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The 'fair' squeeze-out compensation
The 'fair' squeeze-out compensation
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The 'fair' squeeze-out compensation
The 'fair' squeeze-out compensation

El. knyga: 122,79 €

Inhaltsangabe:Abstract:This diploma thesis analyses squeeze-outs ¿ a deal where a controlling shareholder has the right to buy out minority shareholders at a fair compensation. As expected, the term ¿fair¿ can have very different meanings depending on who you ask. On the one hand, minority shareholders often argue perceiving the squeeze-out as a legal expropriation and accordingly demand a significant squeeze-out premium. On the other hand, controlling shareholders have the clear and simple int…
  • Autorius: Markus Dollinger
  • Leidėjas:
  • Metai: 20070207
  • Puslapiai: 74
  • ISBN-10: 3956361806
  • ISBN-13: 9783956361807
  • Kalba: Anglų

The 'fair' squeeze-out compensation - 20070207

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Inhaltsangabe:Abstract:
This diploma thesis analyses squeeze-outs ¿ a deal where a controlling shareholder has the right to buy out minority shareholders at a fair compensation. As expected, the term ¿fair¿ can have very different meanings depending on who you ask. On the one hand, minority shareholders often argue perceiving the squeeze-out as a legal expropriation and accordingly demand a significant squeeze-out premium. On the other hand, controlling shareholders have the clear and simple intention to pay as little as possible when acquiring the remaining stake in the company. Even law, often seen as the last resort, leaves out a clear and definite description of the expression ¿fair¿ why the squeeze-out compensation turned out to be the crucial point in almost all past squeeze-out processes.
Squeeze-outs, in the US called ¿freeze-outs¿, usually follow a public tender offer where a shareholder has acquired the necessary shareholding (e.g. 90 percent) and consequently obtained the right to exclude the remaining minority shareholders by paying an adequate compensation. In this context the squeeze-out rule, providing the legal framework, has the intention to make public takeovers more attractive. However, in the recent years, more and more minority shareholders executed their own right to challenge the proposed ¿fair¿ squeeze-out compensation in court with the objective to improve the value of the initial squeeze-out offer.
For example, minority shareholders of the German Hamburg-Mannheimer AG that protested against the squeeze-out resolution and requested a judicial appraisal of majority shareholder¿s initially proposed ¿fair¿ squeeze-out compensation in June 2002 could, after a costly lawsuit that lasted two years, finally more than double the amount offered under the terms of majority shareholder¿s original squeeze-out proposal. Hence, squeeze-outs under prevailing German as well as Austrian law are often seen as a free call option with exercise price equal to majority shareholder¿s initially proposed ¿fair¿ squeeze-out compensation. This option is almost for free since the court costs due to the appraisal are covered by the majority shareholder and minority shareholders only have to pay for their own lawyer. Moreover, prevailing opinion assumes that the judicial appraisal can¿t result in a decrease of majority shareholder¿s initially proposed ¿fair¿ squeeze-out compensation.
Motivated by these lucrative facts, the objective of this paper is to provide a deeper insight into the legal framework as well as the financial, theoretical and practical, aspects of squeeze-outs in Austria and Germany. In particular, I want to discuss different theoretical valuation approaches used to determine or at least to justify majority shareholder¿s proposed ¿fair¿ squeeze-out compensation. Moreover, I investigate minority shareholders¿ squeeze-out premiums realised in squeeze-out transactions. In this context, I also want to examine the question whether it might pay off for shareholders not to tender their shares in the tender offer stage of a two-tier offer but to wait for the inevitable squeeze-out process, and so possibly receive an even higher premium.
Last but not least, I want to analyse whether some speculating investors intentionally seek to acquire the shares of companies subject to a squeeze-out to maybe benefit from the free call option embedded in the squeeze-out process as represented by the right to request a judicial appraisal of majority shareholder¿s initially proposed ¿fair¿ squeeze-out compensation.
The paper is organized as follows. The next section, Section 2, discusses the prevailing and future legal framework to execute squeeze-outs in Austria and Germany. Section 3 presents the most important theoretical valuation approaches used to determine and justify majority shareholder¿s proposed ¿fair¿ squeeze-out compensation. In Section 4 I empirically survey the practical Austrian and German squeeze-out markets with respect to the ¿fair¿ squeeze-out compensation. Finally, Section 5 draws conclusions and brings-up some of the main unsolved problems in squeeze-out processes.


