69 Pages Posted: 16 Nov 2011
Date Written: October 2005
Freeze-out transactions, in which a controlling shareholder buys out the minority shareholders, have occurred more frequently since the stock market downturn of 2000 and the Sarbanes-Oxley Act of 2002. While freeze-outs were historically executed as statutory mergers, recent Delaware case law facilitates a new mechanism - freeze-out via tender offer - by eliminating entire fairness review for these transactions. This Article identifies two social welfare costs of the current doctrinal regime. First, the freeze-out tender offer mechanism facilitates some inefficient (value-destroying) transactions by allowing the controller to exploit asymmetric information against the minority. Second, the freeze-out merger mechanism may deter some efficient (value-increasing) transactions because of the special committee's ability to block the deal. These negative wealth effects are unlikely to be resolved through private contracting between the controller and the minority. Rather than advocating patchwork reforms to correct these problems, this Article proposes a return to first principles of corporate law in the freeze-out context. The result of this re-grounding would be convergence in judicial standards of review for freeze-outs, and elimination of the efficiency loss that is inherent in existing doctrine. A companion paper, Post-Siliconix Freeze-outs: Theory & Evidence, provides empirical evidence on freeze-outs.
Keywords: Freeze-outs, Squeeze-outs, Controlling shareholders, Takeovers, Tender offers
JEL Classification: G30, G34, K22
Suggested Citation: Suggested Citation