Florida small business owners often enjoy the flexibility that having closely-held companies affords them. But what happens when you want to grow your business through a merger and some of your shareholders do not want to be involved with the new entity? Or, in other circumstances, the combined business may not want certain minority shareholders (i.e., those shareholders who have control of less than 50% of the shares of a corporation) involved in the business any longer. In that case, a business may have several options to satisfy its desire for growth and the requirement for its minority shareholders to be treated fairly.
At BrewerLong, we have been helping businesses grow through mergers, acquisitions, and joint ventures for many years. In this article, we will explain a freeze-out merger in Florida and how it can affect your business.
Understanding a Cash-Out Merger
Definition of Freeze Out
A freeze-out merger, also called a cash-out merger, is considered a kind of hostile merger, where minority shareholders in a company are deliberately prevented from expressing their opinion on whether a merger should take place. Freeze outs usually occur in closely-held companies. They are most common where the majority shareholders have a relationship with one another and can discuss the direction they want the company to go. The process for a freeze-out merger in Florida is that the majority shareholders may attempt to prevent the minority shareholders from participating in the decision-making process.
Ordinarily, to complete a freeze-out merger, the controlling shareholders may set up a new company that they would own and control. The new company would then make an attractive tender offer to the original company. The object of this offer would be to force the minority shareholders to give up their equity stake in the original company.
Where a tender offer is successful, an acquiring company may choose to merge its assets into the new corporation. If this happens, non-tendering (typically, minority) shareholders essentially lose their shares as the original company no longer exists. However, these shareholders are generally compensated for the shares they “lose” as part of the merger—hence the term “cash-out merger.” That said, they no longer have a minority ownership stake.
Legality of Freeze Outs
Freeze outs have not always been looked favorably upon by Florida law. At one time, the term “hostile takeover” was heavily scrutinized by the Florida legislature, resulting in several laws that restricted them. Some readers may remember the famous “corporate raiders” of the 1980s and recall why these laws might have been necessary. Primarily, these laws applied to hostile takeovers of large, publicly-traded corporations, and freeze-out mergers of closely held and small companies were not the primary target of such legislation.
Now, cash-out mergers are generally more accepted in corporate mergers and acquisitions of all sizes. When scrutinized by courts, such transactions are generally required to have both a legitimate business purpose and provide fair compensation for minority shareholders. Florida corporate law was revised in 2020 to resolve ambiguities in mergers and acquisitions and provide additional protections for minority shareholders.
Requirements for a Cash-Out Merger
If you are prepared to proceed with a cash-out merger, the BrewerLong team can help you understand the mechanics of this type of transaction. There are several key requirements that must be met, including:
- Identifying the requirements and rights of minority shareholders under any shareholder buy-sell agreement;
- Overcoming any corporate action requirements that would allow a shareholder to sell their shares to any other third party;
- Confirming all fiduciary duties are met by employing a fair merger process;
- Setting a fair price for the company; and
- Honoring dissenters’ rights and shareholders’ appraisal rights.
This is not an exhaustive list of factors to consider. There are many other legal, financial, and practical considerations to think about before proceeding with a cash-out merger. Majority shareholders interested in cashing out minority shareholders should consider engaging trusted, experienced corporate counsel from the moment they decide to undertake a freeze-out merger in Florida to ensure all steps are properly handled.
How BrewerLong Can Help
Our Orlando mergers and acquisitions attorneys have the knowledge and skill set to provide your company with thoughtful legal advice, negotiate the most advantageous terms, and successfully represent your business’s best interests throughout the process. Whether your goal is to transact a freeze-out merger in Florida or to prevent one, we can provide the practical business advice that you need. Contact our experienced team today to schedule an appointment to speak with one of our knowledgeable attorneys today about your case and discuss your legal options regarding your Florida merger or acquisition.