Minority Shareholder Squeeze-Outs

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Underlying Causes for Minority Shareholder Squeeze-Outs

A "Squeeze-out" occurs when some of the owners of a business use their strategic position, inside information, powers of control, or a legal device or technique to diminish the claim on earnings or eliminate entirely one of the other owners. 

Ringling Family Circus 

A notable example is the dispute that arose within the Ringling family over control of that famous circus. The division occurred when one of the five brothers, John Ringling, sent this circus spiraling toward disaster by borrowing money to buy a competing circus. The purchase occurred right before the Great Depression and led the banks to taking control of the circus. It took a child prodigy from the next generation, John Ringling Jr., to regain family control; but his arrogance as savior offended his two aunts who had inherited stock from the founding generation and they formed an alliance to squeeze him out. Ultimately, the tables turned when the husband of one of the aunts went to jail for setting fire to the circus and John Ringling Jr. formed his own alliance with the new shareholder and squeezed out his aunt! Not all squeeze outs are this extensive but it shows the need for counsel to understand what is motivating disagreements. 

Underlying Causes of Squeeze-Outs

Greed. Many squeeze-outs are attributable to avarice of owners who see an opportunity to enlarge their power and wealth. A trusting or less able associate may become a squeeze-out target. The greedy shareholder may lure other owners into an alliance to create a new majority and make a squeeze-out play. 

Conflicts of Interest. Because owners in closely held corporations are usually also the managers, directors, officers, and key employees, they come in frequent and close contact. If the parties who agreed to go into business together realize they have incompatible working styles, it can lead to dissension among them and tends to escalate until a squeeze-out play develops. 

Inactive Shareholder. An opportunity for squeeze-out also often arises when a business owner is absent for considerable time. While a shareholder may legally withdraw from active participation - whether due to retirement, disability, or other challenges - the owners of closely held corporations often view "sweat equity" as part of the financial investment. When one owner is no longer participating daily, the other owners may feel they are forced to take on additional duties and become resentful of the inactive shareholder. Therefore, they may raise their own salaries, decrease or stop dividend payments, and even take steps to squeeze-out the inactive shareholder.

These are just a few examples of the business situations out of which a squeeze-out play may arise. 

Avoiding Liability 

Legal counsel must probe deeply to understand the underlying issues that may arise when a corporation is formed. Failure to foresee squeeze-out problems and to implement preventative techniques, such as drafting an effective buy-sell agreement, can expose the company to high liability and legal expenses. Lawyers who organize a corporation or prepare a buy-sell or other shareholder agreement  may become liable for malpractice if they fail to take appropriate steps to protect minority shareholders. 

~ When your Business is Exposed, Rely on the Pros at Centeno Law Firm ~

Thank you again for being a client of Centeno Law Firm and I hope this post has provided some valuable information. I know running a business can present unexpected issues, but weak protection against liability does not have to be one of them!

If you would like more information on how Centeno Law Firm can help you, please do not hesitate to contact me via email at melissa@centenolawfirm.com, by phone at (562) 455-4404, or visit our homepage at www.centenolawfirm.com.