346 10 Exit of Shareholders
The question of valuation of shares raises particular questions in involuntary
transactions such as squeeze-out situations. The minimum price payable under the
Directive on takeover bids is the “fair price”, and similar requirements can be
found in Member States’ laws. The method of defining “fair price” or the mini-
mum price payable to an involuntary seller can depend on the governing law and
the context (see section 5.11.7).
Mergers, divisions. A merger or a division can provide for a way to obtain cash
for shares or to change the nature of a shareholder’s holdings. In both cases, the
consideration can consist of shares, other securities, or cash (section 10.4 below).
Termination of a joint-venture. The termination of a joint-venture raises legal
problems, particularly where one party wants to remove the other party and take
over the whole project.
Auctions
Trading on a stock exchange involves the use of auction mechanisms. Auctions
can also be used in private sales and in offerings made to the public.
Auctions have increasingly been used by private equity sponsors and trade sell-
ers instead of an IPO. On the other hand, even where the seller chooses an IPO,
the pricing method can involve the use of an auction process. It is also possible to
combine an IPO process with an auction process (a dual-track process).
From a legal perspective, auctions can be mandatory in some cases, one of the
options available under the applicable laws in other cases, or at least a way to sig-
nal compliance with the seller’s or its representatives’ duty of care. The Delaware
case of Smith v. Van Gorkom is an example of how an auction could have miti-
gated the risk exposure of the seller’s board members.^82
Auction forms in economics. In economic theory, an auction is a game in which
(i) buyers make “bids” for the good, on the basis of which (ii) the good is allo-
cated to (at most) one of the buyers, and (iii) buyers make payments (which can in
principle be negative) to the seller.^83
Auctions are used when there is a monopoly on one side of the market and the
organiser of the auction has the ability to commit himself in advance to a set of
policies. This commitment can induce bidders to bid in desirable ways. According
to auction theory, the reason a monopolist chooses to sell by auction is that he
does not know the bidders’ valuations.^84
There are various forms of auctions. The basic commercial auction types are:
the ascending-bid auction (the English auction); the descending-bid auction (the
(^82) Smith v. Van Gorkom or the Trans Union case, 488 A.2d 858 (Supreme Court of Dela-
ware, 1985).
(^83) Generally, see Milgrom P, Putting Auction Theory to Work. Cam U P, Cambridge
(2004); Maskin E, The Unity of Auction Theory: Milgrom’s Masterclass, J Econ Lit 42
(2004) pp 1102–1115.
(^84) McAfee RP, McMillan J, Auctions and Bidding, J Econ Lit 25 (1987) p 704.