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Minority buyouts and ownership characteristics: evidence from the Toronto Stock Exchange.

* In contrast to the relatively wide ownership of most publicly listed companies on U.S. stock exchanges, most companies listed on many non-U.S. markets, such as the Toronto Stock Exchange (TSE), are closely controlled.(1) The concentration of ownership raises concerns among shareholders and securities regulators in Canada, as in other countries, about the treatment of minority shareholders, especially when controlling shareholders take companies private.

A minority buyout occurs when a controlling shareholder holder purchases the remaining shares of the firm from the minority shareholders. As Eckbo and Langohr [9] discuss, since the dominant shareholder can typically make all but a few decisions affecting the firm without the consent of the minority shareholders, the benefit of acquiring the remaining votes is not as apparent as gaining an initial control position. However, a number of studies have found significant benefits to minority shareholders from buyouts. Eckbo and Langohr [9] report that the average premium over the pre-offer price is 38.3% for 29 all-cash minority buyouts in France and 9.0% for the 12 security-exchange buyouts. Dodd and Ruback [7] report abnormal returns of 17.4% for 19 offers for U.S. companies where the bidder owns at least 50% of the target prior to the offer. They find that for all tender offers where there is a change in control, target shareholders' wealth increases by 20.6%. DeAngelo, et al [6] report an average abnormal return of 22% during the period covering the day before and the day of the announcement in a sample of 72 going-private transactions.

The objective of the paper is to compare target shareholder gains in minority buyouts with buyouts by noncontrolling shareholders.(2) By analyzing a sample of transactions which involve the acquisition of all the shares of a target company, this study can focus on the impact of controlling shareholder bids as distinguished from the wealth effects of delisting. Further tests will determine the cross-sectional differences in the determinants of target shareholder returns between the two types of buyout transactions.

Although a number of studies such as Eckbo [8], Calvet and Lefoll [3], Jog and Riding [16], and Masse, Hanrahan, and Kushner [18], [19], have examined Canadian mergers and acquisitions, this paper is the first to examine separately minority buyouts and other buyout transactions in Canada. Buyout transactions represent over 80% of the tender offers and mergers involving target companies listed on the Toronto Stock Exchange over the period 1977 to 1989. The first section of the paper discusses the sources of target gains from minority buyouts and develops hypotheses about the impact of the distribution of votes among target shareholders on returns during buyouts. The sources of the data are discussed in Section II, while the third section describes the research method employed. Descriptive statistics of the sample and the results of our tests are presented in Section IV. The final section of the paper summarizes our findings.

I. Shareholder Gains in Minority Buyouts

A. Sources of Gains to Shareholders

Several reasons have been proposed to explain the fact that minority buyouts produce significant abnormal returns. First, minority buyouts produce gains that result from taking a company private. DeAngelo, et al [6] discuss how taking a company private saves the firm direct and indirect costs of listing. These include the cost of meeting disclosure requirements and management time in dealing with minority shareholders. Muscarella and Vetsuypens [21] provide evidence that taking companies private allows new management incentive plans to be implemented. Lehn and Poulsen [17] find support for the argument that a reduction in tax liability through increased interest and depreciation expenses may be an incentive for going private. An additional motivation for taking a company private may be the reduction in agency costs associated with the potential conflict between controlling and minority shareholders. Closer ownership may result in the alignment of shareholders' interests and hence reduce shareholder agency costs (Jensen and Meckling [15]). Dodd and Ruback [7] contend that the premium paid reflects litigation costs avoided by the buyout that would otherwise be faced it the minority shareholders decide to legally contest a major management decision. In a comparative study of complete tender offers and tenders offers that involve a partial acquisition of outstanding shares on the Toronto Stock Exchange, Amoako-Adu and Smith [1] find that complete tender offers produce significantly higher returns than partial tender offers even after controlling for factors such as the mode of payment and the effect of multiple bidding.

