Using Auction Theory to Inform Takeover Regulation

Peter Cramton and Alan Schwartz, Journal of Law, Economics, and Organization 7(1), 27-53, .


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

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