The Corporate Governance Endgame – An Economic Analysis of Minority Squeeze-Out Regulation in Germany

Abstract

This paper examines minority squeeze-outs and their regulation in Germany, a country where majority shareholders have extensively used this tool since its introduction in 2002. Using unique data on court rulings and compensations, we analyze a sample of 324 squeeze-outs of publicly listed companies from 2002 to 2011. Large firms with foreign large shareholders are the most likely to be delisted. Positive stock price performance increases the likelihood of a squeeze-out, but operating performance has the opposite effect. Stock prices react positively to squeeze-out announcements, in particular when the squeeze-out does not follow a previous takeover offer. Nearly all squeeze-outs are legally challenged by minority shareholders, either with an action of avoidance or with an appraisal procedure (or both). We find that additional cash compensation is larger in appraisal procedures, but actions of avoidance are completed in less time and offer higher annualized returns. Overall, our evidence suggests that challenging the cash compensation offered in a squeeze-out delivers high returns for minority investors, net of opportunity costs.

Keywords: Corporate Governance, Investor protection, Event studies, Squeeze-outs, Germany

JEL Classification: G14, G34, G38, K22