Takeovers, Shareholder Litigation, and the Free-Riding Problem

Leibniz FH School of Business Research Paper No. 4 (2019)

40 Pages Posted: 25 Apr 2019

See all articles by Mark Broere

Mark Broere

Leibniz School of Business

Robin Christmann

Leibniz School of Business

Date Written: March 29, 2019

Abstract

When shareholders of a target firm expect a value improving takeover to be successful, they are individually better off not tendering their shares to the buyer and the takeover potentially fails. Squeeze-out procedures can overcome this free-riding dilemma by allowing a buyer to enforce a payout of minority shareholders and seize complete control of the target firm. However, it is often argued that shareholder protection laws and litigation restore or intensify the free-riding dilemma. Applying a game theoretic setting, we demonstrate that it is not shareholder litigation that brings back the free-riding dilemma, but rather the strategic gambling of buyers for lower prices and flaws in the design and application of squeeze-out laws. We find, for example, that lawmakers should refrain from setting separate legal thresholds for corporate control and squeeze-outs. We also analyze a favorable change in jurisdiction of the German Federal Court and provide implications for legal policy.

Keywords: squeeze-out, appraisals, entire fairness, judicial review

JEL Classification: G34, G35, K22, K41

Suggested Citation

Broere, Mark and Christmann, Robin, Takeovers, Shareholder Litigation, and the Free-Riding Problem (March 29, 2019). Leibniz FH School of Business Research Paper No. 4 (2019), Available at SSRN: https://ssrn.com/abstract=3365001 or http://dx.doi.org/10.2139/ssrn.3365001

Mark Broere (Contact Author)

Leibniz School of Business ( email )

Expo Plaza 11
Hanover, 30539
Germany

Robin Christmann

Leibniz School of Business ( email )

Expo Plaza 11
Hanover, 30539
Germany

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