Henn, Harry G

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Boston College Law ReviewVolume 3 | Issue 3 Article 304-1-1962O'Neal and Derwin: Expulsion or Oppression ofBusiness Associates: "Squeeze-Outs" in SmallEnterprisesHarry G. HennFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Business Organizations Law CommonsThis Book Review is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has beenaccepted for inclusion in Boston College Law Review by an authorized editor of Digital Commons @ Boston College Law School. For moreinformation, please contact nick.szydlowski@bc.edu.Recommended CitationHarry G. Henn, O'Neal and Derwin: Expulsion or Oppression of Business Associates: "Squeeze-Outs" in Small Enterprises, 3 B.C.L. Rev. 578(1962), http://lawdigitalcommons.bc.edu/bclr/vol3/iss3/30BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWExpulsion or Oppression of Business Associates: "Squeeze-Outs" inSmall Enterprises. By F. Hodge O'Neal' and Jordan Derwin.2 Durham,N.C.: Duke University Press, 1961, pp. xii, 263. $10.00.Any study bearing the by-line, F. Hodge O'Neal, on the specialproblems of the close corporation, is presumptively worthy of attention. Noone has written as extensively and intensively on this subject as has he. In1958, his earlier contributions were collated and amplified in his two-volumework, Close Corporations: Law and Practice, 3 the only published treatise onthe subject.The focus of this study, sponsored by a grant from the Federal SmallBusiness Administration Management Research Grant Program, is on"squeeze-outs"4 in close corporations, although some consideration is givento squeeze-outs in partnerships. The approach is both pragmatic—based onseveral hundred reported cases and the experiences of many small business-men, their lawyers and other business advisers—and academic—posingpossibilities of potential squeeze-out techniques and their prevention in thelight of existing statutory and decisional law. In an appendix are detailedfour case histories.5Various squeeze-out settings are comprehensively but not exhaustivelydiscussed with a view to determining the underlying causes of squeeze-outs.The major discussion is on the various squeeze-out techniques, e.g.,withholding dividends; elimination of minority shareholders from the boardof directors and from employment; high executive compensation to majorityshareholders; extraordinary corporate matters; bankruptcy; issuance ofadditional shares; and contractual arrangements. Many of these techniquesare well known to students of business enterprise law; some of the possibili-ties are ingeniously devious, such as incorporating a partnership to attainthe far greater, varied, and more sophisticated squeeze-out potential avail-1 Professor of Law, Duke University School of Law.2 Associate, Brennan, London & Buttenwieser, New York City.3 See Book Reviews, 45 A.B.A.J. 1189 (1959) ; 1 B.C. Ind. & Coma L. Rev. 335(1960); 33 Conn. B.J. 321 (1959); 21 Ga. B.J. 225 (1958); 72 Harv. L. Rev. 1187(1959); 9 J. Pub. L. 245 (1960); 19 La. L. Rev. 233 (1958); 31 Miss. L.J. 195 (1960);34 N.Y.U. L. Rev. 799 (1959); 26 Tenn. L. Rev. 448 (1959); 26 U.Chi. L. Rev. 347(1959); 12 Vand. L. Rev. 306 (1958); 5 Wayne L. Rev. 278 (1959). On the basis of histreatment of close corporations in the legal periodicals alone, Professor George D.Hornstein of New York University School of Law is Professor O'Neal's peer.4 "Squeeze-out" is used as a synonym for "freeze-out," meaning "the use by someof the owners or participants in a business enterprise of strategic position, inside infor-mation, or powers of control, or the utilization of some legal device or technique, toeliminate from the enterprise one or more of its owners or participants" (p. 3)—theaggressors being called "squeezers" and the victims being called "squeezees." ProfessorO'Neal in his 1958 work uses the term, "freeze-out."' Johnson v. Mansfield Hardwood Lumber Co., 159 F. Supp. 104 (W.D. La. 1958),aff'd, 263 F.2d 748 (5th Cir. 1959), rehearing denied, 268 F.2d 317 (5th Cir. 1959),cert. denied, 361 U.S. 885 (1959) ; Brown v. Dolese, 154 A.2d 233 (Del. Ch. 1959),aff'd sub nom., Dolese Bros. Co. v. Brown, 157 A.2d 784 (Del. Sup. Ct. 1960); Gaines v.Long Mfg. Co., 234 N.C. 331, 67 S.E.2d 355 (1951), 234 N.C. 340, 67 S.E.2d 350 (1951);Matteson v. Ziebarth, 40 Wash. 2d 286, 242 P.2d 1025 (1952).578BOOK REVIEWSable in the corporate form, or, if the local law does not provide a favorablesqueeze-out climate for a corporation, merging or consolidating into acorporation incorporated in a more accommodating jurisdiction. Manipula-tion of share transfer restrictions and the squeeze-out possibilities in tax-option corporations under Subchapter S are also among the subjects covered.But the approach is not entirely Machiavellian. Arrangements to avoidsqueeze-out under present law are outlined in a functional manner, althoughwarranted caution as to the judicial enforceability of some of them invarious jurisdictions is expressed. Such counters to squeeze-outs includeadvance buy-out arrangements; arrangements for settling disputes; share-holder agreements; long-term employment contracts; and intracorporateprovisions requiring greater-than-normal votes for shareholder and board ofdirectors action. Sensible use of these arrangements, unfortunately, is bestleft to legal specialists, who rarely are retained when they should be, namely,when the business enterprise is formed.Most constructive are the authors' "Idea Guides for Changes in LegalControls" in the final chapter. Among those suggested are greater judicialdiscrimination in applying the ostrich-like-approach "business judgment"rule; mandatory dividend statutes; the so-called "fairness" test for extra-ordinary corporate matters—with the burden of proof on the proponents ofthe change; broadening of the appraisal remedy to apply to any corporateaction which substantially impairs the minority shareholder's position;more imaginative equitable relief; and greater judicial tolerance toward thespecial problems of the close corporation, especially their intracorporateprovisions. The British experiences of using the Board of Trade as a"watchdog" over companies and under Section 210 of the English CompaniesAct of 1948 are summarized and found to be less than satisfactory solutions.Susceptible squeezers and squeezees, and their advisors, need thisreference work, much as a physician needs a manual on poisons and theirantidotes. One might well surmise that the publication of this study willdiscourage carrying on a small business in the corporate or partnership formand increase the number of individual proprietorships. The legal practi-tioner, especially of older vintage, can review in this study the tremendousrecent growth of the law in this area; the law student will find concise, well-written abstracts of the leading cases, although the $10.00 price of the263-page book—unfortunate for a study sponsored by the federal govern-ment and published by a university press—militates against student pur-chase.Greater stress in the two concluding chapters, in the opinion of thisreviewer, might have been placed on the need for statutory revision, andless on intracorporate arrangements and judicial enlightenment—importantas both are. To the list of "idea guides" (limited, of course, to close corpora-tions), this reviewer would add three that he feels are more significant thanthose emphasized: (1) liberalization of "statutory norms;" 6 (2) possibility6 By "statutory norms" is meant the courts' construction of explicit statutory lan-guage and the public policy they glean therefrom—generally to the effect that share-579BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWof eliminating the board of directors;? and (3) subjecting associates tofiduciary duties among themselves. 8 These, coupled with the study's sug-gestion for broadening the appraisal remedy 9—a remedy far more meaning-ful in a close corporation than in a corporation whose shares have a stockexchange or over-the-counter market—while no panacea, would detersqueeze-outs by eliminating various technicalities" and generally promotinghigher business ethics and sounder equitable relief."Professor O'Neal and Mr. Derwin are to be complimented on this mostworthwhile, pioneering study, the first comprehensive one on the subject. Itpresages well for the future studies in the series of investigations Duke Uni-versity is making of the legal problems of small business under the sponsor-ship of the Federal Small Business Administration.HARRY G. HENNProfessor of LawThe Cornell Law SchoolAuthor, Henn on Corporationsand Other Business Enterprises(1961).holders, usually by majority vote of the shares, elect the board of directors which,usually by majority vote per capita, manage the business. This idea is discussed butshould have been given more emphasis (see § 8.10). See, e.g., Henn on Corporationsand Other Business Enterprises § 259 (1961). See N.C. Gen. Stat. §§ 55-24(a), 55-125 (a) (3) (1960), discussed in O'Neal, Recent Legislation Affecting Close Corporations,23 Law & Contemp. Prob. 341 (1958) ; Lally, The Close Corporation and the NorthCarolina Business Corporation Act, 34 N.C.L. Rev. 432 (1956); N.Y. Bus. Corp. Law(effective April 1, 1963), discussed in Stevens, New York Business Corporation Law of1961, 47 Cornell L.Q. 141 (1962).7 Kessler, The Statutory Requirement of a Board of Directors: A CorporateAnachronism, 27 U. Chi. L. Rev. 696 (1960). But is, as stated in Kaplan v. Block, 183Va. 327, 335, 31 S.E.2d 893, 896 (1944), a business corporation without a board of di-rectors "an impossible concept"? See Del. Code Ann. tit. 8, § 141 (Supp. 1961) ; N.Y.Bus. Corp. Law §§ 620(b), 701, 707.8 If the shareholders functioned as mutual agents, the fiduciary relationship wouldinhere as a logical consequence. Cf. N.Y. Bus. Corp. Law § 620(e) (shareholders' dutiessame as that imposed on directors—presumably to corporation—§ 717—see note 10infra). Cf. Helms v. Duckworth, 249 F.2d 482 (D.C. Cir. 1957).9 Obviously, the appraisal remedy tends to assure that the squeezee receives thefair value of his shares, but presumably the squeezee does not want to be squeezed out.If he elects appraisal, he elects to be squeezed out in most jurisdictions. Furthermore,the very existence of the appraisal remedy might make it his exclusive remedy or resultin the denial of equitable relief on the ground that the legal appraisal remedy is ade-quate. For comparisons of American appraisal statutes, see 2 Model Business Cor-poration Act Annotated § 74 (1960).to E.g. , elimination or at least limitation of "business judgment" ride; impositionof burden of proof on fiduciary where self-interest involved; greater enforceability ofintracorporate arrangements; enforcement by individual action (subject to possibilityof court's barring actions between "partners"), rather than by derivative action subjectto various restrictions on latter.11 When all is said and done, the chief anti-squeeze deterrent is uncompromisingjudicial insistence upon the fiduciary relationship of those in control whether directors,officers, or shareholders, not only to the corporation but also to other shareholders.580

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