The optimality of the mandatory bid rule

A recent legislative directive from the Commission of the European Community proposes the enactment of a mandatory bid rule (MBR) whereby a bidder trying to acquire control of a firm should be required to extend the offer for all shares of the firm. This article analyzes how adoption of such a rule affects shareholder wealth and allocative efficiency. We derive a general design principle, which precisely characterizes when the MBR is in the interest of the shareholders and when it is not, and evaluate the MBR as a policy instrument. The design principle is shown to closely approximate the choice of the optimal bidform.