Post Date: December 8, 2004
A recent article by Professor Guhan Subramanian ’98 has people in the M&A world talking—and the article has yet to be published.
Although it has a decidedly academic title, “Post-Siliconix Freeze-Outs: Theory, Evidence, and Policy,” Subramanian’s paper has received significant coverage in legal and business trade journals such as The American Lawyer, The Deal and Corporate Control Alert.
By posting a draft of his paper online and delivering a series of lectures on his findings, Subramanian has managed to create a buzz around his newest research on “freeze-out” transactions. Simply put, a freeze-out is a transaction in which a controlling shareholder acquires the rest of a publicly traded subsidiary, either by offering to purchase remaining stock from minority shareholders or by negotiating a merger with the board. Freeze-outs have become more frequent over the past few years, due in part to the additional requirements imposed on public companies by the Sarbanes-Oxley Act of 2002.
Because of recent changes to Delaware law that make the merger approach subject to more stringent fairness standards, Subramanian argues that buying out minority shareholders—known as the “tender offer” approach—is becoming increasingly advantageous to controllers. In the 96 freeze-out transactions Subramanian studied, controllers using the merger approach had to increase their offers by 18.1 percent, while tender offers increased by only 7.2 percent. Deal premiums are also higher in mergers than in tender offers, according to the study.
In addition, Subramanian found that when controlling shareholders retain what he calls “experienced M&A counsel”—he defines this as counsel from one of the top 15 firms listed in Thomson Financial Corp.’s U.S. M&A league tables—the tender offer approach is even more prevalent, particularly when the target is a Delaware company, where the benefits of the tender offer approach are most apparent.
“The starting point for this project was the change in the legal rules governing freeze-out transactions, which happened in 2001,” said Subramanian. “While other academic commentators have debated whether this change was good or bad as a matter of corporate law doctrine, I collect data to determine whether the change has had an influence on the way that deals now get done. The answer turns out to be yes, in some fairly interesting ways. It’s gratifying to me that practitioners seem to be interested in these findings and, more generally, seem to be receptive of ways in which academic analysis can shed light on transactional practice.”
Subramanian has now divided the project into two distinct articles. The first focuses on the econometric data he has developed, and has been submitted for publication in a peer-review journal. The second focuses on policy recommendations for the Delaware courts. The original version was written as part of a “discussion paper series” sponsored by the John M. Olin Center for Law, Economics, and Business. To learn more, visit www.law.harvard.edu/programs/olin_center.