Quick facts
- Also called: freeze-out, cash-out, or short-form merger
- Short-form threshold: 90% of each class, under 8 Del. C. § 253
- Post-tender route: 8 Del. C. § 251(h), no separate vote
- Minority's remedy: appraisal, not a veto
- If a controller is on both sides: entire fairness, unless MFW is satisfied
A squeeze-out merger eliminates minority shareholders by forcing them to accept cash for their shares. The buyer ends up owning everything, and the minority ends up owning nothing, whether they agreed or not.
It is the last step of most acquisitions, and it is the step where minority holders discover how little their position was worth as leverage.
In plain English
Owning shares does not mean you can refuse a sale. Once someone holds enough of a company, the law lets them convert your shares into cash and remove you from the register. You are paid. You are not consulted.
Your only real question is whether the price was fair, and that is a question for a court rather than a negotiation.
The 90% route
The short-form merger is the cleanest instrument. Section 253 applies where "at least 90% of the outstanding shares of each class of the stock" that would otherwise be entitled to vote is owned by a parent corporation.1
At that threshold the transaction requires no shareholder vote and no approval from the subsidiary's board. The parent resolves, files, and it is done. There is nothing for the minority to attend or oppose.
The post-tender route
Reaching 90% is hard. Section 251(h) provides the modern alternative and is why the two-step deal became standard.
Where the company's stock is listed on a national exchange or held of record by more than 2,000 holders, and the merger agreement expressly provides for it, no stockholder vote is required to authorise the back-end merger following a tender offer.1
So the sequence runs: tender offer for control, then an immediate merger cashing out everyone who did not tender, on the same terms, with no meeting. A holdout gains nothing by holding out.
What the minority actually gets
Not a vote. Appraisal. Section 262 entitles a stockholder who has not voted in favour and who follows the procedure to "an appraisal by the Court of Chancery of the fair value" of their shares.1
The catch is well covered on that page: the courts now lean heavily on a properly run deal price. Appraisal is a real remedy where the process was tainted, and a poor trade where it was not.
When the buyer is already the controller
The dangerous version is a squeeze-out by someone who already controls the company, because they sit on both sides of the deal. Delaware's default response is entire fairness, its most demanding standard, requiring the controller to prove both fair dealing and fair price.
Kahn v. M&F Worldwide Corp. set out how a controller can earn the protection of the business judgment rule instead. The standard applies "if and only if":
(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.2
Six conditions, all required. If a plaintiff can plead facts showing any of them was missing, the case proceeds to discovery, and if triable issues remain about whether the protections existed or were effective, the court conducts an entire fairness review.2
The practical reading: a controller who wants deference has to genuinely give up control of the negotiation, and has to do it from the outset rather than after terms are agreed.
The federal overlay
Where the effect is to take a public company private, SEC Rule 13e-3 adds its own requirements. A Rule 13e-3 transaction is one that has "either a reasonable likelihood or a purpose of producing" the going-private effects the rule describes.3
The consequence is heavier disclosure, including the filer's view of whether the transaction is fair to unaffiliated holders and the reasoning behind it. The rule does not block the squeeze-out. It forces the buyer to state a position that can later be measured against the evidence.
What this means for a founder
This is the mechanism that ends the story in a bad exit, and it is worth knowing before you are inside one.
If your investors hold preferred stock with a large liquidation preference, and a buyer emerges at a price below that preference, common holders may receive very little. A drag-along provision can compel you to vote for the deal, and the squeeze-out mechanics then convert everyone's shares to cash regardless.
Three things are worth checking now: who can trigger a drag-along, what preference must be cleared before common sees anything, and whether any protective provision gives common holders a separate vote. If the answer to the last one is no, then your influence over an exit is commercial rather than legal, and it depends entirely on being in the room early.
Related reading
- Tender Offer covers step one of the two-step deal
- Appraisal Rights covers the minority's only remedy
- Fiduciary Duty covers the standards a controller transaction is judged against
- Drag-Along Rights covers the private-company equivalent