Efficient and Inefficient Sales of Corporate Control: The Case of Going Private

Abstract

This paper analyzes the legal rules governing the sale of corporate control in the specific case of going private transactions and examines whether a controlling shareholder must share the premium associated with a sale-of-control. The paper is based on the framework developed in Bebchuk (1994) for analysis of these sale-of-control transactions under the adjusted market rule (AMR) that enables constitution of different rights for the controlling shareholder and the minority shareholders and under the adjusted equal opportunity rule (AEOR) that provides equal rights to the minorities and the controlling shareholder. The paper’s main findings are that both the AMR and the AEOR prevent inefficient transfers, since the new controller fully internalizes the externality imposed by extracting private benefits of control under both rules. However, the AMR is superior to the AEOR in facilitating efficient transfers. This is because the AEOR can prevent efficient transfers, due to the higher price demanded from the buyer in order to compensate both majority and minority shareholders. As a consequence, overall, the AMR dominates the AEOR for transactions in which a company is taken private.