Squeeze-Out (Compulsory Acquisition of Minority Shares)

In corporate law, a squeeze-out (also called a freeze-out or compulsory acquisition) is a legal mechanism that ends a minority shareholder's ownership without their consent, usually so a buyer or controlling shareholder can own 100% of the corporation. The minority receives cash or other consideration and, in most cases, the right to have a court fix fair value instead.

The phrase is also used loosely for conduct that pushes a minority out in practice, such as removing them as a director, cutting off information or stopping dividends. That conduct is not a squeeze-out transaction; it is the territory of the oppression remedy and negotiated buyouts, covered in our guide to how to remove or buy out a shareholder in Ontario. This entry deals with the formal transactions. Which one is available turns on two questions: is the corporation public or private, and is it governed by the OBCA or the CBCA?

For a public company, the cleanest route follows a take-over bid. Under section 188 of Ontario's Business Corporations Act (OBCA), if holders of at least 90% of a class accept a take-over bid or issuer bid within 120 days after the date of the bid, the offeror can acquire the remaining shares. Shares held by the offeror and its affiliates and associates at the date of the bid are excluded from the 90% count. The offeror must send its notice to the holdouts within 60 days after the bid ends, and in any case within 180 days after the bid date.

Each holdout then has 20 days to elect either to take the bid terms or to demand fair value, which a court fixes if the parties cannot agree. Section 189 gives the reverse right: once a person and its affiliates and associates acquire 90% or more of a class, the remaining holders can require the corporation to acquire their shares.

These provisions sit in Part XV of the OBCA, which applies only to offering corporations: broadly, those that have filed a prospectus for securities still outstanding or whose securities have been listed on a recognized stock exchange in Ontario. The CBCA equivalent in section 206 is likewise limited to distributing corporations. A private company cannot use the 90% rule even if a buyer already holds 99% of the shares.

When an Ontario offering corporation ends minority holders' interests by amalgamation, arrangement or a similar transaction instead of a bid, OBCA section 190 treats it as a going-private transaction and adds protections:

• An independent, qualified valuer must value the affected shares as of a date no more than 120 days before the announcement, with no downward adjustment because the shares are not a controlling interest
• A management information circular summarizing the valuation must go to affected holders at least 40 days before the meeting
• Each class of affected shares must approve separately: by special resolution if any of the consideration is non-cash or the cash is below the valuation's per-share value or midpoint, and otherwise by ordinary resolution
• Votes of affiliates, of holders receiving a better per-share deal, and of controlling holders who agreed in advance to support the deal are excluded from the count
• Affected shareholders may dissent and claim fair value

Ontario securities law adds its own layer for public issuers through Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions. The CBCA defers to those securities rules for going-private transactions and, for private federal corporations, adds a rule the OBCA lacks. Under section 194 of the CBCA, a squeeze-out transaction (one by a non-distributing corporation that requires an amendment to its articles and ends a class's interest without consent or equivalent replacement shares) must also be approved by an ordinary resolution of each affected class voting separately, with affiliates and holders receiving superior consideration excluded.

With the 90% rule and section 190 unavailable, a private OBCA corporation commonly squeezes out a minority through a long-form amalgamation. The buyer or majority holder forms an acquisition corporation and amalgamates it with the target. The amalgamation agreement can provide that some holders receive money instead of shares of the amalgamated corporation, so the minority's shares become a right to cash.

The amalgamation needs a special resolution of each amalgamating corporation's shareholders, with separate class votes where a class is treated in a way that would trigger a class vote on an articles amendment. A majority that controls at least two-thirds of the votes cast can carry it, but the minority keeps two protections:

• Dissent. A holder entitled to vote can object, demand payment and have a court fix fair value under section 185. See dissent rights.
• Oppression. Under section 248, a court can intervene where a transaction is oppressive or unfairly prejudicial to, or unfairly disregards the interests of, a security holder, for example through an unfair process or a low price.

A court-approved arrangement under section 182 is an alternative for complex deals, and the court can order that dissent rights apply. Whatever the route, an independent valuation and a price grounded in fair market value are the usual ways to reduce the risk of a later challenge.

The least contentious squeeze-out is the one agreed in advance. A drag-along right in a shareholder agreement lets holders of an agreed percentage require everyone else to sell on the same terms to a third-party buyer. It works for private companies, needs no court process, and can set the threshold well below 90%.

A drag-along binds only shareholders who signed the agreement or a joinder, so a former employee or founder outside the agreement leaves a gap. Confirming that every holder is bound belongs early in preparing a company for sale, before a buyer is at the table.

Millbrook Dental Supply Inc., a private OBCA corporation in Markham, receives an offer from a strategic buyer for all its shares at $12 per share. Founders Raj Bhatia and Mina Cho hold 92% between them and agree to sell. Simone Ferland, a former sales manager, holds the other 8% and never signed the shareholder agreement, so its drag-along does not bind her. She declines to sell.

Because Millbrook is not an offering corporation, the buyer cannot use the 90% compulsory acquisition rule. It buys the founders' 92% and then amalgamates its acquisition company with Millbrook, under an amalgamation agreement that pays Simone $12 per share in cash, the same price the founders received. To reduce oppression risk, the buyer first obtains an independent valuation of $11.40 to $12.10 per share and sends it to Simone with the meeting notice.

Simone reviews the valuation with her own lawyer. A dissent claim would require a written objection before the meeting, and with the offer near the top of the range she decides not to object. The special resolution passes with 92% of the votes cast, and she receives $12 per share when the amalgamation takes effect. The deal closes about six weeks later than a straight purchase of all the shares would have.