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What is a Squeeze-Out Merger?

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The Daily Ledger · Markets

With 94% of the shares tendered, the buyer announced a squeeze-out merger to take the remaining 6% at the offer price, with no shareholder vote required.

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Overview

A squeeze-out merger is the last step of a takeover. Once a buyer owns most of a public company, it takes the remaining shares from the other holders at the deal price, without their consent. The law allows this so that a takeover can end with a single owner rather than a scattering of holders who never sold. In Delaware a parent holding at least 90% can complete the merger by board resolution alone, with no vote, and the squeezed-out holders' only recourse is to ask a court to set a fair value.
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Overview

A squeeze-out merger marks the moment a takeover stops being an offer. The buyer already has most of the company, so the rules let it convert whatever is left into cash and mail the former owners a cheque. In Delaware, 90% ownership is enough to do it without a meeting, and for a listed company a successful tender offer will do. The only question still open is the price, and that one goes to a judge. 😎

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Detail

A squeeze-out merger is the legal step a buyer uses, once it already owns most of a public company, to take the remaining shares at a set price without the holders' consent. Public companies are bought in two ways, and both end here. In a one-step merger the target's shareholders vote, and if a majority of all the shares approve, every share converts into the deal price, including those that voted no. In a two-step deal the buyer makes a tender offer directly to shareholders, and once enough shares are tendered the buyer merges the company to take the rest. For a listed company, enough means the majority a vote would have needed, and no vote is held. At 90% the buyer can merge by board resolution alone, with no notice and no vote. Unocal did exactly that in 1992 with about 96% of a subsidiary, paying the other holders 0.54 of a Unocal share each. The buyer's own shareholders vote only when the buyer pays in shares and issues 20% or more of the shares it has. A squeezed-out holder cannot block the merger or sue over fairness unless there was fraud; the one remedy is appraisal, asking the Court of Chancery to set a fair value. In a private company there is no statute for this, so the same result is written into the shareholders' agreement as drag-along rights. Whatever that price is, it still runs through any liquidation preference before ordinary holders are reached.
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Detail

A squeeze-out merger is how a takeover closes out the shareholders who never said yes. The buyer bids, say, $40 a share when the stock was trading at $32, and most people grab it, because $40 beats $32. That gap is the premium, and it does most of the persuading. Once the shares handed in cross the line a shareholder meeting would have needed, the buyer closes and the leftover shares become $40 each, whether their owners handed them in or not. Get to 90% and the parent can skip the meeting entirely and sign the paperwork itself. Holding out for a better number from the buyer gets you nothing, because the leftover shares are converted at the bid regardless. The one route past the bid runs through a judge in Delaware, who can appraise your shares, which costs money and takes a year or two. The buyer's own shareholders only get a say if the buyer pays in stock and has to print 20% or more of what already exists. On your side the thing is done, and you are choosing between the cheque and the judge. 😎

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Analogy

A new road is planned and your house is on its route. You did not offer to sell, and you cannot refuse to. Once the route is approved the authority takes the house and pays what it says the house is worth, and the only argument left is that number, in front of a tribunal that sets a fair value. Your neighbours took the first offer of $300,000; you held out a year, paid a lawyer, and were paid the tribunal's $310,000. A squeeze-out merger treats the last shareholders the same way: the shares are taken, the price is set, and a court is the only place to argue it.
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Analogy

A developer wants the whole street for a shopping centre, the council backs the scheme, and 96 of the 100 houses have gone at $350,000 each. Number 14 holds out, hoping the final four will fetch double. Then the notice arrives: past a fixed share of the street, the law lets the remaining houses go at a figure a valuer decides, and saying no is not an option. Number 14 gets $350,000, twelve months late, minus the legal bill, plus a hearing on whether $350,000 was right. Squeezed-out shareholders are number 14: the buyer already has the street, and the only fight remaining is the valuer's figure. 😎
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Formal definition — The same term, explained the usual way

A squeeze-out merger (also freeze-out or cash-out merger) is a statutory merger by which a controlling stockholder or acquirer compels the remaining minority holders to exchange their shares for the merger consideration, typically cash, without their individual consent. Under the Delaware General Corporation Law, a parent owning at least 90% of each class of a subsidiary's outstanding stock may effect a short-form merger by board resolution under section 253, without a stockholder vote; and under section 251(h), an acquirer that has completed a tender offer for all outstanding shares of a listed or widely held corporation may effect the second-step merger without a vote once the tendered shares reach the percentage otherwise required for approval. Dissenting holders are entitled to appraisal under section 262. In Glassman v. Unocal Exploration Corp., 777 A.2d 242 (Del. 2001), the Delaware Supreme Court held that, absent fraud or illegality, appraisal is the exclusive remedy of a minority stockholder in a short-form merger and the parent need not establish entire fairness. Separately, exchange rules require the acquirer's own stockholders to approve an issuance of 20% or more of its outstanding common stock in connection with an acquisition.

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