Legal Definitions - cash-out merger

A cash-out merger is a corporate transaction where a majority shareholder or an acquiring company forces the remaining minority shareholders to sell their shares for cash, thereby eliminating their ownership interest in the company. In this type of merger, the minority shareholders do not receive shares in the new or acquiring entity; instead, they are "cashed out" of their investment.

Here are some examples to illustrate this concept:

• Example 1: Taking a Public Company Private

  Imagine "Tech Innovations Inc.," a publicly traded company, where a large private equity firm, "Apex Capital," already owns 70% of its shares. Apex Capital decides it wants to take Tech Innovations Inc. private to restructure its operations without public market scrutiny. To do this, Apex Capital initiates a cash-out merger, offering all remaining public shareholders (the 30% minority) a specific cash price per share. These minority shareholders are compelled to accept the cash offer and surrender their shares, effectively ending their ownership in Tech Innovations Inc. and making it a wholly-owned subsidiary of Apex Capital.

  This illustrates a cash-out merger because Apex Capital, the majority owner, forces the minority public shareholders to exchange their shares for cash, removing them from the company's ownership structure.

• Example 2: Parent Company Consolidating a Subsidiary

  Consider "Global Holdings," a large conglomerate that owns 90% of "Local Logistics Co.," a smaller shipping company. Global Holdings decides it wants to fully integrate Local Logistics Co. into its operations and streamline its corporate structure. To achieve 100% ownership, Global Holdings proposes a cash-out merger. The remaining 10% of Local Logistics Co. shares, held by a few independent investors, are bought out for a predetermined cash amount per share. These minority investors no longer hold shares in Local Logistics Co., which now becomes a fully owned and integrated part of Global Holdings.

  This demonstrates a cash-out merger as Global Holdings, the parent company, uses the merger to compel the minority shareholders of its subsidiary to sell their shares for cash, gaining complete control.

• Example 3: Founder Regaining Full Control

  Sarah founded "Creative Designs Studio" years ago and, to secure early funding, sold a 20% stake to a small group of angel investors. Now, after years of success, Sarah wants to regain full ownership and control of her company. She offers to buy out the angel investors' 20% stake through a cash-out merger, providing them with a significant cash payment for their shares. The angel investors are legally required to accept the offer, and their ownership in Creative Designs Studio is terminated, leaving Sarah as the sole owner.

  This is an example of a cash-out merger because Sarah, as the majority owner, initiates a transaction that forces the minority angel investors to sell their shares for cash, consolidating 100% ownership in her hands.