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Working paper

Transfers of Corporate Control in Firms with Non-Controlling Blockholders

I model the choice between a negotiated block trade and a public tender offer as means of acquiring control in a firm with a dominant minority blockholder. Potential acquirers differ in their (privately known) ability to create value in the target .rm. In equilibrium, high types go for a tender offer, intermediate types purchase just the blockholder’s stake, and low types abstain. The model yields a number of implications. Compared to tender offers, block trades are associated with lower efficiency in equilibrium, which explains lower target announcement returns following block trades. Some equilibrium block trades are value-reducing. The equal opportunity rule (EOR) helps eliminating them, but it needs to go together with a rule allowing to “freeze out” non-tendering shareholders in order to ensure that no value-increasing takeover fails. The two rules are complements: introducing one without the other may hurt efficiency. Better investor protection raises the incidence of full-scale acquisitions relative to block trades. Yet, when the EOR is present, an increase in investor protection may be detrimental for efficiency as it may prevent some value-increasing takeovers.