Types of Freezes
Freezes are generally done by way of internal freeze orfreeze.
In an internal freeze, existing common shares are exchanged for new preferred shares, with a fair market value (FMV) equal to the common shares immediately before the freeze (with these new preferred shares known as the “freeze shares”). Then, new common shares are issued to new shareholders or to a trust for the benefit of those shareholders. The preferred shares typically contain certain rights:
- Redemption/retraction rights: The freeze shares will have redemption/retraction rights equal to the FMV of the old common shares. This means that the holder can demand redemption of the new shares at any time. Additionally, there are often dividend restrictions put in place on the other classes of shares, namely the common shares, so as not to impair the redemption value of the freeze shares.
- Voting vs. non-voting: the preferred shares may have special super-voting privileges and the common shares may have restrictive voting capabilities. This will leave the person who has undertaken the estate freeze (the “freezor”) with control over the decisions of the company.
Holding Company Freeze
In a Holding Company Freeze, the owner transfers the common shares they own in a company to a newly established holding company, in exchange for new frozen preferred shares in this holding company. The common shares of the new holding company will be issued to the new shareholders (typically family members or a trust). The new common shares will have nominal value, and the freeze shares will have all the attributes discussed above.
A holding company freeze is typically used when there are multiple shareholders of the(“Opco”), so as to allow each shareholder to put into place their personal estate plan independent of the other co-owners. The same issues relating to dividends and control as discussed above need to be considered with this type of freeze.