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Post-Siliconix Freeze-Outs: Theory, Evidence and Policy
By Guhan Subramanian
36 Journal of Legal Studies 1 (2007)
Freeze-outs have been on the rise, at least in part due to the increased cost
associated with being a public company under the Sarbanes-Oxley Act of 2002. Between
June 2001 and June 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 1985–96. And according to the Wall Street Journal, "[A] fifth of U.S.
public corporations are considering going private because of the costs of governance
regulations" (Thain 2004, p. A20).
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 policy makers should respond.
This paper presents the first systematic empirical evidence on post-Siliconix
freeze-outs. Using a new database of all freeze-outs of Delaware targets executed in the
4 years after Siliconix was decided (n = 76), I find that minority shareholders achieve
significantly lower abnormal returns, on average, in tender-offer freeze-outs relative to
merger freeze-outs.
183
By Guhan Subramanian
36 Journal of Legal Studies 1 (2007)
Freeze-outs have been on the rise, at least in part due to the increased cost
associated with being a public company under the Sarbanes-Oxley Act of 2002. Between
June 2001 and June 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 1985–96. And according to the Wall Street Journal, "[A] fifth of U.S.
public corporations are considering going private because of the costs of governance
regulations" (Thain 2004, p. A20).
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 policy makers should respond.
This paper presents the first systematic empirical evidence on post-Siliconix
freeze-outs. Using a new database of all freeze-outs of Delaware targets executed in the
4 years after Siliconix was decided (n = 76), I find that minority shareholders achieve
significantly lower abnormal returns, on average, in tender-offer freeze-outs relative to
merger freeze-outs.
183
