Efficiency and fairness in minority freezeouts: Takeovers, overbidding, and the freeze-in problem

This paper argues that there is a trade-off between efficiency and fairness in minority freezeouts and that the focus on fairness (minority shareholder rights) may be misplaced. The model discusses alternative rules for valuing minority shares in freezeouts. Appraisals can be based on the stock price, publicly available information, or private information disclosed by the majority shareholder. Those valuation rules that enhance economic efficiency pay minority shareholders less than what their shares are intrinsically worth. Economic efficiency is worse if minority shareholders extract higher premia in freezeouts. Moreover, all freezeout rules induce inefficient takeovers caused by overbidding. Bidders overpay for some shares in order to obtain a valuable freezeout option, which sometimes remains unexercised. The real problem is the freeze-in problem, as minority shareholders are left with lower-valued shares. Efficiency can be restored through a mandatory bid rule.