Market Failures in Takeovers

Abstract

AbstractThis chapter employs a law and economics approach to identify the potential market failures in takeovers and outlines the regulatory framework of takeovers that will be discussed in detail in Part II of this book (Chaps. 3, 4 and 5). It finds that four types of market failures may arise as a result of takeovers: increase of market power (potential monopoly), severe information asymmetries, negative externalities, and undersupply of public goods. The market failure problems may affect three types of societal interests: (i) the interests of corporate stakeholders with whom target companies have a contractual relationship, (ii) the legally recognized public interest considerations, and (iii) other societal interests affected by a takeover. To address the market failures and protect the relevant societal interests, regulatory frameworks of takeovers are established in different jurisdictions, which consist of both government regulation and private regulation.