A second possible source of wealth effects for minority buyouts arises from the fact that they are initiated by insiders. There may be an asymmetry in the information held by the majority and minority shareholders. The superior information held by the majority shareholder may justify a share price significantly different from that established by outside shareholders. There are further reasons why buyouts by insiders may result in lower gains to minority shareholders. A bidder who already holds a major control stake is less likely, than an outside bidder, to replace management and conduct major changes in corporate strategy after a buyout. Thus, minority buyouts may result in fewer value-enhancing changes to the management of the target firm. As insider bids are non-arm's-lenght transactions, there is also the concern, especially among securities regulators, that minority shareholders may be in a weak position because they tend to be widely dispersed. Thus, minority shareholders may accept a lower price than would large and well-informed insiders.

Canadian securities laws are designed to ensure that shareholders outside the control group are not adversely affected by the non-arm's-length nature of minority buyouts. First, in order to take a company private through a tender offer, over 90% of the outstanding shares other than those held by the bidder must be purchased.(3) Thus, even a small group of minority shareholders may block a minority buyout by forming a coalition to veto the transaction.(4) Second, for all minority buyouts, a valuation report must be prepared by an independent appraiser to determine the value of the target stock. A target shareholder may demand the payment of the determined share value by petitioning the court. The valuation is not supposed to reflect a discount for the fact that the target shares are part of a minority block. However, it is essentially an empirical question whether securities laws and regulations provide minority shareholders with enough power to obtain a "fair" value for their shares. To address the issue, we test the following null hypothesis.

H1: Target shareholders' gains in minority buyouts are not significantly different from the gains of target shareholders in buyout transactions involving non-controlling bidders.

The results of previous studies on this issue do not reject this hypothesis as they indicate that minority shareholders are not adversely affected when insiders take companies private. After controlling for firm size, payment method and success of bid, Eckbo and Langohr [9] find French minority buyouts to have target firm gains not significantly different from those of offers involving a change of control. Travlos and Cornett [27] report that the gains to target shareholders of a sample of U.S. going-private transactions are higher when there is a management buyout rather than a third-party buyout.

B. Ownership Concentration and Gains From Minority Buyouts

In this section, hypotheses are developed that relate target firm ownership to target shareholder gains in minority buyouts and other buyout transactions. Stulz, et al [24] argue that if all minority shareholders of the target firm are atomistic then they will accept a buyout proposal only when the expected value of accepting the proposal outweighs the expected value of rejecting the proposal. Because atomistic shareholders cannot affect the success of the proposal, and their individual decisions will not affect their wealth if the proposal is rejected, the expected values are based on the assumption of a successful buyout proposal.

In almost all Canadian tender offers leading to minority buyouts, the offers are conditional on at least 90% acceptance by shareholders not associated with the bidder. A dissenting offeree can then either accept the bid or demand payment of the "fair" value, as determined by application to a court. Thus, the minority shareholders will accept a buyout bid when the bid price exceeds the expected value of a court application. A similar conclusion can be drawn in the case of a buyout through merger.

Stulz, et al [24], in analyzing a sample of successful takeovers, assume that the slope of the supply curve of atomistic shareholders is independent of the percentage of shares held by minority shareholders. By extension, where all noncontrolling shareholders are atomistic, this assumption implies that the slope of the supply curve is independent of the percentage of shares held by the controlling shareholder who is the bidder. Stulz, et al [24] find the target's gain is inversely related to the offeror's pre-bid ownership for a sample of U.S. takeovers. These takeovers, however, involved the acquisition of sufficient shares to control a firm rather than to take it private. In these cases, the marginal shareholder who must tender to make the offer successful is lower on the supply curve when the bidder owns a greater fraction of the shares prior to the bid. Because successful minority buyouts in Canada require acceptance by almost all minority shareholderss, the marginal shareholder is always high on the supply curve. Thus, one should expect that the following null hypothesis will not be rejected for a sample of Canadian minority buyouts.

H2: Target shareholders' gains are independent of the fraction of target shares held by the bidder prior to the minority buyout offer.

