How (Not) to Administer a Liability Rule—The German Appraisal Procedure for Corporate Restructurings

Mergers, squeeze-outs, and other corporate restructurings serve to transfer control or to save costs by streamlining the corporate structure. However, they also offer an opportunity for controllers to expropriate investors. Corporate law needs to provide safeguards to ensure that the minority shareholders receive fair compensation when they are forced to surrender their shares. This essay in honor of Professor Klaus J. Hopt provides a short overview of the German “Spruchverfahren” (appraisal procedure) that offers shareholders a remedy against receiving insufficient value in corporate restructurings. It then highlights a major flaw in the German appraisal procedure: challenging the transaction has an option value for the minority because the court can only increase, never reduce compensation. As a result, the controller has an incentive to offer less than fair consideration in the original restructuring terms. The limited empirical evidence appears to support this view. The essay concludes with possible avenues for reform