Working Papers,
Copenhagen Business School, Department of Finance

Abstract: This paper examines the consequences of a certain regulatory restriction on bids

for dual class shares. Shares of di erent classes are often argued to have di erent

prices because a premium will be paid to the superior voting shares in the case of a

tender o er. This paper takes as given a setup where the shares in a rm are widely

held and regulations require that a tender o er pays the same relative premium to

all share classes. In this setup, it is shown that the shares of di erent classes will

sell at the same price as long as there is a strictly positive probability thateither

the current management issuÆciently strong or that a suÆciently strong rival will

show up. Furthermore, under this condition the regulation is socially optimal in

the sense that the management that gives the highest total rm value will be the

management of the rm. Finally, theregulation is shown to favor (or protect) the

holders of restricted voting shares and this is not necessarily at the expense of the

holders of superior voting shares.

If the weak condition above is not satis ed, the paper demonstrates the existence

of a whole range of possible price equilibria. These equilibria can be decisive for

whether the current management will continue or the rival will take over.

The practical interest of this paper derives from the fact that some European

countries have adopted regulatory restrictions on bids for dual class shares. This

has more or less occurred due to proposed EU Directives. The regulation examined

in this paper applies for example to tender o ers in Denmark and empirical results

on the voting premium in Denmark are shown to be consistent with the theoretical

results in this paper.

Keywords: Dual Class Shares; Regulation of Tender O ers; the Voting Premium

JEL-codes: G18; G32; G34; G38

37 pages, May 1, 2000

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