One argument that may lead this hypothesis to be rejected relates to how the bidding shareholder acquired the shares prior to the minority buyout offer. If these shares were acquired by a cash tender offer, the target shareholders who did not tender their shares would be those with a higher reservation price than the after-tax offer price. These remaining shareholders would have a higher reservation price and thus, hypothesis H2 may be rejected if prior bidder shareholdings are directly related to previous cash tender offers.

Stulz [25], and Stulz, et al [24] argue that the percentage of shares held by target management will affect the target's gain. Stulz [25] shows that the higher the fraction of votes controlled by management, the smaller the probability of a successful tender offer and consequently, the higher the premium offered during a tender offer. Furthermore, Stulz, et al [24] contend that if managers hold a controlling proportion of votes, they will likely demand a higher premium to cede their position in the target firms. An "insider" manager will agree to sell his or her holdings in a buyout only when the present value of selling the shares outweighs the present value of holding the shares and remaining as the incumbent.

The empirical evidence on the relationship between management shareholdings and target shareholders' gains in going-private transactions is mixed. While DeAngelo, DeAngelo, and Rice [6] provide evidence indicating that the gains to target shareholders are significantly larger when management holds at least 50% of shares, Grammatikos and Swary [12] find an inverse relationship between prior managerial holdings and target shareholder returns. Travlos and Cornett [27], on the other hand, do not find any relationship between these two variables in a set of going-private transactions.

In Canada, some minority buyouts involve controlling shareholders purchasing shares not only from atomistic shareholders but also from other insiders holding large blocks of shares. The presence of such large shareholders may lead to higher returns for all minority shareholders. The third null hypothesis is thus:

H3: There is no relationship between target shareholders' gains and the percentage of shares held by insiders other than the bidder.

Hypotheses H2 and H3 can also be examined in the case of offers to acquire all outstanding shares where the bidder is not a controlling shareholder. The argument that H2 should not be rejected in the case of such takeovers is similar to that for minority buyouts. In successful buyouts involving either tender offers or merger proposals, acceptance is required by almost all shareholders other than the bidder. Thus, for all buyouts, the marginal shareholder is generally high on the supply curve.

While the argument in favor of rejection is similar to that for minority buyouts, H3 may not be rejected in the case of outside takeover offers for a number of reasons. First, many takeovers are initiated by the selling controlling shareholders suggesting that they want to relinquish rather than maintain control. Second, management of more widely held companies, which are takeover targets, may initiate multiple bidding contests if the value of incumbency is high. Our data support this argument, because almost all cases of multiple bidding contests in Canada occur where insiders hold a small proportion of the shares. Bradley, Desai and Kim [2] find that multiple bidding is positively related to target shareholders' gains because of increased competition. The competition among bidders may even push the offer price above the reservation price of the insiders. Thus, in the case of multiple offers, the null hypothesis H3, may not be rejected. Finally, Morck, et al [20] indicate that the relationship between management ownership and value may be nonlinear. This is especially important for our sample of takeover offers from noncontrolling shareholders as the mean ownership by insiders prior to takeover offers is 50.6%.

II. Sources of Data

For the years 1977 to 1984, the sample of buyout transactions was compiled from the merger registry of the Department of Consumer and Corporate Affairs, Richardson Greenshield's publication "Takeover Fever", and the files of the Toronto Stock Exchange. Additional data for the period January 1985 to December 1989 were compiled from Mergers and Acquisitions in Canada, an annual publication of Venture Economics Canada Ltd. Thus, the complete data covered the period 1977 to 1989.

Details on the success of the bid as well as the type and amount of consideration offered were obtained from newspaper articles and Canada Dow Jones and Canada Press Newswire releases. The files of the Toronto Stock Exchange provided us with the time when trading of a security was temporarily halted to allow for public announcement of the takeover.(5) This trading day is designated as t = 0.

The final sample of 172 buyout transactions was chosen on the basis of the following criteria:

(i) The common shares of the target firms should have returns recorded on the Toronto Stock Exchange and Western stock database daily returns tape for the period -300 days before the first takeover announcement to +10 days after the announcement of the final offer.

