Mechanism Design in M&A Auctions
Steven J. Brams
New York University (NYU) - Wilf Family Department of Politics
Sullivan & Cromwell LLP; Yale University - Law School
October 11, 2013
Delaware Journal of Corporate Law (DJCL), Forthcoming
The recent controversy over “Don’t Ask, Don’t Waive” standstills in M&A practice highlights the need to apply mechanism design to change-of-control transactions. In this Essay, we propose a novel two-stage auction procedure that induces honest bidding among participants while potentially yielding a higher sale price than an open ascending, a sealed-bid first price, or a Vickrey second-price auction. Our procedure balances deal certainty with value maximization through the Nobel Prize-winning principle of incentive compatibility, making participation in the M&A auction and honest disclosure of reservation prices in the parties’ interests rather than relying solely on heavy-handed ex-post enforcement. Moreover, the social benefits of our two-stage auction mechanism - greater transparency regarding the distribution of bids, avoidance of the winner’s curse, certainty in the M&A auction environment, and fairness to buyers and sellers - justify reduced judicial scrutiny of transactions utilizing the procedure under Revlon and Chancellor Strine’s recent dicta in Ancestry dot com.
Number of Pages in PDF File: 41
Keywords: mergers, acquisitions, standstills, mechanism design, corporate law, auctionsAccepted Paper Series
Date posted: April 26, 2013 ; Last revised: October 14, 2013
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