[We show how the efficiency of reorganization is affected by the distribution of control rights under the U.K. insolvency code. Control rights raise particular problems when creditors have different incentives to keep the firm as a going concern. Such differences may arise from the possession of private benefits by particular creditors which are lost if the debtor firm is liquidated. The incidence of inefficient liquidations is influenced by the size and seniority of creditors' claims. The current U.K. code is widely thought to give rise to inefficient liquidations. We show, however, that inefficiency depends upon the debt structure and whether the controlling creditor in formal bankruptcy has private benefits.]

This paper examines the disciplining function of hostile takeovers in the U.K. in 1985 and 1986. We report evidence of high board turnover and significant levels of post-takeover restructuring. Large gains are anticipated in hostile bids as reflected in high bid premiums. However, there is little evidence of poor performance prior to bids, suggesting that the high board turnover does not derive from past managerial failure. Hostile takeovers do not therefore perform a disciplining function. Instead, rejection of bids appears to derive from opposition to post-takeover redeployment of assets and renegotiation over the terms of bids.

We show how the efficiency of reorganization is affected by the distribution of control rights under the U.K. insolvency code. Control rights raise particular problems when creditors have different incentives to keep the firm as a going concern. Such differences may arise from the possession of private benefits by particular creditors which are lost if the debtor firm is liquidated. The incidence of inefficient liquidations is influenced by the size and seniority of creditors’ claims. The current U.K. code is widely thought to give rise to inefficient liquidations. We show, however, that inefficiency depends upon the debt structure and whether the controlling creditor in formal bankruptcy has private benefits.