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.