Does Mandatory Bid Rule Discourage Acquisitions above the Threshold?

The mandatory bid rule (MBR) requires anyone who buys a significant portion of a company to make a fair offer to the remaining shareholders. Introduced in the UK in 1972, this rule ensures fairness by guaranteeing that everyone holding the same class of securities is treated equally. Essentially, if someone gains control of a company, minority shareholders have the right to cash out at the same price, giving them an exit if they disagree with the new leadership.

The MBR has become the global standard, embraced by 29 out of 38 OECD countries and many non-OECD nations. While Europe is its main hub, countries in Asia, Latin America, and Africa have also adopted it. Yet, South Korea and the U.S. remain notable exceptions.

Critics argue that the rule is a financial burden, making takeovers too costly and potentially stifling efficient control transfers. They believe that under the mandatory bid rule, acquisition costs may escalate for two reasons: first, acquirers must offer minority shareholders the same control premium as that given to the controlling shareholder; second, this offer must be extended to all minority shareholders.

However, these two critical features of the mandatory bid rule may not necessarily lead to higher acquisition costs. First, acquirers may not continue to offer the same level of control premium as they did before the implementation of the MBR. Acquirers will negotiate harder to lower the offering price, knowing they have to extend the offer to all shareholders. Second, a lower offering price may make the bid less attractive to minority shareholders, making many choose not to tender their shares. As a result, the overall acquisition costs may not necessarily increase; in fact, they could potentially decrease.

Our study investigates these possibilities by examining the MBR's real impact across 41 countries. The findings suggest that the MBR reduces the control premium—the key factor in determining overall acquisition cost and the extent of private benefits an acquirer can gain post-acquisition. Specifically, our analyses show that the MBR leads to a 45-percentage point reduction in the control premium and a 10-percentage point reduction in private benefits of control in deals above the rule-triggering thresholds.

Some might argue that the reduction in premium is due to acquirers gaming the system by buying just below the threshold to avoid the MBR when premiums are high. However, our data doesn't fully support this. While there is some strategic clustering below the threshold, this pattern does not extend to ownership levels distant from the threshold.

Our findings show that the mandatory bid rule reduces post-acquisition ownership size (toehold plus newly acquired shares from the block seller) by only 3.3 percentage points. Additionally, our results do not support the claim that the likelihood of post-acquisition ownership exceeding the threshold decreases. Moreover, our analyses demonstrate that the MBR does not necessarily result in fewer deals occurring above the rule-triggering threshold. In one analysis, comparing the UK (an MBR adopter) and the US (an MBR non-adopter), we found that the gap in deal frequency between transactions below and above the threshold is less pronounced in the UK, where the deal frequency for transactions above the threshold is 46.2 percent less than for transactions below the threshold. In contrast, in the US, the deal frequency for transactions above the threshold is 57.6 percent less than for transactions below the threshold.

In conclusion, the mandatory bid rule is a crucial regulation that ensures fairness in corporate takeovers. Despite criticisms about its potential to raise acquisition costs, our study shows that the MBR can lead to a reduction in control premiums without significantly affecting the overall number of transactions. This rule strikes a balance between protecting minority shareholders and maintaining an efficient and dynamic corporate control market.

For policymakers, our message is clear: don't fear the MBR. It doesn't hike acquisition costs or dampen the takeover market as much as critics claim. Instead, it promotes fairness without significant financial drawbacks. The MBR is a smart policy choice for countries looking to regulate corporate takeovers effectively.

Our study contributes significantly to the literature on corporate takeovers by providing the first empirical examination of the MBR's impact on post-acquisition ownership levels. Previous research has been largely theoretical or has focused on different aspects, such as control premiums for block sellers and acquirers, shareholder returns around the time of rule adoption, and the extraction of private benefits of control.

An obvious extension of this study would be to investigate the impact of the mandatory bid rule on the overall costs of acquisitions, including the expenses incurred from making tender offers to remaining minority shareholders, as this is another factor that determines the overall acquisition costs, along with the control premium paid by the acquirer. It would also be interesting to examine how frequently mandatory bids are triggered and whether voluntary full-takeover bids have increased following the adoption of the mandatory bid rule to avoid mandatory bid triggers.

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By Woochan Kim (Korea University Business School)

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