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Regulating the Takeover of Chinese Listed Companies pp 43–65Cite as

Principles of Chinese Takeover Regulation: Economic Efficiency, Administrative Intervention, and Shareholder Equality

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Abstract

This chapter discusses and evaluates principles for the Chinese takeover law. As an overview, the chapter argues that economic efficiency and shareholder protection are two general principles for takeover regulation. Over the years, economic efficiency has become more and more important in the Chinese takeover regulatory policy. CSRC has gradually adjusted its regulatory approach by reducing administrative intervention and leaving more freedom to market participants. Less administrative intervention is justifiable when considering that takeovers can achieve various efficiency gains. Moreover, administrative regulators should attach greater importance to shareholder protection, which is currently underdeveloped in the Chinese takeover law.

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Notes

  1. 1.

    国务院关于推进企业并购重组的若干意见 [Opinions of the State Council on Promoting Corporate Merger and Restructuring] (People’s Republic of China), the State Council Sept 06, 2010.

  2. 2.

    See Sect. 4.4, Principle of Efficiency Seen in Regulatory Practices.

  3. 3.

    See Sect. 4.5, The Equal Treatment of Shareholders under the UK Law and Protecting Shareholders against Damage/Unfair Treatment under the US Law.

  4. 4.

    上市公司收购管理办法 [Measures for the Administration of the Takeover of Listed Companies] (People’s Republic of China) CSRC, Jul 31, 2006, lastly revised on Feb 21, 2012 (Takeover Regulation 2006), art. 1.

  5. 5.

    Chapter 6 will discuss practical mechanisms to protect shareholders.

  6. 6.

    John Armour and David A. Skeel, Jr., ‘Who Writes the Rules for Hostile Takeovers, and Why? The Peculiar Divergence of US and UK Takeover Regulation’ (2007) 95 Georgetown Law Journal 1727, 1752–1753.

  7. 7.

    Ibid., 1760.

  8. 8.

    Henry G. Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73(2) The Journal of Political Economy 110. This will be discussed in more detail later. See text surrounding note 18.

  9. 9.

    Uwe E. Reinhardt, ‘Reflections on the Meaning of Efficiency: Can Efficiency Be Separated from Equity?’ (1992) 10(2) Yale Law & Policy Review 302, 302.

  10. 10.

    Ibid., 307.

  11. 11.

    Henry G. Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73(2) The Journal of Political Economy 110, 112–113.

  12. 12.

    Roberta Romano, ‘A Guide to Takeovers: Theory, Evidence, and Regulation’ (1992) 9 Yale Journal on Regulation 119, note 134 and surrounding text. Carol B. Stuanson, ‘The Turn in Takeovers: A Study in Public Appeasement and Unstoppable Capitalism’ 30 Georgia Law Review 943, 955. See also Marina Martynova and Luc Renneboog, ‘A Century Of Corporate Takeovers: What Have We Learned And Where Do We Stand?’ (2008) 32(10) Journal of Banking & Finance 2148, 2177. The article concludes that the bulk of M&As are expected to improve efficiency and trigger substantial share price increases at the announcement.

  13. 13.

    Ibid., 125–127.

  14. 14.

    Ibid., 125–126.

  15. 15.

    Ibid., 126.

  16. 16.

    Henry G. Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73(2) The Journal of Political Economy 110.

  17. 17.

    As commented by Adam Smith, ‘the directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such accompany’. Adam Smith (ed), The Wealth of Nations, Modern Library Edition (Random House, Inc, 1776), 700.

  18. 18.

    Henry G. Manne, ‘Mergers and the Market for Corporate Control’ (1965) 73(2) The Journal of Political Economy 110, 113.

  19. 19.

    A brief discussion in Roberta Romano, ‘A Guide to Takeovers: Theory, Evidence, and Regulation’ (1992) 9 Yale Journal on Regulation 119, 133–142.

  20. 20.

    The City Code on Takeovers and Mergers 2011 (UK), Introduction.

  21. 21.

    Securities Commission, ‘Banking & Currency, Full Disclosure of Corporate Equity Ownership and in Corporate Takeover Bids’ (1967), 39.

  22. 22.

    Emphasis added. CLERP Paper No. 6: Promoting Competition, Financial Innovation and Investment Paper No. 6, Introduction; see also Caner Bakir, ‘Who Needs a Review of the Financial System in Australia? The Case of the Wallis Inquiry’ (2003) 38 Australian Journal of Political Science 512.

