The corporate governance endgame – minority squeeze-out regulation and post-deal litigation in Germany

Purpose: The purpose of this paper is to examine minority squeeze-outs and their regulation in Germany, a country where majority shareholders have extensively used this tool since its introduction in 2002. Using unique hand-collected data, the authors carry out the first detailed analysis of the German squeeze-out offers from the announcement to the outcome of post-deal litigation, examining also the determinants of the decision to squeeze-out minority investors. Design/methodology/approach: Using unique data on court rulings and compensations, the authors analyze a sample of 324 squeeze-outs of publicly listed companies from 2002 to 2011 to carry out the first detailed analysis of the squeeze-out procedure and the post-deal litigation. The authors employ the event study methodology to assess the stock market reaction around the announcement of the squeeze-out. Findings: Large firms with foreign large shareholders are the most likely to be delisted. Positive stock price performance increases the likelihood of a squeeze-out, but operating performance has the opposite effect. Stock prices react positively to squeeze-out announcements, in particular when the squeeze-out does not follow a previous takeover offer. Post-deal litigation is widespread: nearly all squeeze-outs are legally challenged by minority shareholders. Additional cash compensation is larger in appraisal procedures, but actions of avoidance are completed in less time. Overall, the evidence suggests that starting post-deal litigation by challenging the cash compensation offered in a squeeze-out delivers high returns for minority investors. Research limitations/implications: The lack of data concerning the identity of minority shareholders in firms undergoing a squeeze-out does not allow a proper investigation of the incentives of the different types of investors. Practical implications: The paper provides evidence about the incentives of the different players in a squeeze-out offer. The findings of the paper could be helpful in assessing the impact of the squeeze-out rule. The results also contribute to the understanding of minority investors’ incentives to start post-deal litigation. Originality/value: This paper provides new evidence about post-deal litigation, in particular how investors use the procedures that the system provides them to protect themselves against controlling shareholders. The paper examines all the phases of the squeeze-out procedure and challenges.