What Happens During a Shareholder Freeze-Out?

A shareholder freeze-out (sometimes called a squeeze-out) occurs when majority shareholders or individuals within corporate leadership try to pressure minority shareholders into selling their ownership interests, often at unfairly low values. Freeze-outs frequently involve tactics designed to reduce the minority shareholder’s influence, financial benefits or participation in company operations. In some situations, these actions may violate shareholder agreements or breach fiduciary duties owed to minority shareholders.

Shareholders invest in a company by purchasing stock, and they secure certain rights in exchange for their investment. Disputes may arise when majority shareholders or executives attempt to consolidate control of the company by marginalizing minority owners or making continued ownership financially burdensome.

The tactics employed in a shareholder freeze-out can vary depending on the circumstances. In some organizations, minority shareholders are also employees of the business. Majority shareholders, who often make the management decisions, may terminate the minority shareholders from their jobs, creating financial pressure that encourages them to sell their shares. 

An alternative approach involves majority owners, or a coalition of shareholders, cooperating to seize control of a company by granting themselves excessive compensation. This measure can reduce profits and shift earned revenue from shareholder dividends to increased payroll expenses. In some cases, majority shareholders may issue new stock that they sell to themselves, often for prices below market rate, thereby diluting the value of existing stock and diminishing the control that minority shareholders typically enjoy.

Other freeze-out tactics can include the following:

• Refusing to issue dividends to minority shareholders
• Excluding minority shareholders from meetings
• Excluding minority shareholders from votes on important issues
• Structuring mergers or transactions that compel minority shareholders to sell

Any of these tactics may constitute a violation of shareholder rights under the law or company bylaws, potentially triggering  business litigation. Victims of minority shareholder oppression may be able fo force a buyout under Arizona law. Consulting with an attorney regarding statutory and contractual shareholder rights, as well as problematic conduct towards minority owners can help identify potential relief available for victims of a freeze-out.

The Law Offices of Donald W. Hudspeth, P.C., has achieved strong results for shareholders in Arizona engaged in disputes over corporate governance. Discuss your situation with an accomplished Phoenix attorney by calling 866-696-2033 or contacting us online.