The Mandatory Bid Rule Under China's Takeover Law: A Comparative and Empirical Perspective

• Author: Robin Hui Huang, Charles Chao Wang
• Pages: 195-233

The Mandatory Bid Rule Under China’s

Takeover Law: A Comparative and Empirical

Perspective

R

OBIN

H

UI

H

UANG

* & C

HARLES

C

HAO

W

ANG

**

I. Introduction

China’s corporate takeover law has been transplanted from overseas

experiences.

1

British colonization of Hong Kong led to the transplantation

of English-style corporate takeover law in Hong Kong, including the

mandatory bid rule (MBR), and then Mainland China (China) transplanted

the MBR from Hong Kong in the 1990s.

2

Under the U.K. City Code on

Takeovers and Mergers (City Code), an acquirer is required to make a

general or full takeover bid to all target shareholders for all their remaining

shares when the acquirer’s shareholding reaches 30 percent in the target

company.

3

It is designed to offer equal treatment to all shareholders in the

target company and thus to protect minority target shareholders.

Shareholder primacy has been the core principle of the U.K. takeover

regulation. The focus of the U.K. takeover rules has been on safeguarding

* Professor, Faculty of Law, The Chinese University of Hong Kong. Adjunct Professor,

Faculty of Law, University of New South Wales, Sydney, Australia; Li Ka Shing Visiting

Professor, Faculty of Law, McGill University, Canada. Email: robinhuang@cuhk.edu.hk.

Telephone: (852) 39431805.

** Corresponding author, Faculty of Law, Chinese University of Hong Kong. Email:

wangchao4999@gmail.com. Telephone: (852) 68565911.

1. The concept of takeover in China is much broader than its counterpart in the U.S., which

means to gain corporate control from dispersed shareholders. Generally, a takeover (shougou) in

China refers to the process of gaining control of a target company by bidding under a formal

process for sufficient shares. It has the purpose and effect of changing corporate control and is

carried out by means of share acquisition. In China, takeover law only applies to a joint-stock

company. See R

OBIN

H

UI

H

UANG

, S

ECURITIES AND

C

APITAL

M

ARKETS

L

AW IN

C

HINA

249 –

91 (2014). A corporate takeover in China can be conducted by means of private agreement

(negotiated takeover), tender offer and other methods. See Zhonghua Renmin Gongheguo

Zhengquanfa ( ) [Securities Law of the P.R.C.] (promulgated by the

Standing Comm. Nat’l People’s Cong., Oct. 27, 2005, effective Jan. 1, 2006) art. 85,

CLI.1.60599(EN) (Lawinfochina) (China).

2. Jurisdictions like China with less developed corporate law regimes often transplant or

piggyback on the legal infrastructures in developed jurisdictions like Hong Kong. See Wei

Shen, Adapting Private Equity to Company Law or Vice Versa? Understanding Some Key

Determinants of a Strong Private Equity Market in the China Context, 8 I

NT

’

L

& C

OMP

. C

ORP

. L.J.

44, 72 (2011).

3. The City Code on Takeovers and Mergers, Rule 9.1 (U.K.).

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shareholders’ interests.

4

The goal of the MBR is to guarantee the equal

treatment of all target shareholders, especially better protection of target

minority shareholders from exploitation by the acquirer and the target

controlling shareholder. “Undistorted choice is essential to the efficient

operation of the market for corporate assets and . . . equal treatment is

suggested by both efficiency and fairness considerations.”

5

When corporate

control is transferred to an acquirer, the business environment and corporate

policy of the target listed company may undergo significant changes, which

pose a great threat to the remaining shareholders. The law should step in

and grant the remaining minority shareholders an opportunity to exit the

company with a fair price.

The City Code imposed restrictions on acquirers’ use of partial bids in

discharging the MBR duty when the acquirer’s shareholding is over 30

percent.

6

A partial bid has a coercive effect on minority shareholders,

although it may relieve the acquirer of the financial burden associated with a

general bid. In a two-tier partial bid, the acquirer may set different bid

prices for the controlling shareholder and the minority shareholders.

7

Minority shareholders usually lack information about the decisions of their

peers and feel strongly coerced to sell their shares for fear of being locked in

the target company.

8

The accepting shareholders may be more successful

than the rejecting shareholders, so it is imprudent for a shareholder to reject

such a bid.

9

Due to the difficulties of launching shareholder litigation in the

U.K. and Australia, the U.S. fiduciary duty rules cannot be used to prevent

the acquirers’ exploitation.

10

In 2006, China significantly reformed its corporate takeover law,

permitting the use of a partial bid by an acquirer to discharge the

MBR duty triggered by his crossing of the thirty percent shareholding

4. Jennifer Payne, Minority Shareholder Protection in Takeovers: A UK Perspective, 8 E

UR

.

C

OMPANY

& F

IN

. L. R

EV

. 145, 146 (2011).

