Abstract
A legislative proposal aimed at harmonizing company code within the European Union advocates the adoption of a mandatory bid rule (MBR), implying that a bidder trying to acquire control of a firm must be required to extend the offer to include all shares of the firm. Based on a generalization of a model by Grossman and Hart (1988), this essay analyzes the shareholder wealth effects of this rule. A general design principle is derived, which precisely characterizes when the MBR is in the interest of the shareholders and when it is not. The essay also evaluates the MBR as a policy instrument. The design principle is shown to closely approximate the choice of optimal bids.