Cash Out Merger: Everything You Need to Know
A cash out merger (sometimes also referred to as a freeze out merger or a squeeze out merger) results from a merger of two entities in which the shareholders (or stockholders) of the target company (the company being taken over) do not want to be involved with the new company. 3 min read
2. More on Freeze Out Mergers
3. The Differences Between Cash and Stock Mergers
4. Short Form vs. Long Form Mergers
Cash Out Merger
A cash out merger (sometimes also referred to as a freeze out merger or a squeeze out merger) results from a merger of two entities in which the shareholders (or stockholders) of the target company (the company being taken over) do not want to be involved with the new company. In the case of a freeze out or squeeze out merger, the shareholders of the target company are often forced to sell their shares as part of the acquisition or merger deal.
Other points to consider include:
- In a freeze out merger, the shareholders of the acquiring company attempt to “freeze out” the shareholders of the target company (typically minority shareholders) as it pertains to decision-making. This essentially renders the minority shareholders useless in times of voting on issues affecting the company.
- In some cases, the actions of the majority shareholders may come under review in court, although it is often an effective tool for the majority shareholders to deal with problems or issues that they are having with minority shareholders.
- Every state has different guidelines in place regarding what actions are and are not permissible during a freeze out merger.
More on Freeze Out Mergers
Freeze out mergers can be tricky, and considered by some, unethical. Some additional details of a freeze out merger are:
- The majority shareholders (also known as the controlling shareholders who are generally from the company doing the acquiring, or heading up the merger) can establish a totally new company, which they own and control.
- Hoping that the minority shareholders will sell their equity, the new corporation may submit a tender offer.
- If the aforementioned tender offer is accepted, then the acquiring company can decide to merge their assets into the new company. When this occurs, the minority shareholders would lose their shares and the previous company would essentially no longer exist. However, they generally do receive some sort of monetary compensation for the shares they owned in the previous company.
- Some corporate charters may include a freeze out provision, which ensures that should they ever merge with, or be acquired by another company, the shareholders will be fairly compensated for their shares in the event of a freeze out.
The Differences Between Cash and Stock Mergers
When a merger occurs, the shareholders can be paid out in one of two ways: cash or stock. Regarding a stock merger:
- When two businesses are merging, shareholders of the target company may offer top dollar to convert their shares into merged equity. “Top dollar” in the context of a stock merger would mean that the shareholders will be offered a high number of shares in the new company in exchange for their shares in the former one.
- While often seen when the company being acquired is of significantly lesser value than the company facilitating the acquisition, it is not uncommon to see this even when the two corporations are of similar or equal value.
Whereas, in a cash merger:
- Shareholders are offered a cash payout in exchange for their shares. This type of merger then means that the shareholders of the company being acquired will no longer be shareholders in the new company, unless they then choose to buy shares on their own.
- The company doing the acquiring buys out the target company’s shares or stocks with cash, rather than with stock options (or shares) in the new company.
- This type of merger is often considered to be a buyout.
- The shareholders of the target company still have to approve the offer being made by the acquiring company and approve the sale of the company.
Short Form vs. Long Form Mergers
Additionally, there exist short form mergers and long form mergers. A short form merger pertains to situations in which a subsidiary is merged into a parent company who already owned the majority of the shares. This is a fairly easy and inexpensive way in which a merger can be conducted, as it is generally achieved by the parent company sending a letter to the shareholders of the subsidiary, called a merger resolution, and then files an executed articles of merger with the Secretary of State in which the company is located.
If you need help with cash out mergers, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.