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Takeovers, Shareholder Litigation, and the Free-riding Problem

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  • Broere, Mark
  • Christmann, Robin

Abstract

When shareholders of a target firm expect a value improving takeover to be successful, they are individually better off not tendering their shares to the buyer and the takeover potentially fails. Squeeze-out procedures can overcome this free-riding dilemma by allowing a buyer to enforce a payout of minority shareholders and seize complete control of the target firm. However, it is often argued that shareholder protection laws and litigation restore or intensify the free-riding dilemma. Applying a game theoretic setting, we demonstrate that it is not shareholder litigation that brings back the free-riding dilemma, but rather the strategic gambling of buyers for lower prices and flaws in the design and application of squeeze-out laws. We find, for example, that lawmakers should refrain from setting separate legal thresholds for corporate control and squeeze-outs. We also analyze a favorable change in jurisdiction of the German Federal Court and provide implications for legal policy.

Suggested Citation

  • Broere, Mark & Christmann, Robin, 2019. "Takeovers, Shareholder Litigation, and the Free-riding Problem," MPRA Paper 93201, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:93201
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    squeeze-out; appraisals; entire Fairness; judicial review;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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