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Post-Siliconix Freeze-Outs: Theory & Evidence

Guhan Subramanian Harvard Law School

May 2005

ABSTRACT: At increased the costs

approximately the same time associated with being a public

that the Sarbanes-Oxley Act company, important Delaware

case law methods

created a difference in the standard of of freezing out minority shareholders.

judicial While a

review for freeze-out

the two basic executed as a

statutory Chancery executed

merger is subject to stringent “entire fairness” review, the Delaware Court held in In re Siliconix Shareholders Litigation that a freeze-out

as

a

tender

offer

is

not.

This

paper

presents

the

first

systematic

empirical evidence on post-Siliconix freeze-outs. freeze-outs executed during the current doctrinal shareholders pay less to minority shareholders,

Using a new database of all regime, I find that controlling on average, in tender offers

relative to mergers. This finding introduces a puzzle as to thirds of post-Siliconix freeze-outs still proceed through

why more than two- the statutory merger

route. I present evidence that they hold a relatively small

controllers controlling

are more likely to choose a merger when stake, in order to avoid supermajority

approval

from

evidence

that

the minority that would be required in a tender offer. I also present controllers are more likely to choose a tender offer when the

controller’s outside counsel has substantial doctrinal and policy implications of these (Subramanian 2005)

M&A experience. I discuss the findings in a companion paper.

JEL classifications: G30, G34, K22

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