An Analysis of the Mandatory Bid Rule
The Mandatory Bid Rule (MBR) requires that any shareholder who either (i) establishes new control of a firm or (ii) takes over control by transfer of an old block position also extends an offer for the remaining shares at a fair price. For three different ownership structures, the paper analyzes the effect of implementation of a Mandatory Bid Rule on the value of the firm. Implicit in the decision to enact the MBR is a trade-off between a value increasing (decreasing) change in the frequency of takeovers and a value decreasing (increasing) effect due to a lower (higher) expected premium. For the ownership structure where a minority owner establishes now control, we demonstrate the general result that the negative probability effect dominates the positive premium effect, i.e. the value of the firm always decreases if a MBR is implemented. If instead the firm is controlled by a majority owner and control is transferred, we characterize the balance of the two ounter-acting effects in general. In particular, if the incumbent majortity owner enjoys larger private benefits of control than a potential buyer, we show that it is likely that enactment of the MBR lowers the value of the firm. This result contrasts with that obtained when the firm is atomistically held. In this case, if either the incumbent management team or the rival enjoy private benefits that are much larger than that of the counterparty, the adoption of the MBR is likely to increase the firm value.
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