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Abstract

A routine defensive tactic of targets of hostile tender offers is to seek a preliminary injunction under section 16 of the Clayton Act on the ground that the offeror's acquisition of the target's stock would effect a merger violating section 7 of the Act. The litigation costs that an antitrust injunction imposes on an offeror seems unlikely to exceed the offeror's risk-adjusted expected benefit from the takeover. In this Article, I discuss several reasons why the possibility of delay tendes to discourage a potential offeror from ever making a tender offer. Part II of this Article presents an economic framework for evaluating the costs and benefits of issuing antitrust preliminary injunctions in hostile tender offers. Using this framework, part II concludes that it is unlikely that issuing such an injunction ever would enhance social welfare and that a court therefore never should grant one, even when the tender offer would merge the corporate control of two competitors. Consequently, part III advocates that Congress deny targets of hostile tender offers standing to sue for preliminary injunctions under section 6 of the Clayton Act. Part IV shows how this economic prescription can be reconciled with exisiting law.

I. Introduction

A routine defensive tactic of targets of hostile tender offers is to seek a preliminary injunction under section 16 of the Clayton Act on the ground that the offeror's acquisition of the target's stock would effect a merger violating section 7 of the Act. In a frequently quoted sentence from Missouri Portland Cement Co. v. Cargill, Inc., Judge Friendly succinctly explained why an antitrust preliminary injunction "spells the almost certain doom of a tender offer":

Drawing Excalibur from a scabbard where it would doubtless have remained sheathed in the face of a friendly offer, the target company typically hopes to obtain a temporary injunction which may frustrate the acquisition since the offering company may well decline the expensive gambit of a trial or, if it persists, the long lapse of time could so change conditions that the offer will fail even if, after a full trial and appeal, it should be determined that no antitrust violation has been shown.

The litigation costs that an antitrust injunction imposes on an offeror, though substantial, seem unlikely to exceed the offeror's risk-adjusted expected benefit from the takeover. Rather, delay seems to be the more determinative tactical result of an antitrust injunction.

For several reasons, the possibility of delay tends to discourage a potential offeror from ever making a tender offer. First, it increases uncertainty for the offeror because the longer the acquisition is deferred, the more likely it is that intervening events will widen the dispersion of the offeror's possible retup).s from the takeover. Second, regardless of how narrow or broad the dispersiOlyof possible returns from a takeover, delay also reduces the takeover's expected value to the offeror because even benefits that are certain to accrue to the offeror must be discounted to their present value if deferred. Third and most important, delay enables the target to search for a white knight and enables other firms to freeride on the offeror's efforts to identify an attractive target. Thus, the original offeror bears greater uncertainty as to the final tender price necessary to acquire the target, and the target's shareholders bear greater uncertainty over whether the antitrust laws will prevent them from ultimately tendering their shares to the higher original bidder.

Part II of this Article presents an economic framework for evaluating the costs and benefits of issuing antitrust preliminary injunctions in hostile tender offers. Using this framework, part II concludes that it is unlikely that issuing such an injunction ever would enhance social welfare and that a court therefore never should grant one, even when the tender offer would merge the corporate control of two competitors. Consequently, part III advocates that Congress deny targets of hostile tender offers standing to sue for preliminary injunctions under section 16 of the Clayton Act. Part IV shows how this economic prescription can be reconciled with existing law.

II. AN ECONOMIC FRAMEWORK FOR EVALUATING MOTIONS FOR ANTITRUST PRELIMINARY INJUNCTIONS IN HOSTILE TENDER OFFERS

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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