Legal Definitions - freeze-out merger

A freeze-out merger is a corporate transaction where the majority shareholders of a company acquire all the shares held by the minority shareholders, effectively forcing them to sell their ownership stake. This is typically achieved by offering cash for the minority shares, thereby "freezing out" the minority owners from the company and making it a wholly-owned subsidiary or a private entity. After a freeze-out merger, the minority shareholders no longer have any ownership interest or voting rights in the company.

Here are some examples to illustrate this concept:

• Taking a Public Company Private: Imagine "Tech Innovations Inc." is a publicly traded company with a few large institutional investors holding 80% of the shares, and thousands of individual investors owning the remaining 20%. The institutional investors decide they want to take Tech Innovations Inc. private to avoid the costs and scrutiny of being a public company and to make long-term strategic decisions without immediate market pressure. They propose a freeze-out merger, offering a premium cash price for all outstanding shares held by the individual minority investors. Once the merger is complete, the individual investors no longer own shares, and Tech Innovations Inc. becomes a privately held company controlled solely by the institutional investors.

  This example illustrates a freeze-out merger because the majority shareholders (institutional investors) force the minority shareholders (individual investors) to sell their shares for cash, eliminating their ownership and taking the company private.

• Streamlining a Corporate Structure: Consider "Global Holdings Corp.," which owns 85% of its subsidiary, "Local Logistics Solutions." The remaining 15% of Local Logistics Solutions is owned by a small group of original founders and early employees. Global Holdings Corp. wants to fully integrate Local Logistics Solutions into its operations, streamline decision-making, and simplify its overall corporate structure by eliminating the need to manage minority shareholder interests in the subsidiary. Global Holdings Corp. initiates a freeze-out merger, offering a cash payment to the 15% minority shareholders of Local Logistics Solutions for their shares. After the merger, Local Logistics Solutions becomes a 100% owned entity of Global Holdings Corp., and the original founders and employees no longer have an ownership stake.

  This demonstrates a freeze-out merger as the majority shareholder (Global Holdings Corp.) uses the transaction to acquire all remaining minority shares, consolidating full ownership and simplifying its corporate structure.

• Resolving Shareholder Disputes: Suppose "Family Foods Co." is a private company where one family branch holds 75% of the shares, and another branch holds 25%. The two branches frequently disagree on the company's strategic direction, leading to significant delays and internal conflicts. The majority family branch decides that to move forward effectively, they need complete control. They form a new entity and propose a freeze-out merger where this new entity merges with Family Foods Co. In this merger, the minority family branch is offered a fair cash price for their shares, effectively ending their ownership and involvement in the company. After the merger, the majority family branch owns 100% of the combined entity.

  Here, the freeze-out merger is used by the majority shareholders to eliminate the ownership of dissenting minority shareholders, consolidating control and resolving ongoing disputes by forcing them to accept cash for their shares.