Private sale of corporate control: why the European mandatory bid rule is inefficient
Working Paper N. 43
Simone Maria Sepe
Università di Siena e Yale Law School
Abstract: On April 21, 2004, the European Community enacted the XIII Company Law Directive on Takeovers, whose primary purpose is the promotion of more efficient capital structures in Europe. The provision of a Mandatory Bid Rule (MBR) is among the several measures devised by the Directive to achieve this goal. The rule requires that anyone acquiring control of a listed company is obliged to make an offer to be addressed to all shareholders for all their holdings at a price at least equal to the highest price paid in the year prior to the acquisition. More specifically, in the intentions of the European legislator, the MBR would be designed to protect minority shareholders from value expropriations by opportunistic buyers, who seek control of the company to extract private benefits rather than to increase corporate cash flows. Moreover, by preventing value-decreasing transfers of controls, the rule would also lead to a reduction of the cost of equity capital. In this paper, I rebut both these claims as misleading and show that the MBR is, in fact, an inefficient rule for Europe. There are two basic reasons underpinning my argument. First, the ability of a controlling blockholder to extract private benefits is basically a function of the legal system in which the controlled company is chartered. Thus, the number of value-decreasing transfers of control tends to be relatively low. Second, by raising the cost of acquisition, the MBR is likely to prevent value-increasing transactions. And because such cost is increasing in the size of private benefits, in Europe where private benefits tend to be relatively high, the MBR is likely to prevent a large number of value increasing transactions. Finally, the MBR both fails to protect minority shareholders, because it does not prevent the extraction of private benefits, and risks reducing corporate value by hindering value-increasing transactions.