A freeze-out is a situation in which a majority shareholder exploits their majority ownership to remove the minority shareholders. It may be done through a vote, changes to the company’s bylaws or other mechanism by which a majority shareholder can exert their influence over a company. The outcome of a freeze-out is that the minority shareholders find themselves excluded from the management of the company and are ultimately forced to give up their shares for minimal compensation.
Examples of Freeze-Out Tactics
In a majority shareholder vote, the majority shareholder may vote to replace the board of directors with their own preferred candidates, preventing the minority shareholders from having any input in managerial decisions. A majority shareholder might initiate a share buyback program, allowing them to purchase the minority shares at a price below market value. In some cases, the majority shareholder might even force the minority shareholder to sell their shares under the threat of legal action.
How Can Minority Shareholders Protect Themselves?
Minority shareholders can protect themselves by understanding their rights and responsibilities in the company. It is important to review the company’s articles of incorporation and any shareholder agreements which may exist for potential protections. Having a lawyer experienced in corporate law review documents related to the company is also beneficial to ensure that minority shareholders are not taken advantage of.
Conclusion
The goal of a freeze-out is to eliminate minority shareholders from the company. To avoid being frozen-out, minority shareholders need to be aware of their rights and remain diligent in understanding the company’s documents. In addition, it is advised to seek advice from a corporate law specialist to ensure that minority shareholders are protected.