Under Delaware law (the predominant corporate law in the US), 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." (Revlon v. MacAndrews & Forbes, 173). The target's board may not use defensive tactics that destroy the auction process and must attempt to seek higher bids. Similarly, the Williams Act requires takeover bids to remain open for at least 20 business days on the grounds that the delay facilitates auctions. This preference for auctions follows from the view that auctions maximize shareholder returns. In addition, auctions promote efficiency by shifting corporate assets into the hands of those that value them most highly. And auctions mitigate the collective action problem of target shareholders by requiring the target board to seek the highest bid. Takeover auctions differ from traditional auctions in important respects. In a traditional auction, the seller describes what is being sold and states the auction rules in a public announcement. Takeover auctions are instead prompted by a potential buyer. Only after the buyer has expressed an interest in the target are bids from others sought. The process is governed not by a fixed set of auction rules specified by the seller, but rather by complex takeover regulations, which give the target board some latitude in the process. The process is typically not stated in advance, but evolves as bidders and bids arrive. For the most part, the regulations provide ways to defend against hostile takeovers with poison pills, greenmail, and other tactics. Despite these differences, to a first approximation takeovers are well modeled as an ascending-bid auction with significant participation costs. This essay begins by looking at takeover auctions from the point of view of a buyer, focusing on bidding strategy. Then strategies of the target are discussed. Finally, the desirability of takeover auctions is addressed.
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