Legal Definitions - freeze-out provision

Definition: A freeze-out provision is a clause in a company's charter that allows an acquiring company to purchase the stock of minority shareholders in exchange for a fair cash value for a certain period of time after the acquisition. This provision is usually valid for two to five years.

For example, if Company A acquires Company B, and Company B has minority shareholders, Company A can use the freeze-out provision to buy the stock of those minority shareholders. This allows Company A to make decisions without the input of the minority shareholders, which can sometimes lead to conflicts of interest.

However, in order for a freeze-out merger to be valid, it must follow strict corporate governance rules to ensure fair dealing and compensation for the minority shareholders. This is because the minority shareholders may not have the same interests as the acquiring company, and may be at a disadvantage in negotiations.