Table of Contents:
Definitions and abbreviations4
List of tables5
1.Introduction6
1.1Economic background of squeeze-outs7
1.2Tax issues8
1.3Squeeze-out - The expropriation8
1.4Delisting as a consequence of the squeeze-out8
2.The legal framework of ¿squeeze-outs¿9
2.1The road to ¿squeeze-out¿ under prevailing Austrian Law9
2.1.1Transformation Act10
2.1.2Demerger Act11
2.1.3The ¿fair¿ squeeze-out compensation12
2.2German squeeze-out law14
2.2.1Squeeze-Outs under German Stock Corporation Act14
2.2.2Squeeze-outs through a domination agreement16
2.2.3Minimum price rule under German case law16
2.3Changes of the legal squeeze-out process due to the new EC Directive17
3.Approaches to determine the ¿fair¿ value of the squeeze-out compensation19
3.1Squeeze-out compensation and the free-rider problem19
3.2Consideration of market share prices when determining the ¿fair¿ squeeze-out compensation (¿market share price approach¿)22
3.2.1Liquidity matters23
3.2.2Conservatism and market share prices25
3.2.3Lemons effect due to information asymmetry25
3.2.4Rumours and market share prices27
3.2.5Representativeness heuristic and market share prices28
3.3Advanced valuation models to determine the ¿fair¿ squeeze-out compensation29
3.3.1Valuation models and the degree of control29
3.3.2Enterprise Discounted Cash Flow (DCF) Approach31
3.3.3Net Asset Value approach36
3.3.4Valuation Multiples (relative valuation approach)37
3.3.5Dividend Discount Model (DDM)40
3.3.6Discounted Earnings approach according to the German IDW S1 principles (similar to the Austrian KFS BW 1 principles)42
3.3.7Summarising ideas about the theoretical valuation models46
4.Austrian and German practical squeeze-out market46
4.1Austrian squeeze-out market47
4.1.1Used valuation models in practice48
4.1.2Squeeze-out premiums49
4.1.3Free-rider problem and squeeze-outs52
4.1.4Evidence of ¿nuisance¿ shareholders54
4.2German squeeze-out market56
4.2.1Squeeze-out premiums56
4.2.2Deviations from the classical ¿front-loaded¿ two tier offer57
4.3Summarising the empirical findings of the Austrian and German practical squeeze-out market58
5.Conclusion59
Appendix62
Empirical results62
Excerpt from the German IDW S1 valuation principles66
German WpÜG-Offer Ordinance67
References68 Inhaltsverzeichnis:Table of Contents:
Definitions and abbreviations4
List of tables5
1.Introduction6
1.1Economic background of squeeze-outs7
1.2Tax issues8
1.3Squeeze-out - The expropriation8
1.4Delisting as a consequence of the squeeze-out8
2.The legal framework of ¿squeeze-outs¿9
2.1The road to ¿squeeze-out¿ under prevailing Austrian Law9
2.1.1Transformation Act10
2.1.2Demerger Act11
2.1.3The ¿fair¿ squeeze-out compensation12
2.2German squeeze-out law14
2.2.1Squeeze-Outs under German Stock Corporation Act14
2.2.2Squeeze-outs through a domination agreement16
2.2.3Minimum price rule under German case law16
2.3Changes of the legal squeeze-out process due to the new EC Directive17
3.Approaches to determine the ¿fair¿ value of the squeeze-out compensation19
3.1Squeeze-out compensation and the free-rider problem19
3.2Consideration of market share prices when determining the ¿fair¿ squeeze-out compensation (¿market share price approach¿)22
3.2.1Liquidity matters23
3.2.2Conservatism and market share prices25
3.2.3Lemons effect due to information asymmetry25
3.2.4Rumours and market share prices27
3.2.5Representativeness heuristic and market share prices28
3.3Advanced valuation models to determine the ¿fair¿ squeeze-out compensation29
3.3.1Valuation models and the degree of control29
3.3.2Enterprise Discounted Cash Flow (DCF) Approach31
3.3.3Net Asset Value approach36
3.3.4Valuation Multiples (relative valuation approach)37
3.3.5Dividend Discount Model (DDM)40
3.3.6Discounted Earnings approach according to the German IDW S1 principles (similar to the Austrian KFS BW 1 principles)42
3.3.7Summarising ideas about the theoretical valuation models46
4.Austrian and German practical squeeze-out market46
4.1Austrian squeeze-out market47
