Protecting the weak: Efficacy of mandated auctions in minority buyouts

Abstract

There is considerable debate among economists and legal scholars about the need for regulatory protection for minority shareholders when controlling shareholders seek to buy them out. We examine the impact of regulatory changes in India which mandated a reverse book building (RBB) process, wherein the buyout price was determined by minority shareholders rather than by the controlling shareholders. Accounting for differences in firm and deal characteristics, we find that the RBB process increased the gains to minority shareholders. Stock price reactions at deal announcement reflect these gains after a learning period during which market participants adjusted to this new mechanism.