The Mandatory Bid Rule: Efficient, After All?

Abstract

The mandatory bid rule has its origins in the UK and now applies throughout the EU and in many other jurisdictions. Under a mandatory bid, an acquirer of a controlling stake in a listed company has to offer to the remaining shareholders a buy-out of their minority stakes at a price equal to the consideration received by the incumbent controller. While the rule warrants that no value-destroying control transfers take place, it is often criticised for preventing value-increasing transactions. This paper challenges some of the claims made by critics of mandatory bids. Highlighting the effects of synergy gains in private sale-of-control transactions, it is shown that mandatory bids prevent inefficient control transfers, where minority shareholder protection rules provide inadequate protection. Furthermore, mandatory bids help facilitate transfers to the most efficient bidders in multi-bidder settings. The mandatory bid is justifiable, on economic grounds, in wider circumstances than is commonly assumed by law and economics scholars. Winner and two anonymous referees for very helpful comments and suggestions.

Legal Investor Protection and Takeovers

“…This rule, known as “market rule” (MR), is the prevailing rule in the United States. Given that it imposes no obligation on the acquirer, “the MR is probably best described as the absence of a rule, rather than a rule” (Schuster, , p. 535).…”

A Panacea or a Wisdom Tooth? Assessing the Misconstrued Mandatory Bid Rule

“…The control premium refers to the additional value above the market price of each share when the controlling shareholder is selling their share block to an acquirer. For many jurisdictions, the MBR is a primary method to protect minority shareholders (Shuster 2013). The UK Takeover Panel first introduced the MBR in the City Code in 1972.…”

“…Decades later, the European Union (EU) adopted it in the process of takeover regulation promulgation in 2004 in the Takeover Directives (TOD) (Skog 2002). Under the influence of European civil law, many countries in the world have implemented a variation of this rule (Shuster 2013). It is arguable that some East Asian countries, such as Korea, introduced this rule for the critical purpose of catering to international financial institutions in order to secure financial assistance.…”

“…In a control transaction, the controlling shareholders receive higher consideration for their shares compared to selling their shares to the market at market price (Enriques, Gilson & Pacces 2014). The MBR enables the distribution of PBC amongst all shareholders in a target by setting a benchmark for the offer price, which is often the recent highest price before the bidder acquiring control over the target firm (Shuster 2013). However, the MBR may have a chilling effect on the takeover market, as the MBR not only causes financing problems that result in investments being less diversified but also increases the cost of the deals by inflating the cost of acquisition.…”

Equal opportunity rule vs. market rule in transfer of control: How can private benefits help to provide an answer?

“…Schuster (2010Schuster ( , 2013 mentions that the costs associated with mandatory bids are not so high in comparison to its advantages. Enriques et al (2013) propose that EOR should be recognized as a part of an "unbiased" takeover law to set up.…”