Wednesday, August 22, 2012

Freeze-Out Transactions in Germany and the U.S.: A Comparative Analysis

By Christian A. Krebs

Suggested Citation: Christian A. Krebs, Freeze-Out Transactions in Germany and the U.S.: A Comparative Analysis, 13 German Law Journal 941-978 (2012), available at
A.  Introduction
A freeze-out is a transaction in which a controlling shareholder forces out the minority shareholders and compensates them in cash or stock.   A successful freeze-out transaction marks the end of the exchange-traded life of a corporation—it is a “going private” transaction.  A freeze-out is therefore the counterpart to an initial public offering.  Whereas the latter leads to the public listing of a corporation and thus a multiplication of shareholders, the freeze-out transaction aims at reducing the number of shareholders of a corporation to one.
Freeze-out transactions are subject to a wealth of case law and scholarly discussion, both in the US legal system, and in Germany.  This does not come as a surprise.  The rules on freeze-outs need to resolve the diametrically opposed interests of the controlling shareholder  and minority shareholders.  The controlling shareholder, often after a tender offer, seeks to consummate her acquisition of the target corporation and to establish efficiency gains.  The minority shareholders are excluded from their share of the future earnings of the company and are concerned that they may not receive full compensation for their shares.  After all, if the compensation is ultimately set or at least influenced by the controlling shareholder, it is evident that a strong element of self-dealing is involved.  So the regulation of freeze-outs is caught in a zone of tension between the legitimate interest of the controlling shareholder to maximize the efficiency of her corporation, and the fears of minority shareholders of self-dealing by the controlling shareholder.
It is striking that the rules on freeze-outs differ significantly between the U.S.  and Germany.  The regulation of freeze-out transactions in Germany is fairly new and quite restrictive by comparison with U.S. standards.  This is remarkable, as the corporate and capital market laws of European and...

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