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3 actions that are warning signs of a shareholder freeze-out

On Behalf of | Oct 27, 2023 | Business Law

Shareholders make significant financial investments in businesses and obtain certain rights and compensation in return. They generally have the right to continue exerting their authority and receive those benefits until they sell their shares in the organization or the company ceases operations.

However, sometimes minority shareholders with a small ownership interest in a company face manipulative misconduct on the part of executives or other shareholders with the aim of forcing them to sell their shares. A shareholder freeze-out occurs when a majority shareholder or a group of shareholders try to force those who have invested in a company to give up their ownership interests. The following kinds of conduct are warning signs of a potential attempt at a freeze-out.

Excluding shareholders from meetings

Shareholder meetings allow those invested in a company to learn about its recent performance and express personal preferences regarding future operations. They typically have the right to attend those meetings, but those trying to freeze them out may try to exclude them. Both meetings held in secret without appropriate notice and instructions left with others at the business to prevent certain parties from entering meetings can be one way to freeze out minority shareholders.

Denying a shareholder their right to vote

Shareholders don’t necessarily have a say in every decision that companies make, but they can influence the overall direction of the company in which they invested. They can also initiate a vote of no confidence to remove executives who have done the organization of disservice. Preventing shareholders from having a say, possibly by refusing to allow them to vote at crucial times, is common during a freeze-out attempt.

Refusing to pay dividends

Shareholders receive a return on their investment in the form of profit-related dividends. When an organization refuses to pay those dividends, shareholders can sometimes fight back. Often, freeze-out efforts culminate in shareholder litigation when it proves impossible to amicably resolve the issue and reinstate the rights of individual shareholders. Otherwise, their only option may be to sell their interest in the company and invest their capital elsewhere.

Being able to recognize a freeze-out when it occurs is crucial for those who have committed resources to help fund a business. Seeking legal guidance can be extremely helpful in this regard.