The Mandatory Bid Rule in the Proposed EC Takeover Directive : Harmonization as Rent-Seeking?

According to the new proposal for an EC takeover directive, anyone acquiring control of a listed company is required to make a bid, to be addressed to all holders of securities for all their holdings at a price at least equal to the highest price paid in the period preceding the acquisition, unless an exemption or a discount on price is granted by the supervisory authority. This paper provides an analysis of the mandatory bid rule as devised in the directive proposal and assesses whether there is a case for an EC rule of this kind. Five possible rationales are identified for the mandatory bid rule: the level playing field, the protection of minority shareholders, equality of treatment, companies' lower cost of capital, and efficiency and integration of European capital markets. Drawing from well-established economic analysis on transfers of control and the effects of the mandatory bid rule, the paper finds that harmonized rules such as those provided for in the proposal do not level the playing field and cannot be justified on this ground alone, have dubious effects on minority shareholders' welfare as a class and on firms' cost of capital, have no legal justification in terms of equal treatment, and can possibly be justified as rules enhancing the efficiency and integration of European capital markets, if other institutional arrangements such as low levels of enforcement of directors' duty of loyalty and the unavailability of the poison pill are taken into account. The paper concludes that certainly well-identified interest groups will gain from an EC mandatory bid rule provision. Corporate managers (and blockholders retaining working control) of widely-held European companies stand to gain from such provision, as it makes hostile takeovers more costly. Even more importantly, policymakers and supervisory agency officials, to whom great power and discretion are granted in deciding whether the mandatory bid rule applies and what its price should be, are going to gain from its introduction. Finally, those providing advisory services in the market for corporate control, and above all lawyers specializing in mergers and acquisitions, stand to gain from having in place an EC mandatory bid rule