The Efficiency and Welfare Foundations of Freezeout Laws in Takeovers
25 Pages Posted: 26 Aug 2002
Date Written: March 1, 2002
We provide an economic basis for permitting freezeouts of non-tendering shareholders following successful takeovers. We describe a specific freezeout mechanism that is based on easily verifiable information, making it simple to implement in practice. We show that this mechanism induces desirable efficiency and welfare properties in models of both corporations with widely-dispersed shareholdings (as in Grossman and Hart, 1980) and corporations with large pivotal shareholders (as in Bagnoli and Lipman, 1988), and that it strictly dominates previous proposals along some important dimensions. The mechanism we describe is very closely related to the practice of takeover law in the US.
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