Squeeze-Out Merger
A squeeze-out merger, also called a freeze-out merger, is a transaction in which a majority shareholder with sufficient ownership uses a statutory merger to acquire the remaining minority shares, forcing minority shareholders to accept cash or other consideration for their equity.
When a controlling shareholder — typically a parent company after a majority tender offer or a private equity firm that has bought most of a company's stock — wants to eliminate the remaining public float and take full ownership, it uses a squeeze-out merger. US state corporate law, most commonly Delaware law, permits majority shareholders meeting a specified ownership threshold to approve a merger by their votes alone, without requiring consent of the minority. Minority shareholders receive the merger consideration and are cashed out, whether or not they vote in favor.
In Delaware, a squeeze-out merger with a controlling shareholder receives heightened judicial review under the entire fairness standard, which requires the controlling shareholder to prove that both the process (fair dealing) and the price (fair price) were fair to minority shareholders. This is a demanding standard that has led deal lawyers to structure squeeze-outs to qualify for the more deferential business judgment rule review instead.
The Delaware Supreme Court's 2014 decision in Kahn v. M&F Worldwide established that a controlling shareholder merger can receive business judgment review if two procedural conditions are met ab initio — from the beginning. First, the transaction must be approved by a properly empowered special committee of independent directors that is given real negotiating authority. Second, it must be conditioned on approval by a majority of the minority shareholders — a vote of public shareholders excluding the controlling party. When both conditions are met, the merger is presumptively fair, and plaintiff shareholders bear the burden of proving otherwise.
Minority shareholders in a squeeze-out merger retain the right to seek appraisal — a separate judicial proceeding in which the Delaware Court of Chancery determines the 'fair value' of their shares, which may differ from the merger consideration. Appraisal rights allow shareholders who believe the merger price undervalues their shares to have a court make an independent valuation determination.
Squeeze-outs frequently follow a two-step merger structure in which the acquirer first completes a tender offer for shares, then uses the shares acquired to meet the statutory threshold needed to do a back-end short-form or long-form merger to mop up the remaining minority.