Takeovers, Shareholder Litigation, and the Free-riding Problem

Broere, Mark and Christmann, Robin (2019): Takeovers, Shareholder Litigation, and the Free-riding Problem.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: squeeze-out; appraisals; entire Fairness; judicial review
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; K - Law and Economics > K2 - Regulation and Business Law > K22 - Business and Securities Law; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K41 - Litigation Process

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