The SEC Regulation of Takeovers: Some Doubts from a Game Theory Perspective and a Proposal for Reform

Abstract

This Article shows that in cases where shareholders subject to partial takeover bids lack information about the tendering decisions of their peers, such shareholders might accept detrimental tender offers. This outcome could be improved by way of a slight change in the rules of the game. We suggest a simple reordering of the tender offer and proxy contest procedures in hostile partial bids that would ameliorate the problem to a significant extent. The decisionmaking problem faced by shareholders in partial bids could be substantially alleviated by the following procedure: first, the tendering period should close prior to the shareholder vote on the bid, second, the final tally of the tender should be made public; and finally, shareholders should vote on the bid. Shareholders would thus be free from the burden of guessing the tendering choices of their peers. When voting for or against the bid, shareholders will know exactly what fraction of shares were tendered, allowing them to have a better sense of the value they will receive for their shares if the bid is approved. This simple procedure overcomes an important challenge at virtually no cost, making shareholders less likely to approve a bid that they will later regret. If this proposal were to be adopted, judicial hostility to partial tender offers might abate. Partial bids sometimes make much sense from an economic point of view, as they allow M&A activity without any necessity for raising funds to acquire the firm in its entirety.