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Post-Siliconix Freeze-Outs: Theory & Evidence

Guhan Subramanian*

1. Introduction

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,

freeze-outs

have

been

on

the

rise.

Between

July

2001

and

April

2005,

2.7

controlling

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.

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