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Shareholder Oppression: Squeeze-Outs

On Behalf of | Apr 4, 2014 | Shareholder Oppression

As we’ve written before, minority shareholder oppression can take a number of different forms and vary in its severity. Some forms of oppression simply deprive minority shareholders of certain rights they should be entitled to. More complete forms of oppression, however, may effectively remove the minority shareholder from the company altogether.

One such form of oppression is known as a “squeeze-out.” With a squeeze-out, the majority shareholders essentially use their collective controlling interest to deprive a minority shareholder of any ability to control the company, or derive any economic return from the company.

For example, say four people started a corporation, as equal shareholders, to operate a pizza restaurant. Before the oppression each shareholder was paid equal amounts, and ran certain aspects of the pizza business. Now imagine three of the shareholders have a falling out with the fourth shareholder. If those shareholders vote to remove the fourth shareholder from the board, and remove his right to compensation, his investment in the pizza business will become practically worthless. Undeniably, this fourth shareholder will grow tired of the business relationship and be forced to sell its shares back to the majority at a reduced price. Thus this shareholder is squeezed out of the company.

Thankfully, the law protects against this kind of shareholder oppression. Majority shareholders who conduct a squeeze-out may be required to show there was a legitimate corporate purpose for their actions, and that there was no other practical way of achieving that purpose.

Understand, however, that fighting against a majority is always going to be an uphill battle. You should contact an attorney with shareholder oppression claims experience who can help make sure you receive the true value of your shares rather than that set by an oppressive majority.