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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 litigation restores the free-riding dilemma. Applying a sequential takeover game, we examine the two standard legal remedies of shareholders, the ‘action of avoidance’ and the judicial ‘price fairness review’ and 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 also analyze a favorable change in jurisdiction of the German Federal Court and provide implications for legal policy.

Suggested Citation

  • Broere, Mark & Christmann, Robin, 2021. "Takeovers, shareholder litigation, and the free-riding problem," International Review of Law and Economics, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:irlaec:v:65:y:2021:i:c:s0144818820301642
    DOI: 10.1016/j.irle.2020.105951
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    More about this item

    Keywords

    Squeeze-out; Appraisals; Entire fairness; Judicial review; Takeover bids;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • 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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