The Foundations of Freezeout Laws in Takeovers

Authors

  • Yakov Amihud,

  • Marcel Kahan,

  • Rangarajan K. Sundaram

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    • Amihud and Sundaram are from the Department of Finance, Stern School of Business, New York University, New York, NY 10012. Kahan is from the School of Law, New York University, New York, NY 10012. Amihud is Ira Leon Rennert Professor of Finance. We thank Rick Green (the Editor), Oliver Hart, Holger Mueller, and Roberta Romano for their input. We are especially grateful to an anonymous referee for detailed comments and suggestions on earlier versions of this paper.


ABSTRACT

We provide an economic basis for permitting freezeouts of nontendering shareholders following successful takeovers. We describe a specific freezeout mechanism based on easily verifiable information that induces desirable efficiency and welfare properties in models of both corporations with widely dispersed shareholdings and corporations with large pivotal shareholders. The mechanism dominates previous proposals along some important dimensions. We also examine takeover premia that arise in the presence of competition among raiders. Our mechanism is closely related to the practice of takeover law in the United States; thus, our analysis may be thought of as analyzing the economic foundations of current regulations.

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