(ii) There are no other takeover bids during the year prior to the first announcement of each takeover bid. This criterion lessens the chance that the stock's response to a takeover announcement will be preempted by earlier news.

(iii) The bidder successfully acquires all shares of the target through a tender offer or merger transaction. This reduces the takeover transactions to a set which can be compared closely with minority buyouts.

(iv) All "exempt" offer transactions were excluded because these offers are not extended to all shareholders.(6)

(v) For the sample of takeover offers other than minority buyouts, the target company's ownership shifted to the bidder from another party. Thus, reverse takeovers and transfers between subsidiaries of the same holding company are eliminated. Interestingly, there were a large number of such transactions on the TSE over the years 1977 to 1989.

(vi) There was no concurrent issue of treasury shares, share repurchases, or changes in debt. Such capital structure changes could send signals to the market which could confound the impact of shifts in the ownership of votes which we try to identify.

Ownership information on target firms is obtained from the annual shareholder meeting circulars in the year prior to the takeover announcement as well as the newswire announcements. For companies which are only listed on a Canadian stock exchange, shareholders who hold at least ten percent of outstanding shares are "insiders" and must report their position to the Ontario Securities Commission. Shareholders of those companies which are also listed on the New York Stock Exchange or American Stock Exchange must report holdings of at least five percent of shares outstanding.

Although companies listed on the TSE must also report ownership of directors and officers as well as significant shareholders in the annual information circulars, insufficient copies of these documents were available. Thus, unlike Stulz, et al [24], our ownership measures exclude senior managers who are not significant shareholders. However, because the average percentage ownership by the significant shareholders is 56% for the stocks in our study, the exclusion of small shareholdings by senior management and directors is unlikely to significantly bias the measures. Furthermore, most of the large shareholders held senior management positions and very few were institutions.

The market value of equity for target firms was calculated from month-end stock prices just prior to the initial announcement by using the TSE and Western database files on shares outstanding and prices. The average market value of equity for companies in our sample was $285 million.

III. Methodology

Three tests are conducted to evaluate the impact on target shareholder wealth of minority buyouts relative to takeover offers by noncontrolling shareholders. The first test is designed to measure whether offer premiums on cash offers for minority buyouts are significantly different from those cash buyouts involving bidders who are non-controlling shareholders. Offer premiums are determined by comparing the final bid price to the average of the closing prices in the period -20 to -1 days prior to the initial announcement.(7)

The second test uses daily stock returns and the standard residual approach to assess the average stock price reaction to the buyout transaction announcement. This test evaluates the immediate impact of the takeover announcement on shareholder wealth. The stock price response for the sample of minority buyouts was compared to that of the noncontrolling shareholder buyouts.

With stock returns over the period -300 to -41 days prior to the initial announcement day (t = 0), the following modified market model is used to estimate the residuals for the -40 to +30 days event window period:

[Mathematical Expressions Omitted]

where [], and [RM.sub.t+k] are the daily holding period returns on stock i and the TSE Total Return Index, respectively, and K denotes the lag and lead days. The coefficients of lagged and leading market returns are added to the standard market model to correct for thin trading problems on the Toronto Stock Exchange as documented in Fowler, et al [10]. This modified market model was used by Cornett and Tehranian [5] to correct for possible nonsynchronous trading problems. The estimated parameters are used to calculate residual returns during the period surrounding the announcement for each firm, i, and later averaged cross-sectionally for each day. The cumulative abnormal returns (CARs) over the event window are plotted. The third test examines whether the cumulative abnormal returns in a period surrounding the announcement are significantly different for the two types of transactions. This test is conducted by controlling for the type of transaction, nature of compensation offered, market value of equity of the target company, multiple bidding, revisions to bids, percentage of shares held by the bidder and percentage of shares held by significant shareholders other than the bidder. Based on the approach of Bradley, et al [2], CARs are determined for each target firm for the period from five trading days prior to the announcement of the first bid to ten trading days after the announcement of the final offer.(8) In the event of a merger, the CAR period is extended to the date of the announcement when the target firm shareholders voted to approve the merger. The cumulative abnormal returns are used as the dependent variable and regressed on factors discussed above as well as a dummy variable indicating whether or not the transaction is a minority buyout.

