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What occurs during a shareholder freeze-out?

On Behalf of | Jul 21, 2023 | Business law |

Shareholders typically play a very important role at a corporate entity. They invest in the business, which helps the company grow. They also have certain rights that can help influence the direction that the company takes. Shareholders may attend meetings where they vote on matters like changes to the company’s operations or executive teams. Shareholders typically also have the right to receive dividends when the business is profitable.

Unfortunately, some companies that become publicly traded entities do not treat their shareholders with the respect that they deserve. A shareholder freeze-out or squeeze-out can undermine the value of a shareholder’s investments and violate their rights. What happens when a business wants to freeze out shareholders?

A stock buyback is often the goal

Perhaps the company was once a closely-held organization, and the prior sole owner now regrets their decision to allow shareholder investment. They may try to place pressure on those shareholders to get them to sell their shares back to the company. Sometimes the business has always been a publicly-traded entity, but there is now a coalition of large shareholders that wants to push out the minority shareholders.

Whatever the motive, a freeze-out can potentially violate shareholder rights. Sometimes, individual shareholders will not be able to attend the meetings where shareholders vote and talk about the future of the company. Other times, they are allowed to be physically present but other parties at those meetings prevent them from giving input or voting. Occasionally, a shareholder frees out looks like intentionally denying shareholders the financial compensation that they deserve for their investments.

Some of these practices may violate shareholders’ rights and could constitute an actionable breach of contract. Typically, for shareholders to fight back against such corporate malfeasance, they will need documentation of what has occurred and also to carefully review their agreement with the business. In some cases, they may be able to seek damages. Other times, they may be able to fight back against those abusing their authority and regain their rightful role.

Being able to identify when a shareholder freeze-out has likely begun may help those invested in a company more effectively protect their interests.