TY  - JOUR
AU  - Bebchuk,Lucian Arye
AU  - Kahan,Marcel
TI  - The 'Lemons Effect' in Corporate Freeze-Outs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6938
PY  - 1999
Y2  - February 1999
UR  - http://www.nber.org/papers/w6938
L1  - http://www.nber.org/papers/w6938.pdf
N1  - Author contact info:
Lucian A. Bebchuk
Harvard Law School
1545 Massachusetts Avenue
Cambridge, MA 02138
Tel: 617/495-3138
Fax: 617/812-0554
E-Mail: bebchuk@law.harvard.edu

Marcel Kahan
AB  - In a corporate freeze-out, the controller is required to compensate minority shareholders for the no-freezeout value of their shares that are taken from them.  This paper seeks to highlight the difficulties involved in determining this no-freezeout value when private information.  In particular, the analysis shows that the pre-freezeout market price of minority shares cannot be used an a proxy for the no-freezeout value that these shares would have in the absence of a freeze-out.  It is shown that, under a regime in which frozen out minority shareholders receive a compensation equal to the pre-freezeout market price, the pre-freezeout market price will be set a level below the expected no-freezeout value of minority shares.  The reason for this is a  lemons effect' that arises when a controller uses her private information in deciding whether to affect a freeze-out.  By showing how controllers are able to use their private information to affect freeze-outs at terms favorable to them, this paper demonstrates that freeze-outs can become a significant source for private benefits of control.
ER  -