out minority shareholders.  In all cases the common law concepts of fairness and fiduciary duty serve as guiding principles.  Courts that have allowed mergers enacted solely to squeeze out shareholders without business purpose have ruled that so long as a shareholder receives fair price for their shares and in general has been dealt with fairly, no breach of fiduciary duty has occurred.

Squeeze out by merger is relatively simpler when the two companies merging are parent and subsidiary and the parent owns a significant majority of the subsidiary’s stock (over 90% in most states).  These so called “short form mergers” require no vote by the subsidiary shareholders, but simply a resolution by the parent’s directors, paperwork filed with the state, and notification of the subsidiary shareholders.  Those shareholders who dissent have the right to have their shares appraised and to be paid accordingly.  Courts are generally less likely to intervene on the behalf of minority shareholders in short form mergers than in other merger situations.

Corporations may sell assets, dissolve, or otherwise restructure themselves so as to benefit the majority and oppress the minority.  Rules governing such actions vary by state, but almost all require a majority or supermajority of shareholder support before any such action can take place.  Majority among the directors is not sufficient.  In general the goal in any of these scenarios is to shift and rearrange corporate assets to apply pressure to the minority.  A corporation, for example, might decide to separate its assets, funneling the rewards of the profitable assets to the majority and likewise directing to the minority  the results of the less favorable assets.

Changes to corporate bylaws or amendments, processes during which most states grant considerable favor and authority to the opinion of the majority, can be used to squeeze out minority shareholders.  A variety of techniques may be used to alter the value, classification and rights of the minority’s shares.  Bylaw modifications can similarly be used to aid other squeeze out techniques.  Veto powers, for example, can be revoked, removing a roadblock to a merger or restructure.  Bankruptcy and similar proceedings can also be used to enact a squeeze out.

In all the above cases, the main considerations remain whether or not the majority has breached their fiduciary duty.  Although the courts recognize the principle of majority rule, no matter how small their claim a shareholder is still a shareholder, part owner of the company, and the directors of the corporation in which they own stock are obligated to act in the interest of the shareholders.  Squeeze play that, in the eyes of the courts, serves to line the pockets of the majority at the clear expense of the minority is likely not to stand.  Conversely, the misfortunes of a minority shareholder, if incurred as part of an operation which is seen to benefit the larger corporation, are almost guaranteed to be viewed as collateral damage.

For more information, contact Horowitz and Weinstein.

Next installment: Minutia

Legal Disclaimer

A squeeze out is a corporate dispute that coerces an initially unwilling minority shareholder to sell his or her shares to the majority.  This can be accomplished through a variety of tactics and most squeeze outs in practice employ several to achieve their goal.  The following techniques seek to persuade or push the shareholder to sell.  I have chosen the metaphor of the siege to represent how these kinds of squeeze play generally involve attempts to cut the shareholder off from many of the benefits of their shares.

One of the most obvious squeeze plays is to terminate the minority shareholder’s employment.  This has the dual benefit of cutting off their salary and removing them from the directorate of the company.  In the absence of compensation, the shareholder will increasingly become more likely to agree to a buyout of their shares.

Another option is to withhold dividends from the shareholder.  C corporations typically compensate their employees in salary since dividends incur double taxation, but in S corporations dividends are a very common form of compensation and dividend withholding can be a potent component of a squeeze out.  Again, just like with denying salary, the idea is simply to cut the minority shareholder off from the benefits of their shares, thus encouraging them to sell.

Rather than directly oppressing the minority, the majority can indirectly apply pressure by increasing their own compensation.  This is accomplished by siphoning an increased share of revenue to themselves in the form of salary, benefits, bonuses and other compensation.  Aside from creating a situation which the minority is likely to regard as unfair, more importantly this practice can impair the company’s perceived earning power.  Earning power is often determined by looking at a company’s recapitalization of its assets, and if those assets are instead being funneled to a few shareholders the whole company’s value will be reduced, lowering the value of the minority’s shares and applying pressure for them to sell.

Finally, the majority can squeeze the minority by denying access to information.  Withholding information is a powerful addition to other squeeze out techniques, and it is usually a part of any squeeze.  The actions of the majority to restructure the company or to deny dividends, are more effective if the minority does not know they are coming.  Information blackout can also squeeze on its own. The squeezee, for example, may not know that they are a shareholder.  Perhaps they inherited shares in a relative’s will, but they never learned this fact.  Other shareholders could manipulate this ignorance to perform a variety of actions to squeeze the minority.

In any of the above cases the actions of the majority are not without risk.  As a general principle, state and federal courts have held that a shareholder is part owner of a company and as such is entitled to information about that company’s operation. The majority must always be wary of placing themselves in a situation where they may be accused of breaking their fiduciary duty or of being wasteful.  An elected director of officer of a company is expected to act in the interests of that company.  A director is more likely to run afoul of the court’s judgment for overcompensating themselves rather than terminating the employment of or withholding dividends from the minority since courts have typically held that the sound judgment of the directors is sufficient basis upon which to make decisions on dividends and employment.  Much like Congress, rule of the majority is the guiding line in corporate governance, but unlike in the Senate, few rules exist in the corporate sector to protect the rights of an oppressed minority.

For information contact the Chicago corporate dispute attorneys at Horowitz and Weinstein.

Next installment: Restructuring

Legal Disclaimer

In corporate law, a squeeze out is a type of corporate dispute.  It occurs when a person or persons who together control the majority of shares in company coerce minority shareholders to sell their shares.  There is no set procedure for a squeeze out.  The action is defined by its results, not the methods used to attain them.

Over the next several posts I’m going to dive into the subject of squeeze play and oppression of minority shareholders.  This first post will cover the motivations behind squeeze play.  Future posts will dig into the various ways squeeze outs can unfold, a well as touching on the remedies available for the oppressed minority.

Surprisingly few squeeze outs result from simple greed, avarice or desire for power.  These do of course happen, but in general people are not willing to undertake legal litigation, a complex and oftentimes sluggish process, solely for the want of more money or control.  Far more commonly than greed, ambition, born from talent and a desire to actualize one’s potential, leads to squeeze play.  A shareholder may decide that he or she is being held back by other shareholders.  This may be simple vanity or it may result from a genuine mismatch of talent.

Family and marital discord can also often lead to squeeze outs.  Especially common is the situation in which the founder of a company dies and divides it up among his or her children and years down the line, disagreement among the children leads to squeeze play.  Two brothers, for example, may inherit their parents’ business.  Perhaps one brother is heavily involved in the operation of the company but the other takes no interest and simply draws dividends from his stock.  Perhaps the uninvolved sibling even actively votes against the efforts of his brother despite his being relatively uninvolved in the company.  In this situation, the older brother might pursue a squeeze out.

Whether or not family ties are involved, many squeeze outs come about because minority shareholders are, in the eyes of the majority, standing in the way of the growth of the company.  Likewise, squeeze outs can come about when a minority shareholder leaves a company without selling off his or her shares and then goes to work for a competitor.  Being a shareholder, this individual would be entitled to operational information about the company, information that would almost certainly benefit the competitor.  A squeeze out in this situation not only seems justified from a fairness standpoint, it is arguably necessary for the continued wellbeing of the company.

For further information on squeeze outs, contact the Chicago corporate lawyers of Horowitz and Weinstein.

Next installment: The Siege

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