Squeeze-Out Merger
Quick Facts
- Also called: Freeze-out merger, short-form merger, cash-out merger
- Threshold: 90% ownership for short-form (Delaware)
- Alternative: 50%+ via Section 251(h) (since 2013)
- Minority protection: Appraisal rights, entire fairness review
A squeeze-out merger (also called a "freeze-out" or "cash-out" merger) is a transaction where a controlling shareholder forces minority shareholders to sell their shares, typically for cash. It allows the acquirer to gain 100% ownership by eliminating remaining minority holders.
In Plain English
A squeeze-out is exactly what it sounds like—you're being squeezed out of your investment whether you like it or not. If someone owns 90% of a company, they can force you to sell your 1% stake. You get cash, they get complete control, and you have no choice in the matter (except to challenge the price in court).
How Squeeze-Outs Work
Two-Step Structure (Most Common)
- Step 1 - Tender Offer: Acquirer offers to buy shares from all shareholders
- Step 2 - Squeeze-Out: After reaching threshold, acquirer forces out remaining holders
Short-Form Merger (90% Threshold)
Under Delaware law (DGCL §253), if a parent owns 90% of a subsidiary:
- No shareholder vote required
- No target board approval required
- Merger completed by board resolution of parent
- Minority cashed out at specified price
- Only remedy: Appraisal rights
Section 251(h) (50%+ Threshold, Since 2013)
Delaware's Section 251(h) allows faster squeeze-outs:
- After tender offer obtains majority of shares
- No separate shareholder vote on back-end merger
- Must be negotiated deal (not hostile)
- Minority squeezed out on same terms as tender offer
The Mathematics
Traditional Two-Step:
Tender Offer → Acquire 90%+ → Short-Form Merger
With Top-Up Option: If tender offer gets 70%, and company has authorized but unissued shares:
- Acquirer exercises option to buy additional shares from company
- Gets to 90% threshold
- Proceeds with short-form merger
Section 251(h) Path:
Tender Offer → Acquire 50%+ → Back-End Merger (no vote)
Minority Shareholder Protections
Appraisal Rights
Squeezed-out shareholders can:
- Refuse the merger consideration
- Petition court for "fair value" determination
- Receive court-determined price (potentially higher or lower)
Entire Fairness Review
When controlling shareholders squeeze out minorities, Delaware courts apply heightened scrutiny:
Two prongs:
- Fair dealing: Was the process fair? (Independent committee, arm's-length negotiation)
- Fair price: Was the consideration fair?
If either fails, the transaction may be enjoined or damages awarded.
Cleansing Mechanisms
Controlling shareholders can shift the burden of proof by:
- Using an independent special committee with real authority
- Conditioning the deal on approval by majority of minority shareholders
- Doing both (strongest protection per Kahn v. M&F Worldwide)
Famous Examples
Dell Going Private (2013)
Michael Dell and Silver Lake:
- Launched tender offer at $13.65/share (later $13.75)
- Acquired sufficient shares via tender offer
- Used Section 251(h) back-end merger
- Squeezed out remaining public shareholders
- Faced significant appraisal litigation
Siliconix (2001)
Vishay's squeeze-out of Siliconix minority shareholders became a landmark case for entire fairness analysis in controlling shareholder transactions.
Strategic Considerations
For Acquirers:
- Plan for 90%: Structure tender to reach short-form threshold
- Top-up options: Negotiate to bridge any gap
- Section 251(h): Faster path if deal is friendly
- Fair process: Reduces litigation risk
For Minority Shareholders:
- Appraisal rights: Understand the procedural requirements
- Entire fairness: Challenge unfair controlling shareholder deals
- Timing: Must act before/during merger, not after
For Target Boards:
- Special committee: Independent directors for conflicted transactions
- Majority of minority: Consider conditioning deal on minority approval
- Advisor independence: Ensure advisors aren't conflicted
The Mechanics Timeline
Typical Two-Step with 251(h):
| Day | Action |
|---|---|
| 0 | Announce deal, commence tender offer |
| 20+ | Tender offer expires (minimum 20 business days) |
| 21 | If majority tendered, announce extension/closing |
| 25 | Tender offer closes, back-end merger filed |
| 26 | Merger effective, minorities squeezed out |
Total time: ~4-6 weeks (faster than traditional merger vote).
Practical Takeaways
For acquirers: Structure deals to reach the 90% threshold when possible—short-form mergers are faster and don't require target shareholder votes. Use Section 251(h) when 90% isn't achievable. A fair process protects against litigation.
For minority shareholders: Understand your rights before you're squeezed out. If you believe the price is unfair, consider appraisal—but recognize courts now heavily favor deal price. In controlling shareholder deals, entire fairness claims may be more promising than appraisal.
Related Reading
- Tender Offer — The first step in most squeeze-outs
- Appraisal Rights — Minority shareholders' remedy
- Drag-Along Rights — Private company equivalent
- Fiduciary Duty — What protects minority shareholders