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Unpublished Paper
Freeze-outs: Transcontinental Analysis and Reform Proposals
(2009)
  • Marco Ventoruzzo
Abstract

One of the most crucial, but systematically neglected, comparative differences between corporate law systems in Europe and in the United States, as crucial as often neglected, concerns the regulations governing freeze-out transactions in listed corporations. Freeze-outs can be defined as transactions in which the controlling shareholder exercises a legal right to buy out the shares of the minority, and consequently delists the corporation and brings it private. Beyond this essential definition, the systems diverge profoundly.

This gap exists despite the fact that minority freeze-outs are one of the most debated issues in corporate law, in the public media, in a vast body of scholarly work and in case law in the United States and, to a lesser degree, in Europe. In light of the relevance of the subject and the extensive and growing number of cross-Atlantic mergers in which the acquiring and the target corporations are subject to different legal regimes, it is startling how little research has focused on a comparison between the European and the American approaches in this area. The This Article fills this gap by offering a first comparative discussion of freeze-out regulations in the U.S. and in Europe, by proposing some explanations for the causes and consequences of the differences between the two regulatory regimes, and by advancing reform proposals for the development of financial markets both in Europe and in the U.S.

From a theoretical point of view, freeze-outs of minorities lie on the contended frontier that separates the powers (and duties) of controlling shareholders and directors from the rights of minority shareholders. It is a boundary drawn along the elusive and politically charged lines of efficiency on the one hand, and fairness and equity on the other hand. A comparative scrutiny of the American and European attitudes toward freeze-outs allows identifying some of the most meaningful and defining features of different corporate law regimes, such as the kind of property interest that minorities are deemed to have in the corporation, the role of litigation in shaping corporate rules, and the propensity toward monetary damages versus other types of reliefs to protect minorities.

Current European regulation is more restrictive of freeze-outs that its U.S. counterpart. This distinction reflects different philosophies concerning shareholders’ rights and minority protection. The European model is based on the idea that every shareholder enjoys a substantially untouchable property right in her shares. The American model, on other hand, shows greater flexibility as a consequence of regulatory competition among states and the common law case-based approach, but it lacks certainty and can lead to partially contradictory outcomes. This Article, after a critical discussion of freeze-out rules in the U.S. and in Europe, builds on the comparative analysis to propose specific reforms that would increase shareholders’ protection in the U.S., and foster more uniform rules in Europe, facilitating, under certain conditions, going private transactions.

The Article is organized as follows. Part I briefly discusses the economic reasons for going private. Part II analyzes U.S. rules concerning freeze-outs and going private transactions, focusing in particular on Delaware law. Part III discusses the corresponding European rules. While every single European country has its own rules, freeze-outs enjoy a certain degree of harmonization. Even though the level of harmonization is partial and insufficient, European Union’s directives on mergers and on takeovers provide for a general uniform framework. Specific details on a selected number of countries will also be offered, but the goal of this work is more to capture the fundamental traits of the European approach. Part IV sums up the major differences between the two systems and offers an explanatory theory of the different developments of the law in Europe and in the U.S. Finally, Part V is dedicated to the normative implications of the analysis.

Keywords
  • freeze-out,
  • squeeze-out,
  • going private,
  • takeovers,
  • private equity
Disciplines
Publication Date
Fall 2009
Citation Information
Marco Ventoruzzo. "Freeze-outs: Transcontinental Analysis and Reform Proposals" (2009)
Available at: http://works.bepress.com/marco_ventoruzzo/2/