Financing Squeeze-Out or Freeze-Out Lawsuits Intelligently

Written by LexShares Team | Jun 1, 2016 4:24:06 PM | 0 Comments

Written by LexShares Team | Jun 1, 2016 4:24:06 PM | 0 Comments

Financing Squeeze-Out or Freeze-Out Lawsuits Intelligently

Like any relationship, business partnerships will wax and wane.  Priorities and alliances can shift, and shareholders whose interests initially align with the majority could easily find themselves at odds with them.  In the long term, disagreements over a company’s direction and management decisions are nearly inevitable, but when majority shareholders use their collective voting power to divest other shareholders of control—or even ownership—of a business through unfair and potentially coercive means, they often violate the law in the process.

Such questionable and illegal efforts by majority shareholders are called squeeze-outs or freeze-outs.  While both terms are often used interchangeably, a squeeze-out tends to refer to tactics intended to induce the targeted minority to liquidate their ownership in the business, whereas a freeze-out more accurately refers to steps focused on divesting minority shareholders of control over the entity.  A prime example of a squeeze-out would be a situation where a cabal of majority stockholders in one company form or acquire controlling ownership in another company that then seeks a merger.  These steps are taken for the express purpose of allowing the cabal to dictate the plan of merger, and thereby force minority shareholders to liquidate their interests, squeezing them out of the resulting company.  On the other hand, in a freeze-out, the conspiring majority would initiate the merger with the intent of structuring the resulting company in a way that would effectively divest minority shareholders from actually taking part in management decisions.  In many cases, these tactics can have a much more sinister character, where controlling shareholders illegally oust minority shareholders from participation in the company by removing them from the shareholder register, denying them voting rights, restricting their access to bank accounts, and withholding financial reporting.  Quite frequently, these tactics are accompanied by asset stripping, where valuable assets are transferred to third parties to the detriment of minority shareholders.  In these situations, the minority is victimized by the majority in a way that leaves them with no meaningful recourse outside of a courtroom.

It is best and often easiest to preclude squeeze-outs and freeze-outs ahead of time by including provisions in a business’s foundational documents, such as the articles of incorporation, which would explicitly safeguard minority shareholders. Foresight is not always an option, however, and there are times where shareholders who find themselves the target of freeze-out or squeeze-out tactics must venture into the courtroom to protect their interests.  Seeking legal redress against majority shareholders when they breach their fiduciary duty by engaging in a freeze-out or squeeze-out often becomes an aggrieved party’s last resort.  Even so, a plaintiff may never receive just compensation or regain control of his or her ownership interest if he or she lacks the resources necessary to conclude the lawsuit.

Where a squeeze-out or freeze-out plaintiff’s own reserves cannot carry his or her lawsuit to a proper and just conclusion alone, several options exist.  A plaintiff can seek out an attorney willing to take the case on contingency, but then risks compromising on legal talent.  Another option is to secure a loan, but since banks will not accept lawsuits as collateral, the collateral necessary to secure a loan is often personal. The loan must also be repaid regardless of case outcome, which is an especially unnerving proposition when the collateral used to secure the loan is a primary residence.  A case’s time to resolution is difficult to predict and so is the cost of the loan as interest payments must be made monthly.   A much more attractive option is to raise funds with a financing platform such as LexShares. LexShares offers support in the form of litigation finance—a powerful and distinctive form of third-party investment—which can provide freeze-out or squeeze-out claimants with the influx of resources they need to litigate their lawsuits to completion.  Also known as litigation funding or lawsuit funding, litigation finance allows third-party investors to provide the finances that cash-strapped plaintiffs need to see them through the entire lifecycle of a case.  In exchange, plaintiffs agree to give investors a portion of future lawsuit proceeds, but only if their claims result in a recovery.  Where traditionally only legally sophisticated investors, capable of assessing a case’s merits themselves, could participate in and benefit from litigation finance investments, LexShares ensures that specialized knowledge and expertise no longer serve as barriers to participation.  It is specifically designed to streamline the process of bringing accredited investors and meritorious plaintiffs together.  Plaintiffs may apply for capital needed for litigation costs or even to keep their businesses afloat during litigation.  LexShares’ team of highly experienced legal professionals review their cases.  Those with strong merits are posted on LexShares’ website as investment opportunities with declared funding goals.  After reviewing case details, investors can quickly decide whether and how much to invest.  As little as $5,000 is all an investor needs to get started.

LexShares’ online model offers several benefits to plaintiffs and investors alike. Plaintiffs need not find a single “angel” investor to fund their entire case, but can instead pool the collective resources of several investors until their funding goals are attained.  Details of a legal claim are never shared without a plaintiff’s authorization, and even then, are only made available to registered investors. Decision-making remains entirely in the plaintiff’s control, as neither LexShares nor investors ever receive a right to manage, interfere with, or even influence the prosecution of the case.  A plaintiff who does not prevail owes investors nothing; one who does merely pays investors an agreed-upon portion of the recovery.  For investors, LexShares handles the hassle of monitoring litigation throughout a case’s lifecycle, and makes developments readily understandable through a viewable timeline and links to public filed courtroom documentation.  

Plaintiffs attempting to bring their squeeze-out or freeze-out lawsuits to a proper and just conclusion are no longer alone.  LexShares can help those undercapitalized claimants finance their legal expenses and attain access to premier legal representation by connecting them with a wider and collectively deeper pool of litigation finance investors.  In doing so, LexShares makes it easier for plaintiffs to not only achieve fuller and fair recoveries, but attain the justice they rightfully deserve.

Topics: Freeze Out, Litigation Finance, Squeeze Out