[CAR.sub.i]=[[alpha].sub.1] + [[alpha].sub.2][(Value).sub.i] + [[alpha].sub.3][(Cash.sub.i] + [[alpha].sub.4][(Merger).sub.i]

+ [[alpha].sub.5][(Bidder).sub.i] + [[alpha].sub.6][(Own).sub.i] + [[alpha].sub.7][(Multiple).sub.i]

+ [[alpha].sub.8][(revisions).sub.i] + [[alpha].sub.9][(Minority).sub.i] + [e.sub.i],

where [CAR.sub.i] = Cumulative abnormal returns for the target firm over the period from five trading days prior to the announcement of the first bid to ten trading days after the announcement of the final offer in the event of a tender offer and to the date of a successful shareholder vote in the event of a merger proposal. [Value.sub.i] = Log of market value of target's equity (a proxy for size). [Cash.sub.i] = Dummy variable is equal to 1 if compensation offered is all cash, and 0 otherwise. [Merger.sub.i] = Dummy variable is equal to 1 if merger proposal, and 0 if tender offer. [Bidder.sub.i] = Percentage of shares owned by bidder. [Own.sub.i] = Percentage of ownership by significant target firm shareholders other than the bidder. [Multiple.sub.i] = Dummy variable is equal to 1 if there are multiple bids, and 0 otherwise. [Revisions.sub.i] = Dummy variable is equal to 1 if there is a revision to bid in absence of multiple bidding. [Minority.sub.i] = Dummy variable is equal to 1 if the largest shareholder is the bidder, and 0 otherwise.

Based on the hypotheses established earlier and previous empirical evidence on cash or noncash method of payment and the relative impact of mergers and tender offers (see Calvet and Lefoll [3], and Masse, et al [19], we expect [[alpha].sub.3] > 0, [[alpha].sub.4] < 0, and [[alpha].sub.5]=0. For the sample of minority buyouts, we expect [[alpha].sub.6] > 0, whereas for the sample of other transactions, we expect no relationship between the percentage of target firm shares owned by significant shareholders other than the bidder and the change in shareholders wealth. From evidence reported in Bradley, Desai and Kim [2], we expect [[alpha.]sub.7] to be positive as multiple bids tend to increase target shareholder returns. Finally, [[alpha].sub.8] is also expected to be positive as bid revisions should be indicative of the level of resistance that minority shareholders can exercise to increase their share of takeover gains. From a review of newspaper articles concerning the 16 minority buyouts, where the terms of the offer were revised in the absence of multiple bids, minority shareholders were able to exercise some collective resistance. Most of the bid revisions were based on the independent valuation reports rather than on formal litigation.

No signs can be established a priori for [[alpha].sub.2] and [[alpha].sub.9] because there is no compelling theory upon which one can hypothesize a relationship. While Stulz, et al [24] report results indicating a positive relationship between size and target shareholder returns, Eckbo and Langohr [9] find an inverse relationship. The regression model above was tested using all the sample data and then separately with minority buyouts and buyouts from noncontrolling shareholders. The cross-sectional regression analysis was also applied to the offer premiums for those takeovers involving cash bids because the use of CARs may be affected by factors such as thin trading.

IV. Empirical Results

Exhibit 1 provides some descriptive statistics for the sample of takeover offers during the period 1977 to 1989 for target companies listed on the TSE. Similar to the sample in DeAngelo, DeAngelo, and Rice [6], minority buyout targets tend to be smaller than other takeover targets. The mean market value of equity of companies which are minority buyout targets is $239.59 million versus $309.99 for other takeover offers.

