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01 Apr 2003

The Economics of the Proposed European Takeover Directive

Joseph A. McCahery / Luc Renneboog / Peer Ritter / Sascha Haller

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This report provides a detailed analysis of the mandatory bid rule. It examines the implications of the rule, taking into account its ex-ante and ex-post trade-offs. The report outlines clearly the valuable features of the mandatory bid rule in safeguarding against value-decreasing takeovers and assesses whether the Commission’s decision to allow member states to define the threshold for the mandatory bid is a sensible approach. The report also outlines the main elements of the break-through rule and assesses the profound changes that would take place in Europe’s takeover market should the rule be adopted. A number of recommendations are made. The report identifies a number of factors that supply good reasons for rejecting the break-through rule. These include the fact that it violates shareholder decision-making, is logically inconsistent with the mandatory bid rule and may create problems associated with two-tier takeovers. Moreover, the evidence on the efficiency implications of dual-class shares is inconclusive. The report concludes that, having highlighted the costs and benefits of the proposed break-through rule, the higher costs associated with the break-through rule outweigh the benefits.