Freeze-Out Transactions the Pure Way: Reconciling Judicial Asymmetry between Tender Offers and Negotiated Mergers
53 Pages Posted: 8 Mar 2005
Under Delaware law, Directors and officers are relatively free to transact in furtherance of maximizing shareholder value without being second-guessed by courts. In limited instances, however, where directors and officers are self-interested in a particular transaction, this deference disappears and the directors and officers are generally charged with proving the fairness of the self-interested transaction. The Delaware courts have attempted to adapt this fiduciary duty paradigm to develop the contours of the relationship between controlling and minority shareholders. This traditional paradigm has been recently challenged by the Delaware Courts.
This Article examines how recent case law (e.g., In re Pure Resources Shareholders Litigation) adversely affects the rights of minority shareholders, particularly in the context of freeze-out and going private transactions. The Article examines the policies underlying fairness review and finds support for its ex post application to interested transactions - irrespective of whether a negotiated merger or tender offer is employed by a controlling shareholder.
The article also explores economic theory relating to freezeouts, including the efficiency, social utility, transaction costs, incentives and externalities associated with freeze-outs and fairness review. The article makes the case that these transactions result in inefficiencies and diminish overall social welfare. Moreover, freeze-outs appear to be socially sub-optimal under both the Pareto efficiency model and the Kaldor-Hicks efficiency model. As such, the article argues that fairness review of these inefficient transactions may decrease their incidence or, at the very least, may better incentivize fair dealings between controlling parties and minorities.
Keywords: Tender offers, mergers, acquisitions, securities, corporate law, law and economics
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