  23. 23.

    On-market takeover bids can be implemented with speed. For instance, in the on-market takeover bid for Queensland Gas Company (QGC) made by BG Group, the acquirer obtained control within one week and reached a shareholding of 90 % within three weeks. King & Wood Mallesons, ‘A Guide to Takeovers in Australia’ (2012) http://www.mallesons.com/Documents/A_guide_to_takeovers_in_Australia.pdf, 12.

  24. 24.

    Takeover Regulation 2006, art. 38.

  25. 25.

    Emphasis added. 国务院关于推进企业并购重组的若干意见 [Opinions of the State Council on Promoting Corporate Merger and Restructuring] (People’s Republic of China), the State Council Sept 06, 2010, art. Two(1).

  26. 26.

    Many SOEs used to be incorporated, with unclear property rights and assets. 关于规范国有企业改制工作的意见 [Opinions on Regulating the Restructuring Work of State-owned Enterprise] (People’s Republic of China) SASAC, 30 Nov, 2003, 1(2).

  27. 27.

    ‘关于执行国民经济与社会发展2009年计划以及2010年草案的报告 [Report on the Implementation of the 2009 Plan for National Economic and Social Development and on the 2010 Draft Plan for National Economic and Social Development] (People’s Republic of China), the third Session of the 11th National People’s Congress on Mar 14, 2010 (2010) http://www.chinadaily.com.cn/china/2010npc/2010-03/16/content_9597963.htm. It states that China will continue to promote environmentally friendly industries and high-technology industries and adjust the industries with overcapacity and outdated technology.

  28. 28.

    国务院关于推进企业并购重组的若干意见 [Opinions of the State Council on Promoting Corporate Merger and Restructuring] (People’s Republic of China), the State Council Sept 06, 2010, art. 2(1).

  29. 29.

    There are many rules in the Chinese takeover law reflecting the stance of ‘guarding against bad guys’. For instance, mandatory takeover bids need to be reviewed by CSRC before they can be made to shareholders; the bidder should deposit money before they can make the takeover bid.

  30. 30.

    There are many government sectors involved in takeover regulation, such as the state asset regulator (SOEs), local government (local enterprises), and anti-monopoly agency. The regulatory practices of these government sectors are not discussed in this work.

  31. 31.

    Both major asset reorganisation and takeovers are M&As, strictly speaking.

  32. 32.

    The three parameters include the track record of financial advisor, information disclosure and compliance performance of listed companies, and industry category of the M&A project.

  33. 33.

    2013年9月13日新闻发布会http://www.csrc.gov.cn/pub/newsite/bgt/xwfbh/201309/t20130913_234878.htm.

  34. 34.

    上市公司收购管理办法 [Measures for the Administration of the Takeover of Listed Companies] (People’s Republic of China) CSRC, Jul 31, 2006, art. 24, 62, 63.

  35. 35.

    关于修改《上市公司收购管理办法》第62条及第63条的决定 [Decision of Amending art 62, 63 of ‘Measures for the Administration of the Takeover of Listed Companies’] (People’s Republic of China) CSRC, Feb 21, 2012.

  36. 36.

    West Law, China Law Alerts, Dec 15, 2013. The mandatory bid rule is to be discussed in Chap. 5.

  37. 37.

    See Chap. 3, The Approach for Developing the Criteria for Evaluating Specific Legal Transplantation. The three steps include, first, identifying general regulatory principle held in the law of its origin; second, identifying local regulatory principles held in the law recipient country; and third, evaluating local regulatory principle by comparing divergence between general regulatory principle and local regulatory principle.

  38. 38.

    Professor Robin Hui Huang also holds that shareholder protection is a general principle for takeover regulation. Robin Hui Huang, ‘China’s Takeover Law: A Comparative Analysis and Proposals for Reform’ (2005) 30 Delaware Journal of Corporate Law 145.

  39. 39.

    Jasper Lau Hansen, When Less Would Be More: The EU Takeover Directive in its Latest Apparition, 9 Columbia Journal of European Law (2002), 275.

  40. 40.

    Chapter 5 Substantive and Procedural Requirements on Making a Takeover Bid.

  41. 41.

    Consolidation of control transactions will be discussed in more detail in Chap. 5.

  42. 42.

    Empirical evidence on Chinese practice can be viewed at Chap. 6, Sect. 6.4.

  43. 43.

