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.