Freeze-Out Mergers

Review of Financial Studies, Forthcoming

43 Pages Posted: 9 Jun 2018 Last revised: 10 Sep 2018

See all articles by Elif Dalkir

Elif Dalkir

University of New Brunswick - Fredericton - Department of Economics

Mehmet S. Dalkir

University of New Brunswick - Fredericton - Department of Economics

Doron Levit

University of Washington, Foster School of Business; European Corporate Governance Institute (ECGI)

Date Written: May 31, 2018

Abstract

Do freeze-out mergers mitigate the free rider problem of corporate takeovers? We study this question in a tender offer model with finitely many shareholders. Under a freeze-out merger, shareholders expect to receive the original offer price whether or not they tender their shares. We show that the ability to freeze out minority shareholders increases the raider's expected profit, and this profit is higher when the ownership requirement the acquirer has to meet in order to complete a freeze-out merger is lower. Furthermore, the raider's expected profit decreases as the firm becomes more widely held. However, in the limit, for any ownership requirement that is more stringent than simple majority, the raider's expected profit converges to zero. In this sense, freeze-out mergers do not provide a solution to the free rider problem.

Keywords: Free rider problem, Freeze-out merger, Takeovers, Tender offer

JEL Classification: C61, D82, G34

Suggested Citation

Dalkir, Elif and Dalkir, Mehmet S. and Levit, Doron, Freeze-Out Mergers (May 31, 2018). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3188109 or http://dx.doi.org/10.2139/ssrn.3188109

Elif Dalkir

University of New Brunswick - Fredericton - Department of Economics ( email )

Fredericton, New Brunswick E3B 5A6
Canada

Mehmet S. Dalkir

University of New Brunswick - Fredericton - Department of Economics ( email )

Fredericton, New Brunswick E3B 5A6
Canada

Doron Levit (Contact Author)

University of Washington, Foster School of Business ( email )

434 Paccar Hall, 4273 E Stevens Way NE
Seattle, WA 98195
United States

HOME PAGE: http://https://sites.google.com/view/doronlevit

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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