5. Lucian Arye Bebchuk, Toward Undistorted Choice and Equal Treatment in Corporate Takeovers,

98 H

ARV

. L. R

EV

. 1693, 1695 (1985).

6. City Code on Takeovers and Mergers, Rule 36.1 (U.K.).

7. Tender offers using a two-tiered price structure are “front-end loaded, two-tiered tender

offers.” David D. Jr. Peterson, The Front-End Loaded, Two-Tiered Tender Offer, 78 N

W

. U.L.

R

EV

. 811, 812 (1983). The acquiring company offers to buy at a premium price “only enough

shares to establish a controlling position in the target company.” Id. “Once it gains control of

the target, the offeror merges the target into itself or a subsidiary and freezes out the target’s

remaining shareholders by forcing them to accept a lower price than the original tender offer

price.” Id.

8. Bebchuk, supra note 5, at 1696; Sharon Hannes & Omri Yadlin, The SEC Regulation of

Takeovers: Some Doubts from a Game Theory Perspective and a Proposal for Reform, 25 Y

ALE

J.

ON

R

EG

. 35, 67 (2008).

9. Razeen Sappideen, Takeover Bids and Target Shareholders Protection: The Regulatory

Framework in the United Kingdom, United States and Australia, 8 J. C

OMP

. B

US

. & C

AP

. M

KT

. L.

281, 298 (1986).

10. Ian Ramsay, Balancing Law and Economics: The Case of Partial Takeovers, J. B

US

. L. 369, 386

(1992).

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2020] MANDATORY BID RULE UNDER CHINA’S TAKEOVER LAW 197

threshold.

11

This represents a profound deviation of the Chinese MBR from

the U.K. MBR.

12

On the other hand, the 2006 reform indicates a new trend

that China’s corporate takeover rules move towards the Japanese model of

mandatory partial bids, which exists in China’s neighboring Asian

jurisdictions like Japan, Taiwan, and South Korea.

13

When certain

conditions are met, an acquirer in Japan is obligated to launch a partial bid

to acquire the number of target shares which it plans to purchase in the first

place.

14

There are no extra financial burdens or risks of delisting associated

with launching a general bid for all the remaining target shares beyond the

purchase plan. Existing literature did not satisfactorily answer some crucial

questions about the Chinese MBR, such as the convergence and divergence

of the Chinese MBR with the U.K. model and other models. These

questions about the Chinese MBR will be answered in the comparative and

empirical studies of this research. The paper is structured as follows: Part II

discusses the history of the legal transplantation and reforms of the Chinese

MBR; and Part III explores different tender offer regulatory models that

have had a profound impact on China’s transplant choice. The MBR models

in the U.K. and Japan are discussed in detail to reveal the new trend of the

Chinese MBR. Part IV empirically examines how general and partial bids

have been used by the Chinese acquirers in a ten-year period from 2007 to

2016; Part V concludes.

II. The Chinese MBR: Legal Framework

A. T

HE

H

ISTORICAL

D

EVELOPMENT

The U.K.-style MBR was formally transplanted into China from the U.K.

through Hong Kong by the 1993 Interim Provisions on the Management of

the Issuing and Trading of Stocks (ITS).

15

In the early 1990s, two national

stock exchanges were established in Shanghai and Shenzhen, marking a new

era in the development of the Chinese securities market. At that time,

Chinese state-owned enterprises (SOEs) were eager to raise funds through

Hong Kong’s stock market. Hence, Hong Kong had the opportunity to

persuade Chinese authorities to learn from Hong Kong securities law,

11. Hui Huang, The New Takeover Regulation in China: Evolution and Enhancement, 42 I

NT

’

L

L

AW

. 153, 162 (2008).

12. Compare id. at 162, with City Code on Takeovers and Mergers (U.K.).

13. See Dan W. Puchniak & Masafumi Nakahigashi, The Enigma of Hostile Takeovers in Japan:

Bidder Beware, 15 B

ERKELEY

B

US

. L. J. 4, 24–25 (2018).

14. Hidetoshi Matsumura & Taisuke Ueno, M&A in Japan for Foreign Investors Part 3: Share

Purchase Regulations in Japan (2), A

MIDAS

P

ARTNERS

(Nov. 27, 2017), http://www

.amidaspartners.com/en/column/003.html.

15. See generally Gupiao Faxing Yu Jiaoyi Guanli Zanxing Tiaoli

() [Interim Provisions on the Management of the Issuing and

Trading of Stocks] (promulgated by the State Council of China, Apr. 22, 1993, effective Apr. 22,

1993) CLI.1.21319(EN) (Lawinfochina) (implementing U.K.-style MBR into China);

Guanghua Yu, Takeovers in China: The Case Against Uniformity in Corporate Governance, 34

C

OMM

. L. W

ORLD

R

EV

. 169, 179 (2005).

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