European takeover regulation[‘Efficient and inefficient sales of corporate control’]

To foster corporate restructuring and capital market integration, the European Commission has repeatedly attempted to introduce Europe-wide takeover regulation, but has encountered strong resistance. We trace the sources of this resistance to differences in corporate governance arrangements across member states and outline the economic effects of takeover regulation, focusing in particular on possible provisions of particular relevance to the European debate. Regulation may stipulate that the same price be offered to all shareholders (a ‘mandatory bid’ rule) and/or that differentiation of voting-rights be voided when a bidder acquires a large enough portion of a firm’s shares (a ‘break-through’ rule). The impact of these and other rules depends on the existing structure of corporate ownership and control, which is very heterogeneous in Europe. And while a break-through rule promotes takeovers, a mandatory bid rule tends to prevent them. Hence, the two rules would tend to offset each other if introduced together, and introducing a strict mandatory bid rule alone would slow down corporate restructuring. We argue that hostile takeovers are a rather blunt instrument for achieving desirable contestability of control, and their regulation is only one of many corporate governance mechanisms to be honed in order to promote corporate restructuring in Europe.— Erik Berglöf and Mike Burkart