Freeze-outs: Transcontinental Analysis and Reform Proposals

One of the most crucial, but systematically neglected, comparative differences between corporate law systems in Europe and in the United States 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. This Article fills this gap offering a first comparative discussion of freeze-out regulations in the U.S. and in Europe. The Article proposes some explanations for the causes and consequences of the differences between the two regulatory regimes, and advances reform proposals for the development of financial markets both in Europe and in the U.S. 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, rather than to dig in the technicalities of single jurisdictions. 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.