Post-Siliconix Freeze-Outs: Theory & Evidence
Due at least in part to the general decline of the stock market since 2000, as well as the
increased cost associated with being a public company under the Sarbanes-Oxley Act of 2002,
shareholders per month, on average, have frozen out their minority shareholders, more than twice
the rate reported by Coates (1999) for the period 1985-1996. At approximately the same time
that freeze-out activity began increasing, important Delaware case law created a difference in the
standard of judicial review for the two basic methods of freezing out minority shareholders.
While a freeze-out executed as a statutory merger is subject to stringent “entire fairness” review,
the Delaware Chancery Court held in In re Siliconix Shareholders Litigation that a freeze-out
executed as a tender offer is not. Academic commentators and practitioners have debated
whether this difference has created meaningful differences in practice, and if so, how judges and
policymakers should respond.
This paper presents the first systematic empirical evidence on post-Siliconix freeze-outs.
Using a new database of all non-short-form freeze-outs that were announced in the current
doctrinal regime (n=121), I find that controlling shareholders pay less to minority shareholders,
on average, in tender offers relative to mergers. This finding introduces a puzzle as to why more
Harvard Law School. I thank Jennifer Arlen, Frank Balotti, Lucian Bebchuk, Laura Beny, David Brown, John
Coates, Sandeep Dahiya, Allen Ferrell, Ron Gilson, Jeff Gordon, Joe Grundfest, Richard Hall, Sam Heyman, Daniel Ho, Hon. Jack Jacobs, Christine Jolls, Marcel Kahan, Louis Kaplow, Rob Kindler, Reinier Kraakman, Paul Laux, Mark Lemley, Bob Mnookin, Jim Morphy, Charles Nathan, Eileen Nugent, Gil Sparks, Elliott Stein, Hon. Leo Strine, Randall Thomas, and seminar participants at Berkeley, Fordham, Harvard, Michigan, Stanford, University of Delaware, University of Pennsylvania, Virginia, Yale and the American Law & Economics Association 2004 annual meeting for comments on earlier drafts. The summer research fund at Harvard Law School and the Harvard Negotiation Research Project provided financial support.