April 8, 2006
Hedge Funds Change the Minority Shareholder Buyout Game
Academics and the courts have long been very wary of majority shareholder buyouts of minority residual shares (known as "squeeze-outs" or "freeze-outs"). The courts have erected a variety of special tests and some courts, notably Massachusetts, have given minority shareholders special buyout rights. Hedge funds have seized the opportunity presented by the rules to buy the minority shares in proposed buyouts and, armed with their knowledge of law and emboldened by bargaining toughness and savvy, have been holding out for higher buyout premiums. The hedge funds assess the type of the acquisition (tender offer or statutory merger), the size of the minority stake, the character of the independent directors, and the state of incorporation (which sets the minority buyout standards). If the funds guess correctly, they make money, buying shares at the buyout offering price (or higher if demand drives up price), holding out, and selling shares at an increased offering price. Great business: Helps minority shareholders; tests court decisions at the margin (do they really help minority shareholders on average?? --i.e. yet another reason not to incorporate in Massachussetts).
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