They can but there are a number of safe-guards that you may be afforded as a minority or non-controlling shareholder. The scenario that arises is whether or not majority or controlling shareholders can propose and advance a corporate merger and in the merger process force the buy-out of your rights as a minority shareholder? Under New York law, the answer is that this is very possible and may be completely lawful. However, the devil is in the details.
Potential Senario: The majority shareholders who control the board and run the company propose a merger with a separate entity. The majority shareholders propose that the company be merged into an acquiring entity and that along the way minority shareholders such as yourself get bought out. That is, the majority shareholders continue along with the newly merged entity and your interests get cashed-out. Basically, whether you like it or not or you agree or not , the majority shareholders want to squeeze you out.
Can this Be Done? The answer is yes but subject to very stringent conditions. The reason is that unlike many other actions taken by majority shareholders against the minority, corporate mergers and acquisitions can and do serve a legitimate corporate purpose.
What You Need to Know When dealing with corporate mergers and the squeeze-out or cash-out of minority shareholder interests, factors that you need to know and consider, include:
As a minority shareholder, when faced with a squeeze-out merger, generally your rights and remedies will be governed by New York Business Corporation Law Section 623, that requires that the minority shareholders that reject the proposed merger be offered a buy-out of their shares at fair market value and subject to an stock appraisal process. If the majority shareholders possess a conflict of interest, the majority shareholders will be required to “demonstrate procedural fairness as to the [mergers] timing, initiation, structure, financing, development, disclosure to independent directors and shareholders and the approvals that were obtained.” Alpert v. 28 Williams St. Corp. 63 NY2d 557. In addition to demonstrating procedural fairness, conflicted majority shareholders must also demonstrate that the merger itself serves a legitimate corporate purpose.
What Does this All Mean for Minority Shareholders? Well, that you have significant rights and options available to you to ensure that that you are treated fairly. If the transaction does not serve a legitimate corporate purpose you could stop it and if you are being treated unfairly as to the valuation and method by which you are cashed-out, you have recourse.
Learn more about minority shareholder rights, order a free copy of Charles N. Internicola’s book The New York and New Jersey Partnership Dispute Guide.
Category: Partnership Disputes
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