An Efficiency Analysis of Proposed Rules to Limit Resistance to Tender Offers

An Efficiency Analysis of Proposed Rules to Limit Resistance to Tender Offers

1986Working Paper No. 903

Easterbrook and Fischel have proposed a passivity rule that would prohibit target management from resisting a tender offer. For a m model in which target management has private information about the true value of the target and tender offers are determined competitively, a passivity rule is shown to be more efficient than allowing target management to resist a tender offer when it is in the best interests of it shareholders to do so. This results because a passivity rule eliminates the adverse selection associated with optimal resistance. A modified passivity rule styled after a proposal by Gilson is shown to be as efficient as a passivity rule for the model studied.