Block Premia, Litigation Risk, and Shareholder Protection

• Author: Julien Le Maux,Claude Francoeur
• Date: 01 September 2014
• Published date: 01 September 2014
• DOI: http://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

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