What is a Rump?
Rump is the name given to minority group of shareholders who refuse to tender their shares in a corporate action. The rump may be attempting to prevent any number of corporate actions, including a rights issue, merger, or acquisition.
- Rump is the term used to describe a group of shareholders attempting to thwart a corporate action.
- The rump may be successful in stopping an intended takeover, or it may otherwise impede the acquiring or merging entity's objectives.
- Rump shareholders can be forced to sell their shares without their consent, through a squeeze-out.
How a Rump Works
The rump can stall or halt corporate takeovers if they own enough shares. However, even if they are not in a position to block a merger, their share of the company’s cash flow may be enough to discourage the acquiring company from completing the merger or acquisition in the first place.
Rump shareholders can be forced to sell their shares without their consent by the underwriters, through a squeeze-out, depending on the percentage of shares owned by the majority — and as long as it is on the same terms as the offer made to the other shareholders. For example, in the United Kingdom, shareholders owning 90% of the company can consent to squeeze out the other minority shareholders. In the United States, the percentage of shareholders required to consent to a squeeze out is governed by state law.
Example of a Rump
Assume a UK based corporation, ABC Company, wishes to merge with XYZ Corp. A small portion of XYZ Corp's shareholders, 8%, are adamantly opposed to the merger. Despite their best efforts, the acquisition goes through as planned. The rump shareholders are subsequently forced to liquidate their shares at the current fair market value in a squeeze out, also sometimes referred to as a freeze out.