Mandatory Bids, Squeeze-out, Sell-out and the Dynamics of the Tender Offer Process

The European Commission's draft directive (October 2002) proposes to introduce a squeeze-out right and a sell-out right and to set the price in a mandatory bid equal to the highest price paid in the 6 or 12 preceding months. Drawing on the existing literature, this paper analyses these three new provisions. In takeovers of widely held targets, the squeeze-out right and the sell-out right have the potential to resolve the collective action problem among shareholders, thereby ensuring the success of value-increasing takeovers and the failure of value-decreasing takeovers. Unlike the sell-out right, the mandatory bid rule requires competition by the incumbent to provide additional shareholder protection. In firms with a dominant shareholder, the mandatory bid rule eliminates inefficient control transfers at the cost of discouraging more efficient control transfers. The benefits but not the costs of the mandatory bid rule tend to disappear when control is consolidated via dual class shares or pyramids or when control benefits are determined by either environment or firm characteristics (but not by the blockholder's identity).