    John Armour and David A. Skeel, Jr., ‘Who Writes the Rules for Hostile Takeovers, and Why? The Peculiar Divergence of US and UK Takeover Regulation’ (2007) 95 Georgetown Law Journal 1727, p. 1757.

  44. 44.

    Chapter 7, Sects. 7.2 and 7.3, Chap. 6, Sect. 6.4.

  45. 45.

    R. La Porta et al., ‘Legal Determinants of External Finance’ (1997) (3), 1131.

  46. 46.

    The City Code on Takeovers and Mergers 2011 (UK) Introduction 2 (a) Nature and Purpose of the Code.

  47. 47.

    The mandatory takeover bid rule will be discussed in more detail in Chap. 5.

  48. 48.

    John Armour and David A. Skeel, Jr., ‘Who Writes the Rules for Hostile Takeovers, and Why? The Peculiar Divergence of US and UK Takeover Regulation’ (2007) 95 Georgetown Law Journal 1727, 1734.

    Some US States, such as Pennsylvania, adopted the mandatory takeover bid rule in its local legislation, which creates barriers for hostile takeovers above a certain threshold. Erik Berglöf et al., ‘European Takeover Regulation’ (2003) 18(36) Economic Policy 171, 188.

  49. 49.

    15 USC §§ 78a et seq.

  50. 50.

    Schedule TO [17 CFR 240.14d-100].

  51. 51.

    Rule 14d-10 [17 CFR 240.14d-10]. This rule requires that the tender offer be made to all security holders and that the highest consideration paid to any security holder be paid to all security holders.

  52. 52.

    Ibid.

  53. 53.

    Rule 14d-8 [17 CFR 240.14d-8].

  54. 54.

    Takeover Regulation 2006, art. 1.

  55. 55.

    Art. 26 requires takeover bids to provide equal treatment to shareholders. Nonetheless, such a principle of equality only applies to takeover bids, not to negotiated takeovers.

  56. 56.

    Statistic shows that from 1995 to 2009, the Chinese stock market witnessed over 2,900 share acquisitions that lead to the change of corporate control. According to the author’s calculations, only 40 took the form of takeover bids. The rest mostly proceeded in the form of negotiated takeovers. 毛程连 [Chenglian Mao], ‘上市公司控制权转让的市场因应: 1995–2009 样本 [Market Responses to Corporate Control Transactions in China’s Listed Companies 1995–2009]’ (2010) (5) Capital Market.

  57. 57.

    Takeover Regulation 2006, art. 1.

  58. 58.

    Takeover Regulation 2006, art. 3.

  59. 59.

    Chapter 3, Sect. 3.5.

  60. 60.

    See George B. Javaras, ‘Equal Opportunity in the Sale of Controlling Shares: A Reply to Professor Andrews’ (1965) 32(3) The University of Chicago Law Review 420. The deterrence effect of the equal treatment rule will be discussed in more details in theoretical contests against shareholder equality rule below.

  61. 61.

    杨忠智 [Zhongzhi Yang] and 杨洁 [Jie Yang], ‘股权集中度、社会责任与公司价值之关系初探-基于我国上市公司的实证分析 [A Study of the Relationships among Ownership Concentration, Corporate Social Responsibility and Firm Value: Empirical Study of China’s Listed Companies]’ (2012) 2 现代财经 [Modern Finance and Economics] 75, Table 1. The statistic period is 2006–2010.

  62. 62.

    Alexander Dyck and Luigi Zingales, ‘Private Benefits Of Control: An International Comparison’ (2004) 59(2) The Journal of Finance 537. The study finds that control premiums widely exist in transitional jurisdictions. Research finds that control premiums exists in China’s listed companies as well. 杨刚 [Gang Yang], 谢玲辉 [Huiling Xie] and 李京京 [Jingjing Li], ‘控制权溢价测量方法综述 [Review of the Methods of Calculating Control Premium]’ (2011) 5 现代经济信息 [Modern Economic Information].

  63. 63.

    Professor Andrews divides control premiums into two categories: (a) the premium arises from extra-stockholder relations or (b) the control premium arises from the intrinsic value of control, such as the privilege to implement the holder’s business decisions. See William D. Andrews, ‘The Stockholder’s Right to Equal Opportunity in the Sale of Shares’ (1965) 78(3) Harvard Law Review 505, 528–529.

  64. 64.

    For an overview of these arguments, see Robert Charles Clark, Corporate Law (Little, Brown and Company, 1986), 491–494; R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 14th ed, 2009), 1086–1087.