4.1.1Used valuation models in practice48
4.1.2Squeeze-out premiums49
4.1.3Free-rider problem and squeeze-outs52
4.1.4Evidence of ¿nuisance¿ shareholders54
4.2German squeeze-out market56
4.2.1Squeeze-out premiums56
4.2.2Deviations from the classical ¿front-loaded¿ two tier offer57
4.3Summarising the empirical findings of the Austrian and German practical squeeze-out market58
5.Conclusion59
Appendix62
Empirical results62
Excerpt from the German IDW S1 valuation principles66
German WpÜG-Offer Ordinance67
References68 Textprobe:Text Sample:
Chapter 2.2.1, Squeeze-Outs under German Stock Corporation Act:
In the beginning of 2002, a general squeeze-out rule was introduced into German Stock Corporation Law whereby shareholders holding more than 95 percent of the share capital are entitled to buy out minority shareholders at ¿full real value¿.
Basically, as in Austria, the majority shareholder has the discretion to choose the valuation model and hence the squeeze-out compensation. The method used to perform the company valuation is not specified in the squeeze-out rules. However, a court-appointed independent auditor will audit majority shareholder¿s company valuation used to determine the ¿full real value¿ of the squeezeout compensation.
In a shareholder resolution, that has to be passed by a simple majority of the voting rights, all specific terms of the squeeze-out transaction including the fair compensation must be specified. Furthermore, German law requires using the squeeze-out resolution date as the valuation date. It is quite obvious that the valuation itself will be performed some days or weeks before the actual shareholder meeting. Nevertheless, it has to be assured that all price relevant information up to the resolution date must be incorporated in the valuation process.
Despite the review by the independent auditor, within three month of the registration of the squeeze-out resolution every minority shareholder has the right to request a judicial appraisal of majority shareholder¿s valuation process. This protest does not prevent the squeeze-out from becoming effective, but the past has shown that the judicial appraisal usually leads to a significant improvement of the initially proposed ¿fair¿ squeeze-out compensation. Moreover, prevailing opinion states that a decrease of the squeeze-out compensation is not possible in the judicial appraisal.
Once challenged, the court will evaluate the fairness of the compensation usually by appointing another auditor to come up with a separate valuation approach. Finally, court¿s ruling has a final and binding effect for all minority shareholders. To determine the ¿full fair value¿ in a squeeze-out, German courts in most cases apply the socalled IDW S1 principles, adopted by the German Institute of Certified Chartered Accountants. Moreover, as in Austria, German courts generally use the Discounted Earnings approach to review the fairness of majority shareholder¿s proposed squeeze-out compensation.
In this context, what we have seen in the past were big price discrepancies between the initially proposed squeeze-out compensation by the majority shareholder and the reviewed compensation by court. Apart from majority shareholder¿s intention to perform a company valuation that yields a very low equity value and consequently a low squeeze-out compensation, the reason definitely was the overvaluing IDW S1 valuation principles. That¿s why IDW S1 was lately modified. However, the counterargument that the court-appointed independent auditor will anyway prevent majority shareholder¿s intention to undervalue the company diminishes due to the information asymmetry and the limited time of the court-appointed auditor to perform an in-depth review.

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  • Autorius: Markus Dollinger
  • Leidėjas: Diplom.de
  • Metai: 20070207
  • Puslapiai: 74
  • ISBN-10: 3956361806
  • ISBN-13: 9783956361807
  • Kalba: Anglų

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