The Mandatory Bid Rule: Efficient, after All?

35 Pages Posted: 2 May 2013

See all articles by Edmund-Philipp Schuster

Edmund-Philipp Schuster

London School of Economics - Law Department

Date Written: May 2013

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.

Keywords: Takeovers, Mandatory Bid Rule, Takeover Directive, Private Benefits of Control, Control Premium, Market for Corporate Control, Efficient Control Transfer

Suggested Citation

Schuster, Edmund-Philipp, The Mandatory Bid Rule: Efficient, after All? (May 2013). The Modern Law Review, Vol. 76, Issue 3, pp. 529-563, 2013. Available at SSRN: https://ssrn.com/abstract=2259468 or http://dx.doi.org/10.1111/1468-2230.12023

Edmund-Philipp Schuster (Contact Author)

London School of Economics - Law Department ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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