New Zealand’s mandatory bid provisions: Fit for purpose?

Abstract

Takeovers aimed at obtaining control of listed companies are subject to regulation across the world. A cornerstone of many takeover regulatory regimes is the mandatory bid rule, which obligates the offeror to extend a takeover offer to all shareholders in the target company once control is obtained. Mandatory bid rules are controversial. Arguments for mandatory bid rules suggest they deter exploitative takeovers and guarantee exit rights for shareholders and so incentivise investment in the first place. Arguments against mandatory bid rules suggest they increase the cost of takeovers, deterring value or efficiency increasing takeovers. Ultimately, the question of whether a mandatory bid rule is beneficial is seen as an empirical one. This paper argues that the empirical question cannot be divorced from the particular characteristics of the capital market in which a mandatory bid rule is imposed. New Zealand’s capital markets are small by international standards, are relatively dependent on foreign investment and characterised by concentrated ownership. These characteristics suggest the incidence of takeovers in general may be lower, which in turn suggests that its takeover regime should be wary of increasing the costs of takeovers, notwithstanding the benefits a mandatory bid rule may provide. This paper finds that New Zealand’s mandatory bid rules, owing to the allowance of partial bids, largely responds to this concern and appears to be appropriate given the characteristics of New Zealand’s capital markets.