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Freezeout ProvisionsVote FOR proposals to opt out of state freezeout provisions. DiscussionFreezeout provisions were a response to the highly leveraged takeover bids of the 1980s. Often, acquirers took on massive amounts of debt to finance an acquisition, only to "break-up" the acquired company, sell its assets at a profit, and service the acquirer's initial debt. How Freezeout Provisions WorkFreezeout provisions force an investor who surpasses a certain ownership threshold in a company (usually between ten percent and 20 percent) to wait a specified period of time before gaining control of the company. However, the potential acquirer must secure adequate financing before proceeding with the acquisition and, quite often, is subject to a fair price requirement once the freezeout period has expired. Proponents argue that such provisions protect shareholders from leveraged takeover bids, when some of the target company's assets may be sold to pay the purchase price. Opponents, on the other hand, see such statutes as takeover devices that further insulate management from shareholders. Prevalence of Freezeout ProvisionsCurrently, 33 states have adopted freezeout provisions. Freezeout periods range from two years to five years, an unacceptable waiting period in most instances. Trigger thresholds vary from five percent in Massachusetts to 25 percent in Maine. Freezeout statutes with extremely low ownership triggers serve to insulate management even from those shareholders buying blocks of stock for investment purposes only. Table 4-3. Length of Freezeout Periods[1]
Table 4-4. Trigger Thresholds for Freezeout Provisions[2]
Other differences among freezeout provisions include approval of the business combination by a majority or supermajority of disinterested shares, certain threshold requirements once the business combination has been consummated, and additional conditions that must be satisfied after the moratorium period on business combinations has expired. The most common of these is the fair price provision which, when combined with the freezeout provision, mandates that the subsequent business combination offer a fair price for all shares acquired. Freezeout provisions serve to insulate management from shareholders. While such statutes may discourage highly leveraged tender offers, they doubtless prevent offers in which other shareholders might like to participate. Proposals to opt out of freezeout provisions should generally be supported. Notes
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