A Panacea or a Wisdom Tooth? Assessing the Misconstrued Mandatory Bid Rule

Abstract

The Mandatory Bid Rule (MBR) requires a bidder who acquires control over a firm to make a general offer to all remaining shareholders to purchase their residual shares. It is the most powerful institution that requires controlling shareholders to share the control premium with other shareholders in a control transaction. The MBR is considered to be a key method of protection for minority shareholders, but nevertheless faces strong criticism over high implementation costs and an ongoing debate over its effectiveness in practice. From a utilitarianism perspective, the paper shows the relevance between the MBR and the effectiveness of minority shareholder protection mechanisms in a jurisdiction of legal transplantation. Using Mainland China as the test sample where the MBR was adopted, removed and then reintroduced, the paper employs the empirical research methodology to highlight market reactions when the rule is removed. The paper analyzes the efficiency of the MBR and outlines the types of environments and jurisdictional specifications where the MBR can operate at an optimal level, and alternatively, where the MBR will not be value-maximizing. It offers ideal legislation suggestions for similar jurisdictions considering transplanting MBR.