The average prior ownership by bidders in the case of minority buyouts is 62.86% versus 2.10% in the case of buyouts from noncontrolling shareholders. Similar to the sample of French minority buyouts examined by Eckbo and Langohr [9], most controlling shareholders have a majority of votes. Thus, the bidder's motivation for buying out minority shareholders can be contrasted with other takeover offers in that the average bidder in a minority buyout has legal control whereas bidders in most other takeovers have no more than ten percent of shares.

There are fewer cash offers and more mergers for the sample of minority buyouts than other takeovers. Given the extensive evidence in the literature that the type of bid and method of takeover affect shareholder returns, the cross-sectional regressions will control for such factors.

While the percentage of cases involving multiple bids is higher for takeovers offers from noncontrolling shareholders, the percentage of cases where bids are revised for other reasons is higher for minority buyouts. Of bids involving minority buyouts, 27.19% were revised in the absence of multiple bids, while only 10.62% of other bids had such revisions. Consequently, the absence of outside bids does not prevent minority shareholders from gaining additional compensation for their shares.

Exhibit 2 further illustrates the higher gains to cash tender offers and mergers. The 38 cash offers of minority buyouts have a mean offer premium of 52.15% while the 86 cash offers from noncontrolling shareholders have a mean price premium of 38.33%. The mean difference was statistically significant at the five percent level (t = 2.292). Therefore, without controlling for other factors, the price appreciation associated with cash offers of minority buyouts is bigger than similar cash offers of buyouts from noncontrolling bidders.

Exhibit 3 shows a plot of cumulative abnormal returns of the two buyout samples for the period -40 prior days to 30 days after the first announcement of the bid. On the day that the shares first traded after the announcement, shareholders of the minority buyout sample gained 20.7% on average. This was highly significant with a z-statistic of 59.84.(9) This is comparable to the 22.3% abnormal return calculated by DeAngelo, et al [6] on a sample of U.S. buyouts over a two-day period surrounding the announcement. For the sample of buyouts from noncontrolling bidders, the gain to the target on the announcement day was 15.9% with a z-statistic of 68.13. The difference between the announcement day return of the two types of buyouts was not statistically significant. [TABULAR DATA OMITTED]

Results of cross-sectional analyses of the CARs are reported in Exhibit 4. After controlling for other factors, the results indicate that the announcements of minority buyouts produce no significantly differnet returns compared to the news of takeover offers from noncontrolling bidders. These findings confirm those of Eckbo and Langohr [9] using French securities data, but differ from those of Travlos and Cornett [27], who found significant differences in the performance of target shareholders in U.S. minority and third party buyouts.

The lack of significance of the coefficient on the log of market value variable, which measures the size of the companies, indicates that target shareholder returns are independent of the size of their company. This finding is consistent with the absence of a theory linking the two variables and the conflicting results of studies by Eckbo and Langohr [9] and Stulz, et al [24].

The coefficient of cash offers for the total sample and for the sample of minority buyouts is significant and of the expected sign. Similar evidence of higher premiums for cash transactions is reported in Gordon and Yagil [11], Calvet and Lefoll [3], Huang and Walking [14], Bradley, et al [2], and Masse, et al [19].(10) For the 113 takeover offers not from controlling shareholders, the coefficient is positive and almost significant at the ten percent level.

As expected, the coefficient of the dummy variable for merger proposal is negative for the whole sample and for all subsets. The coefficient is significant for the whole sample and the subset of takeover offers not from controlling shareholders. Thus, unlike Huang and Walking [14] mergers appear to have significantly lower target sharholder returns than tender offers.(11) This confirms the findings of Masse, et al [19], who used a different sample of Canadian takeover offers.

The coefficient for multiple bidding is not significant for each sample of buyouts. The absence of statistical significance of multiple bidding compared to the evidence reported for U.S. markets in Bradley, Desai and Kim [2] likely results from the lower frequency of multiple bids on the Toronto Stock Exchange. There is only one case of multiple bidding in the sample of minority buyouts. The coefficient for revisions is positive as expected, but not significant for all samples of takeovers reported in Exhibit 4.

