executed as reverse stock splits as mergers, because the requirement of board action that seems
to distinguish mergers from tender offers is met, and because the Chancery Court has subjected
reverse stock splits to fairness review in other (non-freezeout) contexts.29 The findings reported
in this Part remain unchanged if I exclude reverse stock splits from the analysis.
To assess the outcome of each transaction, I calculate the premium implied in the controller’s
first offer and (for successful deals) the premium implied in the controller’s final offer, over the
average trading price of the target stock for 30 days and 60 days prior to deal announcement. I
use two different time windows in order to minimize the effect of any run-up in the target stock
price before the deal announcement.30 I define the controller’s first offer as the first formal offer
that the controller makes to the target board. This offer is sometimes disclosed publicly at the
time it is made, through a press release and 8-K filing by the target company, though more often
it is disclosed after the transaction is announced in the company’s Schedule 14A filing. In five
transactions the controller proposed a price range as its first offer;31 in these cases I use the
midpoint of the range as the first offer. Interestingly, in no case did the SC make the first offer,
although in some transactions there were substantial discussions between the controller and the
SC before the controller made its offer.
committee.”); In re Emerging Communications Inc. Shareholders Litigation, C.A. No. 16415 (Del. Ch. May 3, 2004) (freeze-out merger structured as two-step tender offer subject to entire fairness review).
29 30 Applebaum v. Avaya, 805 A.2d 209 (Del. Ch. 2002). Interestingly, and in contrast to the arms-length deal context, the pre-announcement average target abnormal returns are not statistically different from zero in my freeze-outs sample, both for merger freeze-outs and tender offer freeze-outs. This finding is consistent with the intuition among practitioners that the number of advisors in freeze-outs is relatively small compared to the number of advisors in arms-length deals – most obviously, until the announcement of the deal only one side to the transaction (the controller) has even engaged legal and financial advisors. As a result deal leakage is relatively minimal, and the problem of pre-deal stock price run-up seems to be small.
31 See, e.g., RDO Equipment Press Release (Dec. 16, 2002) (“Mr. Offutt [the controller] stated in his letter that he has not yet finally decided the offering price he is willing to pay for the Company shares he does not own. However, he has indicated that he is currently considering an offer in a range of $5.22 to $5.66 per share.”).