Efficiency in Private Control Sales – The Case for Mandatory Bids

There are two main regulatory approaches in relation to private sale-of-control transactions. The ‘market rule’ confers maximum freedom on a company’s incumbent controller by enabling sale shares (hence control over the company) to any acquirer offering an acceptable price. This concept applies to most private sale-of-control transactions in the US. On the other hand, the ‘mandatory bid rule’ requires a potential acquirer to offer a buy-out to all remaining shareholders once he obtains control over a company. 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, the price offered to the remaining shareholders by the acquirer must be at least equal to the consideration received by the incumbent controller. This effectively prevents transactions with potential acquirers who are unable to offer a price acceptable to the incumbent controller to all shareholders of the company. While this warrants that no value-destroying control transfers can take place, some value-increasing takeovers are also prevented by the rule, potentially reducing the overall level of (beneficial) takeover activity. This “chilling effect” of the mandatory bid rule, it is often argued, is too high a price to pay for the few advantages offered in exchange. This paper seeks to analyse the determinants for a re-estimation of the efficiency costs entailed by the mandatory bid and market rules and argues that the efficiency advantages of the mandatory bid rule go far beyond simply deterring inefficient takeovers. The paper also emphasizes that private benefits of control – especially in the form of synergies – exist irrespective of the level of investor protection offered by a particular legal environment.