Sunday, October 6, 2013
Restrepo on Whether Different Standards of Judicial Review Affect the Gains of Minority Shareholders in Freeze-Out Transactions
Freeze-out transactions have been subject to different standards of judicial review in Delaware since 2001, when the chancery court, in In re Siliconix Inc. Shareholders Litigation, held that, unlike merger freeze-outs, tender offer freeze-outs were not subject to “entire fairness review”. This dichotomy, in turn, gave rise to a tension in the literature regarding the potential impact of Siliconix, as well as the treatment that freeze-outs should receive. While some defended the regime established by Siliconix, others argued for doctrinal convergence through a universal application of entire fairness, and still others proposed alternative variations of convergence based on how the negotiation process is conducted. The Delaware Chancery Court itself, in fact, subsequently made a partial step toward convergence by narrowing the scope of its precedent, as reflected in In re CNX Gas Corporation Shareholders Litigation. The empirical evidence on the effect of Siliconix (and, therefore, on the practical relevance of different standards of judicial review), however, is limited. In particular, in “Post-Siliconix freeze-outs: Theory and Evidence,” Guhan Subramanian found that minority shareholders obtain lower cumulative abnormal returns (CARs) in tender offer freeze-outs relative to merger freeze-outs, and, based on this finding, Subramanian advocates for doctrinal convergence. That article, however, does not formally examine whether Siliconix generated a structural change in relative CARs in both transactional forms and, therefore, whether the differences in outcomes are actually attributable to the disparity in standards of judicial review. The purpose of this work is, therefore, to fill this gap in the literature. To this end, this work uses a difference-in-differences approach, which compares changes over time (before and after Siliconix) between CARs in tender offers (the treatment group) and CARs in statutory mergers (the control group). As further discussed in the text, the results seem to suggest, in line with Subramanian’s intuition, that Siliconix actually had at least some negative effect on CARs in tender offers, since the estimator of difference-in-differences is consistently negative and generally significant. Based on the results, this work discusses specific policy implications, particularly in terms of regulatory convergence.