Regulatory frameworks impact squeeze-out outcomes for minority shareholders, study says

By Sim Shuzhen

SMU Office of Research & Tech Transfer – When it comes to squeeze-outs – instances where majority shareholders force minority shareholders to sell their stakes in the company – small differences in regulatory frameworks can translate into significantly different outcomes for minority shareholders, according to a new study published in the Journal of Corporate Law Studies.

While squeeze-outs can allow listed companies to achieve better cost savings and more efficient organisational structures, they also carry controversy – controlling shareholders may attempt to use squeeze-outs to extract personal benefits at the expense of minority shareholders.

To examine corporate governance, market integrity and investor protection concerns over squeeze-outs, the present study – led by Associate Professor Wan Wai Yee, Associate Professor Christopher Chen and Assistant Professor Zhang Wei at the Singapore Management University School of Law – compared regulatory frameworks and squeeze-outs in Hong Kong and Singapore, two of Asia’s largest international financial centres. The research was supported by an Academic Research Fund Tier 2 grant from the Singapore Ministry of Education.

While the two jurisdictions share the same common law heritage and similar market environments, Hong Kong’s regulatory framework is more restrictive of squeeze-outs and provides stronger protections for minority shareholders than Singapore’s, write the researchers.

Analysing a dataset of mergers and acquisitions that occurred in Hong Kong and Singapore between 2008 and 2014, the researchers found that, consistent with the former’s stricter regulatory framework, fewer squeeze-outs took place in Hong Kong than in Singapore, with minority shareholders in Hong Kong also receiving higher premiums than in Singapore.

However, the researchers also found that controlling shareholders in Hong Kong engaged in significantly higher levels of related party and self-dealing transactions prior to squeeze-outs than in Singapore. This indicates that controlling shareholders may try to find other ways of expropriating shareholdings from minority shareholders if they find it harder to do so through squeeze-outs, the study noted.

“Our research finds that small differences in regulation can lead to significant differences in outcomes to minority shareholders. This is an illustration of why regulatory design is important,” says Professor Chen. “The results will offer valuable lessons to regulators – not only in Hong Kong and Singapore, but also in other markets where it is common to have a controlling shareholder – to reconsider regulatory design as a strategy for preventing controlling shareholders from expropriating minority shareholders through squeeze-outs.”

The study also contributes to the broader academic debate on whether or not ‘law matters’, showing that regulatory frameworks and the degree of legal protection for minority shareholders do indeed affect the outcomes of squeeze-outs, the researchers write. “This connects to the ‘law and finance’ literature that a strong legal regime governing companies and the financial market is important to the creation of a sound capital market,” says Professor Wan.

This article is a summary piece of the following paper:

Chen, Christopher, Zhang, Wei, and Wan, Wai Yee. (2017). “Regulating Squeeze-outs and Delistings by Controlling Shareholders: the Divergence between Hong Kong and Singapore.” Journal of Corporate Law Studies 18(1): 185-216 (http://dx.doi.org/10.1080/14735970.2017.1316554) (*Scopus)

For more information, please contact:

Goh Lijie (Ms)
Office of Research & Tech Transfer
DID: 6828 9698
Email: ljgoh [at] smu.edu.sg

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