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The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions by H. Kent Baker, Halil Kiymaz

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CHAPTER 10

The Law and Finance of Control Premiums and Minority Discounts

HELEN BOWERS

Associate Professor of Finance, University of Delaware

INTRODUCTION

An unfortunate and unintended consequence of corporate control transactions, such as mergers, tender offers, and minority squeeze-outs, is that such transactions often result in expensive litigation concerning the relative economic rights of minority and majority shareholders. According to the Delaware Division of Corporations (2010), more than 850,000 businesses, including more than 50 percent of all U.S. publicly traded companies and 63 percent of the Fortune 500, are incorporated in Delaware. Delaware corporate law and decisions made by the Delaware Supreme and Chancery courts have substantial impact and sustained influence on how the economic benefits of control rights are distributed between minority and majority shareholders. This is particularly true when the majority seeks to eliminate the minority by acquiring the minority's shares in a cash transaction. Transactions of this kind are often referred to as minority “squeeze-out,” “freeze-out,” or “cash-out” mergers.

The law takes extra care to protect minority shareholder interests in squeeze-out mergers because the pricing of minority shares in such transactions does not emerge from a third-party arm’s-length negotiation. Because the squeeze-outs create opportunities for the controlling majority to take advantage of the minority, such transactions are held to the “entire ...

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