A Comparative Study of Takeover Defences in UK, US and Chinese Law

Abstract

This thesis explores the issues regarding which regime style would be appropriate for China to adopt in the regulation of takeover defences, given that there are two distinct takeover regulatory systems in the world – that of the UK, and that of the US. China has already adopted a UK-style shareholder-friendly regulatory system. This thesis considers the reasons why China has chosen a shareholder-friendly takeover regulatory system rather than a US-style director-friendly regulatory system. In addition, combining analysis of the character of China’s market and its legal framework, it discusses whether the current regulatory system is appropriate for China or not. Furthermore, it considers specific features of individual takeover defensive tactics and the possibility of their use being legitimised in China.
This thesis is relevant because of the likelihood of the freeing up of the Chinese takeover market in the future; as this happens, there will be more and more takeover activity, taking place in China’s market. Thus it is important to provide adequate legislation for market players. Though China adopted the UK’s shareholder regulatory system many years ago, when it first regulated its takeover market, the shareholding structure in China is totally different to the UK’s, and so it is important to discuss whether this regulatory system is still relevant for China or whether there should be a change to a regulatory system more like that of the US. As China issued the Administrative Measures of Preferred Shares Experimental Units in 2014, and the new leadership in China has continued China’s economic reform over recent years, it
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could be said that China’s listed companies have become more attractive to investors and there could be more hostile raiders entering the market. Hence there is a need to consider whether China’s delegation of decision-making powers to the shareholders regarding defence against hostile raiders is appropriate. It is also important to establish which takeover defence measures might appropriately be legalised and which would be inappropriate for China.
Chapter 1 introduces background information about the trend of mergers and acquisitions and hostile takeovers, China’s state-owned enterprises and briefly consider takeover defensive measures. Following this, it discusses shareholding structures, and problems in China’s market in comparison with the UK and US.
Chapter 2 outlines both the UK’s and US’s distinctive takeover regulatory systems and evaluates their pros and cons, as well as the reasons why certain regulatory systems are suitable for each market.
Chapter 3 explores the differences between China’s ownership structure, market, and legal framework, and those of the UK and US. It also summarises the weaknesses of the Chinese system(s) in seeking to transplant a western-style set of takeover regulations into China’s market. Primarily, these are that (a) China does not provide sufficient legislation relating to takeover defence measures and (b) Chinese market players and legal advisors do not have adequate experience of takeover defence measures.
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Chapter 4 discusses takeover defence measures related to stock trading – share repurchase, the ‘pac-man’ defence, the use of white knights and ESOP. The chapter concludes that the first two tactics may be too risky for target companies such that their adoption should be prohibited in China while the latter two tactics may be helpful and could be widely used by China’s listed companies.
Chapter 5 considers takeover defence measures related to management, such as poison pills, shark repellents, the scorched earth policy, dual class recapitalization and three kinds of parachutes. Except for the scorched earth policy, which could be harmful to the long-term interests of target companies, the other tactics may work well in China’s market and help Chinese companies secure controlling power or raise the share premium.
Chapter 6 looks into defensive measures relating to litigation, raising anti-trust issues with relevant authorities, inadequate information provision by bidders and other crimes. It summarizes how measures relating to litigation could help delay the hostile takeover process, but could also terminate it, even if the target company is only seeking a greater share premium. This process could also involve government intervention, and its effectiveness cannot be guaranteed. Even if this group of measures are the most frequently used tactics by target companies, this thesis does not recommend it over other options.
Chapter 7 analyses and compares the legislative systems of the US and UK and concludes that the UK’s system is better for contemporary China. However, there is
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still the potential for China to legalise certain takeover defensive measures in the future as China’s market is continually being reformed.
Chapter 8 concludes the thesis in proposing that China is justified in adopting the UK’s shareholder-friendly regulatory system. This is partly based on consideration of promoting takeover activities, and the existence of China’s SOEs, which may be reasons to prohibit certain defensive measures in China’s market. As the reform of China’s market continues, moderate defensive tactics like the white knight, parachute system and poison pill could work well. However, the decision-making power should remain in the hands of shareholders and the government should provide sufficient supervision over the market whilst following the principle of protecting shareholders’ interests.
The importance of the thesis, and its contribution to existing knowledge, is the research for it has found that most other researchers are focused on the mandatory bid rule – adopted from the UK – in China, but that hardly any systematic research is being undertaken into defensive measures. Thus, this thesis fills a gap in the current literature on the takeover regulations area for China. It also discusses most of the major takeover defensive tactics, analysing in which markets certain defensive tactics work, and whether they would be appropriate for China. Newly-released regulations show the intention of Chinese legislators to turn to a more US style – which will make certain takeover defence measures possible in China, such as the poison pill; whether these are suitable for the Chinese market is debatable. In addition, it is found that
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Chinese companies, especially high-tech companies, quite frequently use several defensive measures when they list on the US market, and the function of these tactics in securing control over the target company can be seen. Thus, research into how to regulate those defensive measures and what problems might arise with their use in China is important for regulators, and will make this thesis meaningful in China.