Some privately-held companies develop a widely diversified capital structure by issuing equity to small investors during the company's early stage of operations, to the shareholders of add-on acquisition targets as the company grows by acquisition, and to key employees. Once a company achieves stable growth, it may desire to buy out its smaller shareholders in order to simplify and consolidate its capital chart.
There are many other reasons that a group of shareholders may want to consider a squeeze-out transaction. A group of shareholders may wish to cause the company to buy out minority shareholders in order to ensure that the shareholders are unified in pursuing the strategic goals that they feel are important for the company. Removing minority shareholders may help a corporation qualify for S corporation status. A squeeze-out transaction could significantly reduce a company's administrative costs.
If a single owner holds enough voting equity in a company to approve a merger transaction, or if a group of shareholders are able to consolidate the ownership of their shares through a new holding company which would then have sufficient control to approve a merger, then the company may wish to consider a squeeze-out merger transaction.
To implement the squeeze-out, the shareholder or holding company normally forms a merger subsidiary. The company's board authorizes the squeeze-out merger and determines the per share value of the company's stock. Obtaining a third party appraisal and/or fairness opinion for the share price is recommended. Under Wisconsin law, the company is required to notify its shareholders of their right to dissent to the merger transaction.
If the merger is approved by the required number of shares, the merger subsidiary will merge into the company, with the majority shareholder or holding company becoming the sole owner of the company as a result of the merger transaction. The shares held by all other shareholders would be eliminated, with the shareholders receiving the right to receive cash consideration equal to the undiscounted value of their shares in the company.
If a minority shareholder believes that the price per share is too low, they have the right to dissent to the merger. Dissenters' rights would then allow the minority shareholder to petition a court to determine the proper value of the dissenter's shares.
After the squeeze-out transaction, the company will be owned by the majority shareholder or majority holding company. As noted above, this may reduce company administrative costs, allow the company to make an S election (or a QSUB election in the event of a holding company parent) and consolidate shareholder opinion regarding the future direction of the company. A company and its majority shareholders should consider the cost of implementing a squeeze-out transaction and verify that it has adequate funding to pay for the minority shareholders' shares prior to planning such a transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
