Freeze Out (Trading) - Explained
What is a Freeze Out?
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Table of ContentsWhat is a Freeze Out?How Does a Freeze Out Work?How Freeze-Out Mergers WorkWhat Is a Freeze-Out Provision?Laws and Fiduciary Duty
What is a Freeze Out?
In its literal meaning, a freeze-out is an act of preventing someone from participating in an activity by being hostile to them or acting in a cruel or unfriendly manner. A trader can be freezed-out of trade in the market. A free-out is otherwise known as a squeeze-out. This action can be taken by a firms majority shareholders against the minority shareholders that cows them into selling their holdings in a company. There are diverse freeze-out techniques that can be used to exclude a set of people from an activity, these tactics are also used in the business world.
How Does a Freeze Out Work?
In a company, the majority of shareholders can liaise to pressure the minority shareholders to sell their stake due to many reasons, when this happens, it is an example of freeze-out. Also, an attempt to terminate the minority shareholders-employees of a company by a majority group is also a freeze-out. When freezing-out occurs in a company, a minority group will be denied from participating in the decision-making process and they would be forced to sell their stake in the company. On many occasions, freeze-outs are seen unethical by the court but some freeze-out tactics are permissible in mergers and acquisitions.
How Freeze-Out Mergers Work
Oftentimes, some freeze-out actions come with mergers and acquisitions but many states regulate the type of freeze-out that is allowed. In a merger, the controlling shareholders of an acquiring company can pressure the minority shareholders of a target company to sell their stake or give up their position in the target company so that the merger would be much easier. When the minority shareholders of the corporation yield to the pressure of the controller shareholders, they will lose their positions, since their company will bo longer be in existence.
What Is a Freeze-Out Provision?
A freeze-out provision is a clause in a company's charter that permits the purchase of the stock belonging to minority shareholders of the company by the shareholders of an acquiring company during merger and acquisition. The minority shareholders receive fair value, often in cash price for giving up their stock or holdings in the acquired company.
Laws and Fiduciary Duty
There are several laws that regulate freeze-outs, due to the tendency of the controlling (majority) shareholders to use freeze-outs in unethical and cruel ways, there has been a measure of scrutiny for freeze-outs. Before laws were made to regulate freeze-outs, they are commonly associated with unfair transactions where the minority shareholders are forced to give up their positions with receiving a fair compensation or cash value for their stock. However, as against the popular belief that the law is hostile to freeze-outs, freeze-outs are now becoming more acceptable and the law has created room for the occurrence of freeze-outs.