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Warning
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LSDefine
Simple English definitions for legal terms
freeze-out
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A quick definition of freeze-out:
A freeze-out is when the people who own most of a company unfairly treat the people who own less. They might take away their voting power or make it hard for them to make money from the company. This is not fair and can hurt the smaller owners. Sometimes, the smaller owners are forced to sell their shares for less money than they are worth. The courts try to make sure that the bigger owners are fair to the smaller ones. They look at whether the bigger owners were fair in how they treated the smaller ones and whether they paid a fair price for their shares.
A more thorough explanation:
A freeze-out is a term used to describe a situation where majority or controlling shareholders in closely held corporations use their power to oppress minority shareholders. This can involve manipulating corporate control to eliminate minority shareholders, reduce their voting power or percentage of ownership assets, or unfairly deprive them of advantages or opportunities they are entitled to.
For example, imagine a corporation where one shareholder owns 80% of the shares and the other shareholder owns 20%. The majority shareholder could use their power to force the minority shareholder to sell their shares for less than they are worth, effectively freezing them out of the company.
Courts impose a heightened fiduciary duty on majority or controlling shareholders in these corporations. They will look at two aspects of "fairness" of the corporate "freeze-out" merger: fair dealing and fair price. This means that the majority shareholder must act fairly and offer a fair price to the minority shareholder if they want to force them out of the company.