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:
- Mergers Are Recognized as Legitimate Corporate Actions – Under New York Business Corporation Law Section 901 New York corporations are authorized to merge into a single corporation.
- Two-Thirds Shareholder Approval Required for Merger – The procedural requirements for a merger under Section 901 do not require a justification for the merger, just compliance with procedural requirements like the preparation of a plan of merger, a statement of any changes to the certificate of incorporation of the surviving corporation, the submission of the merger plan to a vote of the shareholders and the adoption of the plan by a vote of two thirds of the shareholders entitled to vote.
- Judicial Standard of Review – “Was the Transaction Fair” – Just because the merger is approved by a two-thirds vote does not mean it is free from scrutiny. As a minority shareholder you possess the right to challenge a squeeze-out merger on the ground that it was not fair to minority shareholders. You will possess the burden of proof but if the majority shareholders have a conflict of interest (i.e., they possess ownership interests in the combined entity or they will become shareholders of the merger entity) the burden of proof shifts to the controlling shareholders to demonstrate that the transaction was procedurally fair.
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.