The coefficient of the percentage of shares held by the bidder is not found to be significant in the samples of buyout transactions.(12) This provides furthe revidence that minority shareholders in buyout transactions are not adversely affected even when the bidder holds a majority of the shares. It also provides empirical support for the contention by Stulz, et al[24] that the slope of the supply curve of the atomistic shareholders is indespendent of the percentage of shares held.

For the sample of minority buyouts, the coefficient for the variable of ownership by large shareholders other than the bidder is significant at the five percent level. This relationship suggests that the large target firm shareholders other than the bidder may force the offer price higher to compensate for the lost value of control and associated benefits of management incumbency. For the sample of other takeover transaction, no significant relationship between pre-bid concentration of ownership and target shareholder gain is identified.(13) Thus, on average, target sharholders of closely controlled firms fare as well as shareholders of widely controlled companies during takeovers when the bidder is an outside party.

The cross-sectional regressions were reestimated using offer premium rather than CAR for the subset of buyouts involving cash bids. The results reported in Exhibit 5 are generally similar in terms of both the significance of the coefficients reported in Exhibit 4.(14) However, for this analysis, similar to Bradley, Desai, and Kim [2], the coefficient of multiple bidding is positive and significant for the whole sample. The coefficient for revisions for minority buyouts is positive and significant which confirms the expectation that revisions reflect the ability of minority shareholders to capture greater takeover gains through collective resistance.

V. Conclusions

This paper provides evidence on the relative performance of target shareholders in minority buyouts and takeover offers from noncontrolling bidders in an equity market characterized by closely held firms. After controlling for the target's size, type of compensation, form of transaction, multiple bidding and distribution of votes among target shareholders, minority buyouts and buyouts undertaken by noncontrolling bidders were not found to have significantly different shareholder returns. This suggests that the policy objective of securities regulation to ensure "fair" treatment of minority shareholders during takeover bids and mergers is being achieved on the Toronto Stock Exchange.

It also suggests that the extent of the gains from a buyout is independent of a change in controlling shareholders. This implies that an outside bidder is expected effiency related gains that an outside bidder is expected to introduce are not significantly different from the gains that can be effected once a majority shareholder acquires ownership of all votes. Thus, the benefits to taking a company private likely result from sources other than the change in control per se.

The study also reveals some insights into the factors related to cross-sectional differences in returns generated by minority buyouts. Shareholder returns during the announcement period are positively related to a form of payment involving cash rather than shares and the use of a tender offer rather than a merger proposal. The results indicate that in minority buyouts where cash is the only mode of payment, the premiums tend to be higher when there is a bid revision resulting from collective shareholder resistance. In addition, the presence of a large minority block shareholder tends to increase the premium target shareholders obtain in a minority buyout. This suggests that minority shareholders receive higher gains when one insider acquires the large holdings of another insider because of the significant value associated with management incumbency. However, when a noncontrolling bidder attempts to take a company private, the percentage of shares owned by insiders of the target firm has no impact on target shareholder wealth. We attribute this finding to the fact that most Canadian target firms are closely controlled prior to takeover and thus the benefits of concentrated ownership do not vary significantly across firms in our sample. Finally, in both subsamples of buyouts by controlling and noncontrolling bidders, the prior holdings of the bidder do not affect the takeover premium.

(1)In January 1988, insiders of over 80% of the firms comprising the "TSE 300 Index" held at least 20% of their companies' voting shares.

(2)We define a buyout as an acquisition of all the publicly listed shares of a target firm resulting in the delisting of the firm from the stock exchange.

(3)A buyout can be effected through a tender offer followed by a statutory acquistion of the shares not tendered by offerces or by a merger. Minority shareholders have veto voting power in the event of merger. The Ontario Businss Corporations Act requires that, in a merger, a majority of at least two-thirds of the votes cast by the shareholders of each of the merging corporations should approve such a transaction. In addition, a simple majority of the minority shareholders must approve the merger. When the consideration is not all cash or where the cash payment is less than the valuation price, two-thirds of the minority votes are required for approval of the buyout transaction.

