Takeover law to protect shareholders: Increasing efficiency or merely redistributing gains?

Abstract

We construct a dynamic takeover law index using hand-collected data on legal provisions and empirically examine the effect of takeover regulation to protect shareholders on shareholder wealth for bidders and targets in a multi-country setting. We find that a stricter takeover law increases combined wealth for bidders and targets, which suggests that stronger shareholder protection in the takeover bid process increases the efficiency of the takeover market. Contrary to our hypothesis, results show that stricter takeover law does not hurt bidders. Its effect on target announcement returns and takeover premiums is significantly positive and economically large. Our findings suggest that the mandatory bid rule and ownership disclosure increase synergistic gains in takeovers, whilst the fair-price rule and squeeze-out rights may reduce combined gains. Further results show that increased overall gains can be explained by greater competition in the market for corporate control and a shorter time to successful completion of a takeover under stricter takeover law. KeywordsTakeover laws, Mergers and acquisitions, Shareholder protection, Announcement returns, EU takeover directive JEL classification G32, G34, G38, K22, O16 AcknowledgementsWe thank

Do investment banks create value for their clients? Empirical evidence from European acquisitions

“…This is surprising, because some literature suggests a negative effect from implementation of the ETD on shareholder value (Drobetz & Momtaz, ; Humphery‐Jenner, ) . However, Dissanaike et al () and Wang and Lahr () document that improvements in legal regulations (i.e., the ETD) influence bidder shareholder value positively. As UK bidders outnumber CE bidders in my sample, my result (insignificant ETD coefficient) could potentially be driven by the UK.…”

“…This gives advisors easier and faster access to critical numbers and further information that is crucial to successful target identification and acquisition execution. However, high disclosure makes it more likely that other bidders also launch a bid, potentially leading to bidding contests and increasing premiums (Wang & Lahr, ). Moreover, high disclosure, a well‐developed and liquid equity market (La Porta et al, ; Martynova & Renneboog, ) in the UK lead to high acquisition activity.…”

Fifty years of research on takeover target prediction: a historical perspective

“…Corporate events such as takeover and bankruptcy announcements usually result in significant price movements. Indeed, prior M&A research consistently documents significant M&A announcement abnormal returns to targets but insignificant returns to bidders (Andrade et al , 2001; Brooks et al , 2018; Bruner, 2002; Datta et al , 1992; Franks and Harris, 1989; Goergen and Renneboog, 2004; Graham et al , 2002; Jaffe et al , 2015; Jensen and Ruback, 1983; Masulis et al , 2007; Tuch and O’Sullivan, 2007; Wang and Lahr, 2017). These studies suggest that targets gain upwards of 20% abnormal returns when bids are announced.…”

The Ambiguous Awareness of Approaching Squeeze-out – Czech Case Study in the EU Perspective

“…According to the prevailing opinion in basically all EU member states and even states out of the EU, stricter rules on a squeeze-out with requirements regarding compensation determination and ownership disclosure are considered as preferable [28]. The related EU harmonization wave induced all EU member states jurisdictions to modify their previous rules in this matter.…”

“…Undoubtedly, the more than one-decade long harmonization of shareholders and shareholder companies relationships, such as via Directive 2004/24/EC on takeover bids ("Takeover Directive"), belongs to them and touches, among other items, the hot squeeze-out matter, business sustainable prosperity v. failure in the economic process of "creative destruction" [24], leading to the total devaluation of investment and elimination of participation [26]. It is highly legitimate because stricter takeover laws increase the protection and wealth gains to shareholders, they do not hurt the bidder and contribute to the efficiency of the market [28]. Squeeze-out is a legal method allowing a shareholder with an at least 90% share in the shareholder company to become the only, a 100% shareholder.…”