Abstract

http://ssrn.com/abstract=2297707
 
 

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The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach


Fernan Restrepo


Stanford Law School

Guhan Subramanian


Harvard Business School

July 1, 2013

Rock Center for Corporate Governance at Stanford University Working Paper No. 153

Abstract:     
Historically, Delaware corporate law provided different standards of judicial review for buyouts by controlling shareholders (also known as “freezeouts”) based on what transactional form was used: deferential business judgment review for freezeouts executed as tender offers, and stringent “entire fairness” review for transactions structured as mergers. Subramanian (2005), Subramanian (2007), and Restrepo (2013) provide doctrinal and empirical evidence that transactional planners responded to these differences in standards of judicial review; that these differences in judicial scrutiny created differences in outcomes for the minority shareholders; and that differences in outcomes created a social welfare loss, not just a wealth transfer from minority shareholders to the controlling shareholder. Over the past decade, in a series of important decisions, Delaware law has migrated toward a “unified approach” to freezeouts regardless of transactional form. In this paper we present empirical evidence on all freezeouts of Delaware targets during this period of doctrinal evolution. In general, we find that deal outcomes have converged in the eight years since the Delaware Chancery Court’s decision in Cox Communications, but approximately half of merger freezeouts in the post-Cox era still did not follow the procedural template provided by the unified approach. Our findings suggest that: (1) transactional planners seem to respond to even probabilistic changes in the Delaware case law; (2) the social welfare loss identified in Subramanian (2005) seems to no longer be present; but (3) the Delaware Supreme Court may nevertheless wish to “finish the job” by endorsing the unified approach, in order to ensure adequate procedural protections to minority shareholders.

Number of Pages in PDF File: 37

JEL Classification: G30, G34, K22

working papers series


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Date posted: July 24, 2013 ; Last revised: September 18, 2013

Suggested Citation

Restrepo, Fernan and Subramanian, Guhan, The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach (July 1, 2013). Rock Center for Corporate Governance at Stanford University Working Paper No. 153. Available at SSRN: http://ssrn.com/abstract=2297707 or http://dx.doi.org/10.2139/ssrn.2297707

Contact Information

Fernan Restrepo
Stanford Law School ( email )
Stanford, CA 94305
United States
Guhan Subramanian (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-9784 (Phone)
617-496-7379 (Fax)
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