The TRV-RPS Prize 2016 for the best master thesis in company, financial or tax law written at a Belgian university is awarded to Tom Vos. His master thesis studied “freeze-outs of minority shareholders” using a comparative law and economics approach. The thesis is available here. A revised version will also be published in TRV-RPS.
This prize has been awarded by the Revue pratique des sociétés (RPS) since 2009. Since the merger of RPS with the Tijschrift voor Rechtspersoon en Vennootschap (TRV) in 2016, the prize is awarded by the combined journal TRV-RPS, the leading journal for company law in Belgium.
About the master thesis
The master thesis started from the problem that minority shareholders of a listed company often constitute a nuisance to a controlling shareholder. It then considered to what extent the controlling shareholder can eliminate the minority shareholders through a freeze-out, and what protection these minority shareholders should receive.
The author tried to answer this question by comparing the legal regime for freeze-outs in the United States with the regime in the European Union, and specifically in the Netherlands and Belgium. In the United States, the legal regime is much more flexible: “cash mergers” can be used to freeze out minority shareholders when the controlling shareholder owns a simple majority of the shares. In the European Union, on the other hand, cash mergers are unavailable as a freeze-out technique, but the technique of the “squeeze-out” can be used if the controlling shareholder reaches a threshold between 90 and 95%, which is considerably higher.
However, the author notes that legal practice in the Netherlands has developed alternative freeze-out techniques to the traditional squeeze-out. For example, a triangular merger or an asset sale can be used to freeze out minority shareholders at the lower threshold of two thirds respectively a simple majority of the shares. Dutch case law (especially the Versatel case) has allowed such alternative freeze-out techniques, but under certain conditions: the price must be fair, the transaction must serve a legitimate business purpose and the transaction must be negotiated by a supervisory board that includes independent directors with veto power.
In Belgium, alternative freeze-out techniques have not yet been tested in listed companies, in contrast with the Netherlands. Some older cases seem to suggest that alternative freeze-out techniques might constitute an abuse of majority. However, these cases were decided in the context of closely held corporations and usually concerned a procedure that was severely conflicted and unfair. Therefore, the author argues that it is not possible to draw a conclusion on the validity of alternative freeze-out techniques under Belgian law.
The author then proceeded to analyze the desirability of the different legal regimes, using the method of law and economics. He comes to the conclusion that freeze-outs beneficial for society because they allow a controlling shareholder to run the company more efficiently, without the burden of minority shareholders. More importantly, freeze-outs are also a solution for a free rider problem and a holdout problem in the market for corporate control. In the absence of freeze-outs, shareholders would have an incentive to refuse to accept a takeover bid, even if they prefer the takeover bid to succeed, in order to free ride on the profits that they assume the bidder will make (free rider problem) or to extract a higher price from the bidder with their nuisance value (holdout problem).
Based on this economic analysis, the author proposes to lower the threshold for freeze-outs in the European Union, because the high threshold of 90 or 95% fails to solve the free rider and holdout problem completely. He suggests a threshold that is the same as the threshold for other fundamental transactions, i.e. two thirds of the shares (for the Netherlands) or three quarters of the shares (for Belgium). The lower threshold can be adopted either by transplanting the Dutch regime for alternative freeze-out techniques, or by lowering the threshold in the squeeze-out legislation.
Finally, the author argues that the protection against a freeze-out offered to minority shareholders should depend on the type of freeze-out. If the freeze-out is preceded by a takeover bid by an independent bidder without control over the target company (a “post-acquisition freeze-out”), the freeze-out is nothing more than the second step of an at arm’s length transaction. Hence, no additional procedural protection should be offered to minority shareholders if the freeze-out follows promptly after the takeover bid and at the same price, and if the takeover bid is accepted by a majority of the shareholders.
On the other hand, if the freeze-out is done by a controlling shareholder that has had control over the company for some time (a “going-private freeze-out”), a situation of self-dealing is present. Therefore, minority shareholders should be protected, for example by requiring approval of the freeze-out by a special committee of independent directors with veto power and by a majority of the minority shareholders (as under the MFW case in the United States), or by having a court review the fairness of the freeze-out price (as under the American appraisal remedy and under the European squeeze-out legislation).
A more detailed discussion of these arguments can be found in the full version of the master thesis.
About the laureate
Tom Vos studied law at the KU Leuven (Bachelor 2011-2014; Master 2014-2016) and followed the option of the research master in law (organized together by Tilburg University and KU Leuven). He obtained his master degree magna cum laude (major: business law; minor: tax law).
After his studies, he started as a PhD researcher at the Jan Ronse Institute for Company and Financial Law. He is currently preparing a doctoral thesis on the topic of “shareholder protection in share issues: the legal capital model versus the contractual model”, under supervision of prof. dr. Marieke Wyckaert and prof. dr. Veerle Colaert.
A previous post of him on the valuation of shares (in Dutch) on Corporate Finance Lab can be found here.