Efficient and Inefficient Sales of Corporate Control

Abstract:     
This paper develops a framework for analyzing transactions that transfer a company's controlling block from an existing controller to a new controller. This framework is used to compare the market rule, which is followed in the United States, with the equal opportunity rule, which prevails in some other countries. The market rule is superior to the equal opportunity rule in facilitating efficient transfers of control but inferior to it in discouraging inefficient transfers. Conditions under which one of the two rules is overall superior are identified; for example, the market rule is superior if existing and new controllers draw their characteristics from the same distributions. Finally, the rules' effects on surplus division are analyzed and this examination reveals a rationale for mandatory rules.

Number of Pages in PDF File: 52

Keywords: Corporate control, sale of control, control blocks, large shareholders, mergers and acquisitions, private benefit of control, minority shareholders

JEL Classification: G30, G34, K22

Accepted Paper Series