Block Premia, Litigation Risk, and Shareholder Protection

Abstract

Blocks of shares are typically traded at a premium for the buyer. The academic literature shows that anticipated private benefits are the main determinant of this premium rather than the projected value of future synergies. The results of this study indicate that a target's litigation risk has a significant impact on the control premium. Acquirers tend to lower block premia significantly in anticipation of potential litigation related to financial disclosure or the target's market value. Legal shareholder protection also plays a significant role in countering shareholder expropriation. Block buyers pay higher premia to acquire targets that operate in protective legal environments.

Litigation risk: Measurement and impact on M&A transaction terms

“…() look at M&A litigation cases mostly based on overpayment to the target's shareholders (or managers). This is opposed to Le Maux and Francoeur's () findings. Looking at a sample of 808 M&A transactions in Europe between 1998 and 2011, they provide evidence that lower premiums are associated with litigation risk.…”

“…Acquirers, anticipating lawsuits by shareholders, negotiate lower premiums to cover potential damage and liability expenses. Le Maux and Francoeur (2014) also confirm the crucial role of the legal environment, as previously demonstrated by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997) and Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008), in the case of M&As.…”

“…This will harm them, particularly if the litigation risk is important. Ceteris paribus , they will ask for a higher premium when paid in shares (Le Maux & Francoeur, ). They may also ask not to be paid in shares to avoid this boomerang effect when the litigation risk of the acquirer is important.…”

“…This will harm them, particularly if the litigation risk is important. Ceteris paribus, they will ask for a higher premium when paid in shares (Le Maux & Francoeur, 2014).…”

“…We will investigate whether the risk of litigation is effectively priced in M&A terms. This question has not yet been extensively addressed in the literature (except by Le Maux & Francoeur, 2014). Krishnan, Masulis, Thomas, and Thompson (2012) and Yuan and Zhang (2015) similarly developed studies crossing litigation risk and contractual pricing.…”