The Mandatory Bid Rule (MBR) forms an important part of the EU Directive (2004/25) on Takeover Bids. The MBR is generally seen as a benign protection of investors in listed companies. The Directive itself, on the other hand, is widely seen as unsuccessful. This was probably because it went well beyond its purpose of settling the formalities surrounding cross-border takeover bids, e.g. publication, minimum information about the bid, duration, and choice of applicable law and competent authority. Instead, it ventured to harmonise corporate governance, which is notoriously ill-suited for harmonisation.
This paper is a lecture delivered at a conference in 2016 marking the 10th anniversary of the Directive. It lays out the many well-known arguments against the MBR. It is unnecessary, because companies could adopt such a rule in their bylaws if they really want it. It is unjust, because there is no equality among shareholders in the secondary market and shareholders don’t have a claim on any ‘control premium’, which is an elusive concept anyway. It is inefficient, because its main purpose is to protect incumbent management against shareholder control and the MBR consequently prevents the necessary monitoring and disciplining available to shareholders acting in concert. By increasing the cost of company restructuring, it reduces the instances of takeovers, which the Directive was supposed to foster, and the relative efficiency that may arise in certain cases where synergies happen to serve as private benefits does not compensate for the overall loss of efficiency and damage to shareholder control and monitoring.
The MBR is undeniably popular, however, because management likes the protection and isolation from shareholders that it offers; politicians like the reduction of takeovers that may result in lay-offs among their constituencies and many have a natural deference for anything labelled investor protection; and investors, especially institutional investors who are often holding minority stakes, like the windfall that it offers, almost like a lottery paid for by others. So, there is little chance of the MBR disappearing any time soon.
It is a sad outcome well described in public choice theory: a rule that favours small vocal groups will remain even if the detrimental effect of the rule to society overall is far greater. In a time when the EU is becoming ever more unpopular, we should take the MBR as a lesson in what the powerful instrument of EU law should not be used for.
Jesper Lau Hansen is a Professor of Law at the University of Copenhagen and an occasional contributor to the Oxford Business Law Blog.