(4)For example, two-thirds of the minority shareholders of Inglis Ltd., were clients of investment manager Stephen Jarislowsky of Jarislowsky, Fraser & Co. Ltd. This group resisted an initial bid for Inglis Ltd., in December 1989 by its majority shareholder, Whirlpool Corporation. The initial bid of $31.50 was revised to $33.00 after the investment manager recommended that minority shareholders not tender their shares to the oroginal offer. The revised bid was at the upper end of an independent valuation report that established a fair price between $28.50 and $33.00.

(5)The halts typically lasted for no more than a few hours and trading usually resumed during the day of the halt. If the halt extende beyond the close of a trading day, the day when the stocks resumed trading was assumed to be the announcement day, t=0. In the few cases in which trading was halted from the open to the close, the day prior to the halt was treated as the first day prior to the announcemnet (t = 1). This approach follows Masse, et al [19].

(6)An "exempt" offer is defined in Section 92(1)(C) of the Ontario Securities Act as a takeover bid in which purchases are made from not more than five shareholders with the premium paid not exceeding 15% of the average price of the acquired class of shares over the 20 days preceding the offer announcement. Purchases which meet these criteria do not have to be extended to all shareholders. It should be noted that the effective premium could be bigger than 15% if information about a takeover offer leaks to the market and the stock price increases significantly during the days preceding the announcement.

(7)As discussed in footnote 6, this calculation corresponds to the Ontario Securities Act provisions for "exempt" takeovers. Futhermore, the use of an alternative period of -10 to -6 days prior to the announcement did not significantly alter the results in Exhibits 2 and 5.

(8)Bradley, Desai and Kim[2] determine their CAR over a period -5 before to +5 days after the announcement of the takeover offer. Their choice of this period was based on the 1968 Williams Act which Allowed tendered shares to be withdrawn within five days of the offer. This paper's choice of -5 to +10 days is based on the fact that prior to 1987, the Ontario Securities Act, Allowed tendered shares to be withdrawn within ten days to the offer.

(9)The z-statistic is computed along the lines of Bradley, et al [2]. the standardized abnormal return to the ith common stock on day t, [], is defined as:

(10)The three theories put forward to explain the higher premiums associated with cash transactions are: (i) the tax hypothesis (Wansley, Lane and Yang [29]), (ii) information asymmetry hypothesis (Myers and Majluf [22]), and (iii) signalling hypothesis.

(11)Huang and walkling [4] added a variable to proxy for managerial resistance in their cross-sectional regression analysis of target shareholder returns. Given that virtually all of the takeovers in our sample were friendly, the exclusion of such a variable from our analysis does not explain the dirrerence in results between U.S. and Canadian samples.

(12)To investigate whether this test of the hypothesis H2 was affected by earlier cash tender offers by the bidder, the Canadian Business Periodical Index was searched over the three years previous to each takeover announcement. Of the 59 minority buyouts, there were only four cases in which the bidder had made an earlier cash tender offer. After removing these four cases, the results of the coss-sectional regressions shown in Exhibits 4 and 5 are unchanged.

(13)Multiple bids may push the offer price above the reservation price of insiders. As a consequence, we may not be able to reject the hypothesis that pre-bid concentration of ownership and target shareholder returns are related. To evaluate the impact of multiple bids, all takeovers involving such bids were removed form the sample. The cross-sectional regressions reported in Exhibits 4 and 5 were reestimated and the results were unchanged.

(14)The only major difference is that for the sample of 38 cash minority buyouts in Exhibit 5, the coefficient of revisions of bids is significantly positive, while in the sample of all 59 cash minority buyouts in Exhibit 4, the coefficient is not significant. The cross-sectional regression with the CARs was reestimated with the subset of 38 cash minority buyouts and the coefficient of bid revusions was found to be significantly positive at the 5% level. Thus, the use of CARs and offer premiums provides consistent results.


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Title Annotation:Issues in Corporate Investments
Author:Smith, Brian F.; Amoako-Adu, Ben
Publication:Financial Management
Date:Jun 22, 1992
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