A squeeze out is the compulsory sale of the shareholding of minority shareholders of a company to an acquirer or majority shareholder. This technique allows one or more shareholders who collectively hold a majority of shares in a corporation to gain ownership of remaining shares in that corporation often following a merger or acquisition. The selling shareholder are then entitled to fair compensation.
In a tender offer, a squeeze out, also known as a freeze-out, allows the acquiring company to freeze out existing shareholders by forcing non-tendering shareholders to sell their shares for the tender offer price. The percentage level of shareholders required for a squeeze-out can vary from country to country. The UK for example requires a majority shareholding of at least 90% of the target firm while in Germany 95% threshold is required.
Because collusion between shareholders with the intent of causing a freeze out can be illegal, the end result is often achieved using an acquisition. However, the consent of the minority shareholders is not required in the U.S. and under 8 Delaware Code § 253, (DGCL) a parent corporation owning at least 90% of the stock of a subsidiary is permitted to initiate a merger with that subsidiary. It is possible that in the U.S., laws of different states will provide both advantages and disadvantages to this approach.
Squeeze Out Process
Freeze out tactics may include but are not limited to
- termination of minority shareholder employees
- refusal to declare dividends.
Typically, a controlling shareholder, or shareholders, set up a new corporation (merger sub) under their control and ownership. This new company then submits a tender offer to the target company with an acquisition premium to the current market price. If the tender offer is successful, the acquiring company may choose to merge the target assets into the new corporation. As the new majority shareholder, they are in a position to dictate terms. An example of proposed squeeze out can be seen in AVX Corporation’s 8-K from filed with the SEC relating to the initial tender offer from Kyocera which resulted in a bidding war.
Outcome
In effect, the non-tendering shareholders lose their shares because the target corporation no longer exists. They force the minority stockholders in the original corporation to accept a cash payment for their shares, effectively “freezing them out” of the resulting company.
The acquirer obtains full ownership of the target for the original tender offer price. As the non-tendering shareholders also receive this price, the law recognizes it as fair value thus leaving the non-tendering shareholders no legal recourse.
Under these circumstances, and the threat of a squeeze out, existing shareholders and merger arbitrageurs will tender their stock and take their profits. There is no benefit to holding out unless the arbitrageur is convinced the acquirer will have to raise the offer. See Qualcomm (QCOM) and NXP Semiconductors (NXPI) for an example of this. If the tender offer succeeds, all shareholders will get the same tender offer price. By holding out, they may cause the deal to fail if the minimum tender condition is not achieved. This in turn will cause a significant loss. If the tender offer is extended and ultimately successful, the delay in payment will reduce the annualized return.
