Why prohibiting creeping takeovers would not be such a good idea

Why prohibiting creeping takeovers would not be such a good idea

Takeover transactions play a pre-eminent role in promoting shareholder and social welfare. They assist to assure the quality of corporate management, promote the efficient allocation of resources within industries and enhance shareholder wealth. Given this, the law governing takeover activity would serve the interests of shareholders and the economic order of society in general better if it had as its prime objective to encourage significant amounts of that activity. However, of late calls have been made to restrict the use of creeping takeovers, one of the presently recognised methods of effecting corporate control transactions. These entreaties, if heeded are apt to lead to unfortunate consequences. The creeping takeover method affords potential acquirers the real benefit of gradually gaining the desired level of control of a company through the purchase of shares on the market at favourable prices or from the holders of strategic blocs at their reservation prices, instead of making a formal takeover offer to all shareholders. Blocking creeping takeovers is thus liable to unnecessarily raise the cost of takeovers, in the process making it less attractive for prospective acquirers to attempt acquisitions. Ultimately, this is prone to lead to a diminution in the level of takeover activity. A reduction in takeover activity can only serve to deny shareholders and society as a whole the positive effects of that activity. This is undesirable. It is bound to hurt shareholder and social welfare and in the end leave every one worse off. For this reason, policy makers should be very loath to adopt measures that have the potential to reduce the incidence, or success of creeping takeover bids. To the extent they tend to promote more takeover activity, thereby enhancing shareholder and social welfare, creeping takeovers should be encouraged rather than obstructed.

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