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What to do if you are a minority shareholder facing a freeze-out

On Behalf of | Jun 28, 2021 | Business & Commercial Litigation |

New York City is one of the largest epicenters of commerce in the world. For any new company starting out, it can be a chaotic and difficult process to build a business that is successful and long-lasting.

Sometimes competition not only stems from external forces, but it can also rise from internal strife.

Maybe because of differences of opinion or an unshared vision of a company’s future, there may come a time where the majority shareholders wish to freeze out minority shareholders and take a company private.

What is a freeze-out?

When a firm’s majority shareholders pressure minority shareholders into selling their shares, that is called a free-out. The pressure may come in the form of the majority holders voting to terminate minority shareholders or by withholding dividend payments. They can also suspend the voting rights of the minority shareholders.

What should you do if you are facing a freeze-out?

The first thing you should do is make yourself aware of New York’s view on what is permissible through existing statutes on corporate mergers and acquisitions.

Though we have seen historically courts ruling against majority shareholders in some instances, freeze-outs have become generally more accepted in corporate acquisitions in recent years.

Courts allow freeze-outs to see the process through to the end if it is evident that as part of a fair transaction, an acquisition should have a business purpose and have a fair compensation for the shareholders being bought out.

If you see this situation starting to unfold at a company that you have an ownership stake in, make sure to seek legal support immediately.

The law is a bit ambiguous in these types of mergers and acquisitions and you may have more recourse than you think. Even if there is not much that you can do to prevent the acquisition, you will want to make sure you are fairly compensated for your shares.