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Using Auction Theory to Inform Takeover Regulation

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  • Cramton, Peter
  • Schwartz, Alan

Abstract

This paper focuses on certain mechanisms that govern the sale of corporate assets. Under Delaware law, when a potential acquirer makes a serious bid for a target, the target's Board of Directors is required to act as would "auctioneers charged with getting the best price for the stock- holders at a sale of the company." The Delaware courts' preference for auctions follows from two premises. First, a firm's managers should maximize the value of their shareholders' investment in the company. Second, auctions maximize shareholder returns. The two premises together imply that a target's board should conduct an auction when at least two firms would bid sums that are nontrivially above the target's prebid market price.
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Suggested Citation

  • Cramton, Peter & Schwartz, Alan, 1991. "Using Auction Theory to Inform Takeover Regulation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(1), pages 27-53, Spring.
    • Handle: RePEc:oup:jleorg:v:7:y:1991:i:1:p:27-53
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    References listed on IDEAS

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    1. Daniel R. Vincent, 1990. "Dynamic Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 49-61.
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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