Block Premia in Transfers of Corporate Control

This paper studies block trades and tender offers as alternative means for transferring corporate control in firms with a dominant minority blockholder and an otherwise dispersed ownership structure. Incumbent and new controlling parties strictly prefer to trade the controlling block. From a social point of view, however, this method is inferior to tender offers, because it preserves a low level of ownership concentration which induces more inefficient extraction of private control benefits. This discrepancy is caused by the free-riding behaviour of small shareholders. Moreover, the controlling block trades at a premium which reflects, in part, the surplus that the incumbent and the acquirer realize by avoiding a tender offer and the consequent transfer to small shareholders. Therefore, factors that alter the pay-offs of small shareholders in a tender offer (e.g. supermajority rules, disclosure rules and non-voting shares) also alter the block premium. Finally, the paper argues that greenmail, like block trading, enables the controlling parties to preserve low levels of ownership concentration and large private control benefits.