The Construction of Tender Offers: Capital Gains Taxes and the Free Rider Problem

David T Brown

The Journal of Business, 1988, vol. 61, issue 2, 183-96

Abstract: Shareholders are less likely to tender shares in the first stage of a two-tier offer than in an any-or-all offer. This is inconsistent with the view that two-tier offers overcome the free-rider problem. This article shows that two-tier offers with a fully taxable first stage and a nontaxable second stage are structured to induce shareholders with low capital-gains tax liabilities to accept the first stage and shareholders with high capital-gains tax liabilities to accept the second stage. In offers where both the first- and second -stage compensations are taxable, high tendering rates occur in the first stage. Copyright 1988 by the University of Chicago.

Date: 1988
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