Should shareholders earn premiums on mergers?
The Executive Board and Supervisory Board of a company have a fiduciary duty to the shareholders to achieve the highest possible price enforceable on the market in a sale process of the company. The price should therefore, as a rule, exceed the current price in effect when the sale or partial sale is announced, because the acquirer, the future owner, expects to realize benefits from the investment. The investor expects synergies from the purchase or leverages other strategic potential. This creates added value, at least some of which should also flow to the former owners.
A merger inevitably ends the existing shareholders’ long-term economic interest in the company and thus also their entitlement to future dividends or the right to sell shares at a time of their own choosing. All these aspects justify a “premium”.
A going-private transaction usually involves a squeeze-out for all shares in a company acquired by the new majority shareholder in the course of the transaction. By realizing the intrinsic value of the company, the acquirer is later able to sell either the company, parts of the company or products of the company at a profit, thus reaping the rewards of the investments of the former shareholders. These values should be legally reviewed in particular when insiders delist a company because they may have had access to confidential information about the company’s future prospects.
The sale of a company requires the approval of the shareholders. Often, however, the company’s management promotes the transaction. Frequently, material information is withheld from shareholders or other potential suppliers that is relevant for a fair valuation of the transaction by the shareholders.
Shareholders may oppose the merger process on behalf of the company, a procedure that often results in additional disclosures and information. This enables shareholders to make a better-informed choice. In addition, these lawsuits may lead to significant improvements in the terms of the merger. A review of documents of the selling company can make a variety of information available to shareholders such as. the future valuation of the company or growth prospects. Used properly, this information can significantly improve the terms of the transaction.