Squeeze-Out and Business Valuation in Germany - A Law and Economics Analysis of Judicial Decision-Making

Abstract

As an outcome of the scientific conflict within business valuation theory in the German-speaking area, New Political Economy of Business Valuation has developed a possible approach to explain the dissemination of neoclassical valuation concepts in theory and practice. This explanatory model, designed by Quill (2016), is extended by Follert (2020) to include the share valuation in squeeze-out cases for the compensation of minority shareholders. For this purpose, the different actors in the legal mediation procedure ("Spruchverfahren") - the judge, the auditor as expert, and the conflicting parties - are modeled based on their stereotypical interests. The aim of the present paper is to introduce international scientific community to the scientific conflict between the proponents of investment-theoretical and those of the finance-theoretical conception, and to discuss the role of judicial decision-making from a legal-economic perspective. We would like to illustrate why a judge could benefit from the use of finance-theoretical valuation methods based on the neoclassical capital asset pricing model recommended by the relevant standard (so-called standard 1) of the "Institut der Wirtschaftsprüfer in Deutschland IDW"(Institute of Public Auditors in Germany) ("IDW S 1"). The analysis takes a socioeconomic perspective and argues that judicial valuation is primarily influenced by the judges' tendency to promote their own reputation and by social pressure from their professional environment and different interest groups. This paper adds a further perspective to New Political Economy of Business Valuation. Moreover, the close link between jurisprudence, economics and business economics theory is pointed out. Although the approach presented deals with the squeeze-out under German law, it may be applicable to squeeze-out arrangements in other countries as well, as long as the basic assumptions apply in their legal systems.