In the world of corporate finance and mergers and acquisitions, the term “freeze-out” refers to a situation in which a controlling shareholder or group of shareholders takes action to exclude minority shareholders from participating in the management or profits of a company. This can occur in a variety of ways, from the manipulation of corporate voting procedures to the use of buyout offers that undervalue the shares of minority shareholders. In this article, we’ll take a closer look at the concept of freeze-out and explore some of the tactics that are used to execute these types of maneuvers.
What is a Freeze-Out?
A freeze-out occurs when a controlling shareholder or group of shareholders takes steps to exclude minority shareholders from participating in the management or profits of a company. This can be done in a variety of ways, such as through the use of voting agreements that effectively give control of the company to the majority shareholder(s) or through the use of squeeze-out provisions that allow controlling shareholders to force minority shareholders to sell their shares at an undervalued price.
Freeze-outs are generally carried out by majority shareholders who want to consolidate their control over a company and limit the ability of minority shareholders to influence its direction. This can be especially common in closely-held companies, where a small group of individuals or families hold a controlling interest in the business.
Tactics Used in Freeze-Outs
There are a number of tactics that can be used to execute a freeze-out, including:
- Manipulation of Voting Procedures: One of the most common tactics used in freeze-outs is the manipulation of corporate voting procedures. This can involve the use of voting agreements, proxies, or other mechanisms to effectively give control of the company to the majority shareholder(s) and prevent minority shareholders from having any meaningful input.
- Use of Buyout Offers: Another tactic used in freeze-outs is the use of buyout offers to undervalue the shares of minority shareholders and force them to sell their stakes in the company. This can be done through the use of squeeze-out provisions or other legal mechanisms that allow controlling shareholders to force the sale of minority shares at a price that is below fair market value.
- Share Dilution: Controlling shareholders can also execute a freeze-out by diluting the ownership stakes of minority shareholders through the issuance of additional shares. This can effectively reduce the value of minority shares and limit the ability of minority shareholders to influence the direction of the company.
- Oppression: In some cases, controlling shareholders may engage in conduct that is oppressive to minority shareholders, such as denying them access to information or opportunities to participate in the management of the company. This can be done with the intention of forcing minority shareholders to sell their shares at a discounted price.
Legal Protections for Minority Shareholders
Despite the tactics used by controlling shareholders in freeze-outs, minority shareholders do have legal protections that can help to safeguard their interests. These protections can include the right to dissent from certain corporate actions, the right to sue for oppression or breach of fiduciary duty, and the right to seek appraisal of the fair value of their shares in the event of a squeeze-out or buyout offer.
In addition, some jurisdictions have laws that specifically address freeze-outs and provide additional protections for minority shareholders. For example, the Delaware General Corporation Law (DGCL) includes provisions that require controlling shareholders to provide fair treatment to minority shareholders in the event of a squeeze-out, and that allow minority shareholders to challenge the fairness of a proposed transaction.
Conclusion
In the world of corporate finance and mergers and acquisitions, freeze-outs are a common tactic used by controlling shareholders to consolidate their control over a company and limit the influence of minority shareholders. These maneuvers can take a variety of forms, from the manipulation of corporate voting procedures to the use of buyout offers that undervalue the shares of minority shareholders and force them to sell at a discounted price. However, despite the tactics used by controlling shareholders, minority shareholders do have legal protections that can help to safeguard their interests.
It’s important for investors to be aware of the potential for freeze-outs when considering investments in closely-held companies or companies with a dominant shareholder or group of shareholders. By understanding the tactics that can be used to execute these types of maneuvers, investors can better evaluate the risks and potential returns associated with their investment.
Overall, freeze-outs are a complex and often controversial aspect of corporate finance and mergers and acquisitions. While they can be an effective way for controlling shareholders to consolidate their control over a company, they can also be harmful to minority shareholders and may even violate laws and regulations designed to protect their interests. As such, investors should approach these types of situations with caution and seek expert legal and financial advice to ensure that their interests are properly protected.
