Edited by Claire A. Hill and Brett H. McDonnell
Chapter 12: Takeover Theory and the Law and Economics Movement
Steven M. Davidoff 1. INTRODUCTION The legendary Henry Manne can be credited with the first significant application of law and economics scholarship to takeover theory. In his short ten-page article Mergers and the Market for Corporate Control (Manne 1965), Manne set forth a theory of the market for corporate control. The takeover market serves as a monitor for managers in public corporate entities. If these managers fail to efficiently run the corporate enterprise or otherwise seek their own private benefits to the detriment of the corporation, the takeover market serves as a monitor. The value of the corporate enterprise will decline relative to shares in similarly situated corporations. This will attract third parties to bid for control of the company, actors who will otherwise operate it more efficiently and without such detriment. Though Manne recognized that various takeover forms could have differing costs, Manne’s article was an implicit endorsement of an unconstrained takeover market, one where acquirers could freely bid for companies. This would produce net social gains by allocating resources more efficiently; it would also force managers to operate their companies more capably or otherwise be replaced, itself a net social gain. Manne’s article was framed as primarily about the proper scope of antitrust enforcement and the desirability of horizontal mergers, but its true influence was its implicit support for a free market for corporate control as well as the assignment of a value on corporate control. Manne’s theory would shape repeated debates over the subsequent forty years about...
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