THE OPTIMALITY OF THE MANDATORY BID RULE

A recent legislative directive from the Commission of the European Com munity proposes the enactment of a mandatory bid rule (MBR) whereby a bidder trying to acquire control of a firm should be required to exten d the offer for all shares of the firm. This article analyzes how adop tion of such a rule affects shareholder wealth and allocative efficien cy. We derive a general design principle, which precisely characterize s when the MBR is in the interest of the shareholders and when it is n ot, and evaluate the MBR as a policy instrument. The design principle is shown to closely approximate the choice of the optimal bidform.