Legal Definitions - Squeeze-out

A squeeze-out is a legal process where a majority shareholder or an acquiring company forces minority shareholders to sell their stock. This typically occurs during a corporate acquisition, merger, or significant restructuring when the majority owner desires to gain complete control and ownership of the company, eliminating all remaining minority interests. State laws govern these transactions, requiring that the minority shareholders receive a fair cash value for their shares.

Here are some examples to illustrate how a squeeze-out works:

• Example 1: Public Company Acquisition

  Imagine "InnovateTech Inc." is a publicly traded company. "MegaCorp Global" decides to acquire InnovateTech and successfully purchases 98% of its shares through a public tender offer. To achieve 100% ownership and fully integrate InnovateTech into its operations without the complexities of managing minority shareholders, MegaCorp Global initiates a squeeze-out. The remaining 2% of InnovateTech's shareholders are legally compelled to sell their shares to MegaCorp Global for a price determined to be fair according to state law, even if they preferred to retain their ownership.

  This illustrates a squeeze-out because the minority shareholders (the remaining 2%) are forced to sell their stock to the acquiring corporation (MegaCorp Global) against their will, in exchange for fair cash value, allowing the acquirer to achieve full ownership.

• Example 2: Taking a Private Company Fully Private

  "Local Brews Co." is a small, privately held brewery with a few early investors holding minor stakes alongside the founding family, who owns 92% of the company. The founding family decides they want to consolidate all ownership, simplify decision-making, and avoid the administrative burdens associated with having outside shareholders. They initiate a squeeze-out, legally compelling the few minority investors to sell their shares back to the company or the founding family at a valuation determined to be fair by an independent appraisal or court process.

  Here, the founding family, as the majority shareholders, uses a squeeze-out to force the minority investors to relinquish their shares, achieving complete private ownership and control, with the minority shareholders receiving fair compensation.

• Example 3: Corporate Restructuring for Simplicity

  "Legacy Holdings," a long-established investment firm, has a complex ownership structure with numerous small, inactive shareholders who inherited their shares over generations. The current majority board and management want to streamline the company's capital structure, simplify its governance, and make it more attractive for future strategic partnerships or a potential sale. They decide to execute a squeeze-out to eliminate these numerous, often difficult-to-track minority shareholders. Each minority shareholder is legally required to sell their shares for a fair market price, allowing Legacy Holdings to consolidate its ownership and simplify its operations.

  This example shows a squeeze-out used for corporate restructuring, where the majority forces the sale of shares from numerous minority shareholders to simplify ownership and operations, ensuring the minority shareholders are compensated fairly.