Squeeze-outs / Going-privates | Holger Spamann | December 10, 2017


Squeeze-outs / Going-privates

by Holger Spamann Show/Hide

In a squeeze-out a/k/a cash-out merger, a controlling shareholder acquires complete ownership of the corporation’s equity, squeezing/cashing out the minority. Technically, the transaction is structured as a merger between the controlled corporation and a corporation wholly-owned by the controlled corporation’s controlling shareholder. The controlling shareholder retains all the equity of the surviving corporation, while the merger consideration for the outside shareholders is cash (or something else that is not stock in the surviving corporation). If the controlled corporation was previously publicly traded on a stock exchange, the transaction is also known as a going private merger because the surviving corporation will no longer be public, i.e., it will be delisted from the stock exchange.

There can be good economic reasons for a squeeze-out. It facilitates subsequent everyday business between the controller and the corporation, among other things because there are no more conflicts of interest to manage (cf. Sinclair). Private corporations do not need to make filings with the SEC and the stock exchange. Finally, the controlling shareholder may be more motivated to develop the corporation's business when owning 100% of it.

At the same time, squeeze-outs pose an enormous conflict of interest. Any dollar less paid to the minority is a dollar more to the controlling shareholder. For this reason, the SEC requires additional disclosure under rule 13e-3, and Delaware courts police squeezeouts under the duty of loyalty. In fact, controlling shareholders' duty of loyalty was developed principally in squeeze-out mergers, in particular the adaptation in Kahn v. MFW below.

Question: Can you think of another, procedural reason why squeeze-outs generate most duty of loyalty cases against controlling shareholders in Delaware courts? Hint: Consider Aronson and its scope of application.

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  1. 1 Show/Hide More Weinberger v. UOP, Inc. (Del. 1983)
    Original Creator: Holger Spamann

    This decision introduced the modern standard of review for conflicted transactions involving a controlling shareholder. We could have read it in the general Duty of Loyalty section above, but I wanted you to read it together with the next two cases.

    Review questions (answer now or while reading the opinion):

    1. What is the standard of review for conflicted transactions, generally speaking?
    2. Can the controlling shareholder do anything to obtain a more favorable standard, or at least a more sympathetic application of the standard (cf. footnote 7)?
    3. How does the judicial treatment of self-dealing by a controlling shareholder compare to that of self-dealing by simple officers and directors (as described in the Duty of Loyalty section above)?

    Policy questions:

    1. Does it make sense to treat controlling shareholders more harshly than other fiduciaries?
    2. Why allow squeeze-outs at all?
    3. Is there a connection between the Delaware Supreme Court's abandonment of the business purpose test (part III) and its refinement of the standard of review, in particular a more flexible approach to valuation (part II.E)?

    Check your understanding:

    1. Why does Weinberger bother bringing a fiduciary duty action? Couldn't he have obtained the same relief through appraisal, without having to prove a violation of fiduciary duty?

  2. 2 Show/Hide More Glassman v. Unocal Exploration Corp. (Del. 2001)
    Original Creator: Holger Spamann
    The most basic facts of this case are similar to those in Weinberger: parent attempts a cash-out merger, or squeeze out; minority stockholders of the subsidiary complain. Why is the outcome in this case different from Weinberger? Does the difference make sense from a policy perspective? And what happened to Schnell?
  3. 3 Show/Hide More Kahn v. MFW (Del 2014)
    Original Creator: Holger Spamann
    This decision epitomizes the Delaware judiciary's approach to tricky conflict situations. Practitioners have figured out the court's approach and structure deals accordingly.

    1. What standard of review does the court apply? Is it different from the cases we had seen thus far?
    2. How does the court want to protect minority shareholders? Does it work? Does it work better than alternatives?
    3. Why did this case proceed to summary judgment, whereas the complaint in Aronson was dismissed even before discovery? Hint: under what rule was Aronson decided, and did that rule apply here?

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December 17, 2017

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