Squeeze-outs happen almost exclusively in the event of takeover of company shareholdings. When a shareholder acquires a majority shareholding in a company that is not less than 90%, they acquire the right to compulsorily acquire any residual shares held by minority shareholders. In other words, this is also known as a cash-out.
Correspondingly, sell-outs are when minority shareholders require majority shareholders to buy out their shares after a takeover to enable them to exit from the company.
Benefits of squeeze-outs and sell-outs
Both mechanisms help prevent disputes with minority shareholders who oppose a takeover, which could lead to disruptive and uncooperative actions. This could lead to administrative difficulties and limits on the majority shareholder’s powers, such as passing special resolutions or calling general meetings at short notice. This offers both effectiveness and flexibility in large companies.
Minority shareholders could face detrimental outcomes following a takeover because of shifts in the company’s focus, a decline in their investment’s worth, or disagreements with the new managements strategies.
Squeeze-outs and sell-outs appear more frequently in situations of private company acquisitions and mergers and acquisitions (M&A).
Procedures
To account for potential minority shareholder opposition, rights for squeeze-outs are generally subject to significant restrictions.
If a takeover bid for company shares is successful, the acquirer must own over 90% of the shares. Then, they issue a formal notice indicating their plan to compulsorily acquire the remaining shares. If minority shareholders receive a squeeze-out notice, they have six weeks to ask the court to challenge the compulsory purchase offer or to negotiate the offer’s terms.
Drag-alongs
A drag-along clause is usually written into a shareholders’ agreement or the company’s articles and allows majority shareholders to force a sale of minority shares on the same price and terms as the majority. This usually happens in founder exits or private company sales where a majority shareholder decides to sell off their shares and the buyer intends to have full ownership over the company. For example, if a majority shareholder with a 75% shareholding wishes to sell off all their shares, drag-along rights vested in the company’s articles can compel the other shareholders of 15% and 10% to sell off theirs at the same rate as the majority shareholder as well. The sale is conducted under the same terms, which allows the buyer to acquire the whole company without the need for drawn-out negotiations.
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