The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach

Takeovers, Shareholder Litigation, and the Free-Riding Problem

“…In this scenario, the court will observe the realization of the share value after the squeezeout price is set by the Buyer at stage 3. 24 Given the success of the takeover and the squeezeout, the decision to litigate by minority shareholders is then also based on the observed realization of the stock price Z . For example, when the high stock price z is realized, then minority shareholders can expect to extract from court procedures…”

Deal Structure and Minority Shareholders

“…139 In 2015, Restrepo and Subramanian furthered this research and jointly authored an article about the impact of more recent Delaware case law on deal outcomes, calling this period one of "doctrinal evolution" in judicial review of squeeze-outs executed as tender offers versus those structured as mergers. 140 The authors present empirical evidence on all squeeze-outs of Delaware targets during the shift to the "unified approach" to squeeze-outs, and find that deal outcomes have converged after the Delaware Chancery Court's decision in In re Cox Communications, which explicitly endorses the unified approach. The study showed that post-Cox, practitioners used the tender offer squeeze-out mechanism less often and, when it was used, minority shareholders received higher relative CARs compared to the pre-Cox period.…”

“…These differences create a permanent social welfare loss that requires judicial intervention." 137 Subramanian's post-Siliconix study did not formally examine whether Siliconix generated a structural change in relative CARs in tender offers versus mergers, and thus whether the differences in outcomes are attributable to dissimilar standards of review. A follow-up empirical study by Restrepo further explored Subramanian's thesis.…”

“…They then argue that, not only did the Delaware Supreme Court adopt the right policy by endorsing the unified approach for merger freeezouts, but that the Delaware Supreme Court should explicitly endorse the unified approach in tender offer squeeze-outs to ensure adequate procedural protection to minority shareholders. 142 As Restrepo and Subramanian state, SC approval alone is insufficient to protect minority shareholders because SC approval and MOM conditions serve different purposes (i.e., SC is "a back-and-forth and typically hard-fought negotiation between the controller and representatives of the minority" while MOM provides a "binary check against a captured SC"). 143 Accordingly, they endorse the unified approach to incentivize controlling shareholders and SCs to provide a MOM condition, arguing that both procedural protections should be necessary for controlling shareholders to receive the benefit of business judgment review.…”