Mechanism Design in M&A Auctions

34 Pages Posted: 10 Apr 2014

See all articles by Steven J. Brams

Steven J. Brams

New York University (NYU) - Wilf Family Department of Politics

Joshua Mitts

Columbia Law School

Date Written: 38 3, 2014

Abstract

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 Article, 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.com.

Keywords: Delaware, Corporate, Journal, Law, M&A, Mechanism Design

Suggested Citation

Brams, Steven and Mitts, Joshua, Mechanism Design in M&A Auctions (38 3, 2014). Delaware Journal of Corporate Law (DJCL), Vol. 38, No. 3, 2014. Available at SSRN: https://ssrn.com/abstract=2422577

Steven Brams (Contact Author)

New York University (NYU) - Wilf Family Department of Politics ( email )

Dept. of Politics
19 West 4th St., 2nd Fl.
New York, NY 10012
United States
212-998-8510 (Phone)
212-995-4184 (Fax)

HOME PAGE: http://politics.as.nyu.edu/object/stevenbrams.html

Joshua Mitts

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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