A Regulation of Bids for Dual Class Shares. Implication: Two Shares { One Price

This paper examines the consequences of a certain regulatory restriction on bids for dual class shares. Shares of di erent classes are often argued to have di erent prices because a premium will be paid to the superior voting shares in the case of a tender o er. This paper takes as given a setup where the shares in a rm are widely held and regulations require that a tender o er pays the same relative premium to all share classes. In this setup, it is shown that the shares of di erent classes will sell at the same price as long as there is a strictly positive probability thateither the current management issuÆciently strong or that a suÆciently strong rival will show up. Furthermore, under this condition the regulation is socially optimal in the sense that the management that gives the highest total rm value will be the management of the rm. Finally, theregulation is shown to favor (or protect) the holders of restricted voting shares and this is not necessarily at the expense of the holders of superior voting shares. If the weak condition above is not satis ed, the paper demonstrates the existence of a whole range of possible price equilibria. These equilibria can be decisive for whether the current management will continue or the rival will take over. The practical interest of this paper derives from the fact that some European countries have adopted regulatory restrictions on bids for dual class shares. This has more or less occurred due to proposed EU Directives. The regulation examined in this paper applies for example to tender o ers in Denmark and empirical results on the voting premium in Denmark are shown to be consistent with the theoretical results in this paper.