Disclosure Laws and Takeover Bids

THE SECURITIES AND EXCHANGE ACT not only prohibits the making of false statements, but also requires that parties to a takeover bid make positive disclosures. This paper discusses some of the effects of requiring positive disclosure as opposed to simply outlawing the making of false statements. We begin in Section 1 by asking how much disclosure will be voluntarily forthcoming if lying is illegal but there is no positive disclosure requirement. Rather than starting with the complex problem of disclosure in takeover bids, we first consider the simpler case of a seller who knows something about the quality of the item he is selling. We show that if there is no transactions cost$then it will always be in the seller's interest to disclose the quality of the item voluntarily. It is not an equilibrium for the seller to withhold information in an attempt to defraud. Section 2 uses the model of takeovers in Grossman and Hart [6] to analyze the effect on the takeover bid process of requiring the firm carrying out the takeover (i.e., the acquiring firm) to make particular disclosures required by the Securities and Exchange Act. We focus on the effect of implicitly requiring the disclosure of any intention to dilute the rights of shareholders who do not tender. We show that this type of disclosure may overly hinder the takeover bid process. This will have an adverse effect on managerial efficiency.