Block Premia, Litigation Risk, and Shareholder Protection

Date01 September 2014
Published date01 September 2014
DOIhttp://doi.org/10.1111/eufm.12005
European Financial Management, Vol. 20, No. 4, 2014, 756–769
doi: 10.1111/eufm.12005
Block Premia, Litigation Risk, and
Shareholder Protection
Julien Le Maux and Claude Francoeur
HEC Montr´
eal, 3000 Cˆ
ote-Ste-Catherine, Montreal, Quebec, Canada, H3T 2A7
E-mail: julien.lemaux@hec.ca; claude.francoeur@hec.ca
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 relatedto f inancial disclosureor the target’smarket 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.
Keywords: block premium,block trades,litigation risk,mergers and acquisitions,
shareholders rights
JEL classification: G34, K40
1. Introduction
Whereas a sizable body of the academic literature addresses the impact of merger and
acquisition (M&A) transactions on firm value,1few studies have investigated the prices
paid for blocks of shares. Such studies focus mainly on the difference between the
price paid by the buyer and the market value of the block. This spread, called the block
premium, has been interpreted in three ways. In one view, the premium is paid by the
buyer to ensure that the transaction will be concluded. A second interpretation is that the
premium simply reflects better information on the part of the buyer about the value of
the target company and potential synergies.The third view assumes that such transactions
can transfer control to a better executive team. However, none of these theories benefit
We acknowledge f inancial support from HEC Montr´
eal and the CGA Professorship in
Strategic Financial Information. We are also thankful to the editor and the anonymous
referee for their helpful comments.
1See, for instance, the recent study of Martynova and Renneboog(2011) on the f ifth takeover
wave.
C
2013 Blackwell Publishing Ltd
© 2013 John Wiley & Sons Ltd

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