The John M. Olin Center

Paper Abstract

830. Fernan Restrepo & Guhan Subramanian, The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach, 07/2015; published in Harvard Business Law Review, Vol. 5, Issue 2 (May 2015).

Abstract: Historically, Delaware corporate law provided different standards of judicial review for buyouts by controlling shareholders (also known as “freezeouts”). The standards were based on what transactional form was used: deferential business judgment review for freezeouts executed as tender offers and stringent “entire fairness” review for transactions structured as mergers. Subramanian (2005), Subramanian (2007), and Restrepo (2013) provide doctrinal and empirical evidence that (1) transactional planners responded to these differences in standards of judicial review; (2) these differences in judicial scrutiny created differences in outcomes for the minority shareholders; and (3) differences in outcomes created a social welfare loss, not just a wealth transfer from minority shareholders to the controlling shareholder. Over the past decade, in a series of important decisions, Delaware law has migrated toward a unified approach to freezeouts regardless of transactional form. In this Article we present empirical evidence on all freezeouts of Delaware targets during this period of doctrinal evolution. In general, we find that deal outcomes converged after the Delaware Chancery Court’s decision in In re Cox Communications, Inc. Shareholders Litigation. Our findings suggest that: (1) transactional planners seem to respond to even dicta in the Delaware case law; and (2) the social welfare loss identified in Subramanian (2005) seems no longer to be present. This result in turn suggests that the Delaware Supreme Court seems to have adopted the correct policy by endorsing the unified approach for merger freezeouts in Kahn v. M&F Worldwide Corp., and moreover, that the court should also explicitly endorse this approach ┬áin the context of tender offer freezeouts when presented with such facts.

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