  65. 65.

    As stated, ‘much of the significance of the rule of equal opportunity, however, is that it does not depend upon proof of harm to the corporation’. William D. Andrews, ‘The Stockholder’s Right to Equal Opportunity in the Sale of Shares’ (1965) 78(3) Harvard Law Review 505, 518.

  66. 66.

    William D. Andrews, ‘The Stockholder’s Right to Equal Opportunity in the Sale of Shares’ (1965) 78(3) Harvard Law Review 505, 517.

  67. 67.

    George B. Javaras, ‘Equal Opportunity in the Sale of Controlling Shares: A Reply to Professor Andrews’ (1965) 32(3) The University of Chicago Law Review 420, 425–427.

  68. 68.

    For relevant theoretical discussions, see Adolph Berle, ‘Control in Corporate Law’ (1958) 58 Columbia Law Review 1212; Adolf A. Berle, ‘Price of Power Sale of Corporate Control’ (1964) 50 Cornell Law Quarterly 628; A. Hill, ‘The Sale of Controlling Shares’ (1956) 70 Harvard Law Review 986; Richard W. Jennings, ‘Trading in Corporate Control’ (1956) 44(1) California Law Review; N. Leech, ‘Transactions in Corporate Control’ (1956) 104(6) University of Pennsylvania Law Review 725. For an overview of dissenting opinions, see Richard W. Jennings, ‘Trading in Corporate Control’ (1956) 44(1) California Law Review, 9–11. See also Frank H. Easterbrook and Daniel R. Fischel, ‘Corporate Control Transactions’ (1981) 91 Yale Law Journal 698.

  69. 69.

    Adolf A. Berle, Jr., and Gardiner C. Means, The Modern Corporation and Private Property (Transaction Pub, Firstly printed in 1932, reprinted in 1991), 13. See also pp. 1–9, 69–70, 119–25.

  70. 70.

    Adolf A. Berle, Jr., and Gardiner C. Means, The Modern Corporation and Private Property (Transaction Pub, Firstly printed in 1932, reprinted in 1991), 244.

  71. 71.

    A. Hill, ‘The Sale of Controlling Shares’ (1956) 70 Harvard Law Review 986, 992.

  72. 72.

    Ibid.

  73. 73.

    The seller of control nonetheless needs to share the premium with others. Adolf A. Berle, ‘Price of Power Sale of Corporate Control’ (1964) 50 Cornell Law Quarterly 628, 631.

  74. 74.

    Adolf A. Berle, ‘Price of Power Sale of Corporate Control’ (1964) 50 Cornell Law Quarterly 628, 639–640.

  75. 75.

    See text surrounding, Chap. 3, Sec. 3.6.

  76. 76.

    The principle of ‘fairness, impartiality, and openness’ is provided in both Chinese takeover law and Chinese securities law. See Takeover Regulation 2006, art. 1, 3. 中华人民共和国证券法 [Securities Law of the People’s Republic of China] (People’s Republic of China) the Standing Committee of National People’s Congress, Dec 29,1998, lastly revised on Oct 27. 2005, art. 1, 3.

  77. 77.

    Meredith M. Brown, ‘The Scope of the Williams Act and Its 1970 Amendments’ (1971) 26 Business Lawyer, 1637.

  78. 78.

    Corporations Act 2001 (Cth), s602 (a) (b).

  79. 79.

    See Chap. 6, Sect. 6.5.

  80. 80.

    For summary of the dissenting ideas, see Robert Charles Clark, Corporate Law (Little, Brown and Company, 1986), pp. 491–494; R P Austin& I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths,14th ed, 2009), 1086–1087.

  81. 81.

    Robert W. Hamilton, ‘Private Sale of Control Transactions: Where We Stand Today’ (1985) 36 Case Western Reserve Law Review 248.

  82. 82.

    See Chap. 5, Sect. 5.9.

  83. 83.

    See Chap. 5, Sect. 5.5 on consolidation of control transactions and text surrounding Chap. 6 on MBOs.

  84. 84.

    The Codes on Takeovers and Mergers and Share Repurchases 2002 (HK) (the Hong Kong Takeover Code), General Principle.

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    Juan Chen

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Chen, J. (2014). Principles of Chinese Takeover Regulation: Economic Efficiency, Administrative Intervention, and Shareholder Equality. In: Regulating the Takeover of Chinese Listed Companies. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-54508-5_4

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