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

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.