The Mandatory Bid Rule: Efficient, After All?


  • I would like to thank John Armour, Paul Davies, Peter Doralt, Leonardo Felli, Carsten Gerner-Beuerle, Tom Kirchmaier, Roland Kirstein, Jonathan Rickford, Alan Schwartz, Martin Winner and two anonymous referees for very helpful comments and suggestions.


The mandatory bid rule has its origins in the UK and now applies throughout the EU and in many other jurisdictions. Under a mandatory bid, an acquirer of a controlling stake in a listed company has to offer to the remaining shareholders a buy-out of their minority stakes at a price equal to the consideration received by the incumbent controller. While the rule warrants that no value-destroying control transfers take place, it is often criticised for preventing value-increasing transactions. This paper challenges some of the claims made by critics of mandatory bids. Highlighting the effects of synergy gains in private sale-of-control transactions, it is shown that mandatory bids prevent inefficient control transfers, where minority shareholder protection rules provide inadequate protection. Furthermore, mandatory bids help facilitate transfers to the most efficient bidders in multi-bidder settings. The mandatory bid is justifiable, on economic grounds, in wider circumstances than is commonly assumed by law and economics scholars.