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Simple English definitions for legal terms
freeze-out provision
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A quick definition of freeze-out provision :
A freeze-out provision is a rule in a company's charter that allows a bigger company to buy the shares of smaller shareholders for a fair price after taking over the company. This can happen for a few years after the takeover. The bigger company has to follow strict rules to make sure they treat the smaller shareholders fairly. This is because the bigger company can make decisions without the smaller shareholders, and their interests might not be the same.
A more thorough explanation:
Definition: A freeze-out provision is a clause in a company's charter that allows an acquiring company to purchase the stock of minority shareholders in exchange for a fair cash value for a certain period of time after the acquisition. This provision is usually valid for two to five years.
For example, if Company A acquires Company B, and Company B has minority shareholders, Company A can use the freeze-out provision to buy the stock of those minority shareholders. This allows Company A to make decisions without the input of the minority shareholders, which can sometimes lead to conflicts of interest.
However, in order for a freeze-out merger to be valid, it must follow strict corporate governance rules to ensure fair dealing and compensation for the minority shareholders. This is because the minority shareholders may not have the same interests as the acquiring company, and may be at a disadvantage in negotiations.