Freeze Out

What Is a Freeze Out?

A freeze out (likewise called a shareholder crush out**)** is an action taken by a company's majority shareholders that pressures minority holders to sell their stakes in the company. Different moves might be viewed as freeze out strategies, for example, the termination of minority shareholder-employees or the refusal to declare dividends.

Understanding Freeze Outs

Freeze outs generally happen in intently held companies, wherein the majority shareholders can banter with each other. The majority shareholders will endeavor to freeze out the minority from the dynamic interaction, delivering minority voting rights pointless.

Such actions might be illegal and could be upset by the courts after audit and are much of the time achieved utilizing an acquisition. Many states have defined what is permissible in freeze outs through their current rules on corporate mergers and acquisitions (M&A).

A majority shareholder is a person or entity that claims and controls over half of a company's outstanding shares. They have critical influence over the company, particularly assuming the shares are voting shares.

In a commonplace freeze-out merger, the controlling shareholder(s) may set up another corporation that they own and control. This new company would then present a tender offer to the next company, wanting to compel the minority shareholders to surrender their equity position. Assuming the tender offer is effective, the obtaining company might decide to blend its assets into the new corporation.

In this scenario, non-tendering shareholders would basically lose their shares as the company would never again exist. While non-tendering shareholders would generally receive compensation (cash or securities) for their shares as part of the transaction, they would never again hold their minority ownership stake.

Freeze Out Laws and Fiduciary Duty

By and large, freeze outs by controlling shareholders have confronted contrasting degrees of legal investigation.

In the 1952 case of Sterling v. Mayflower Hotel Corp., the Supreme Court in Delaware laid out a fairness standard that would apply to all mergers, including freeze outs. It decided that while a procuring company and its directors "stand on the two sides of the transaction, they bear the burden of laying out its [the merger's] whole fairness, and it must breeze through the assessment of careful examination by the courts."

Albeit the law was once hostile to freeze outs, they are generally more accepted in corporate acquisitions nowadays. Courts generally require that as part of a fair transaction, an acquisition ought to have both a business purpose and fair compensation for shareholders.

Corporate charters may contain a freeze out provision that permits a getting company to buy the stock of minority shareholders for fair cash value inside a defined timeframe after the acquisition is completed.

Features

• This pressure might be acquainted by majority holders voting with fire employees who are minority shareholders in the company or declining to approve dividend payments.
• Freeze outs might accompany a corporate merger or acquisition that suspends minority voting rights.
• Freeze outs are subject to regulatory investigation, however the legal landscape is muddled.
• A freeze out happens when majority shareholders pressure minority shareholders into selling their shares.