Abstract
The current Chinese takeover law transplants practices in Western countries, including the U.S., the U.K., and the E.U., which adopt hostile takeover regulatory frameworks to protect legitimate rights of the participants in the acquisitions. However, Chinese takeover law failed to provide enough and clear guidance for participants in takeovers, causing uncertainty and anxiety in Chinese market. This article will reveal the limitations of the legal transplantation in Chinese takeover law by analyzing the tender offer rules.

I. Introduction

In order to set order for hostile takeovers and protect the lawful rights of the participants, the U.S., the U.K., and the E.U. have all adopted regulatory frameworks in the hostile takeover domain. All of these models have set rigorous procedural and substantial rules for public acquisitions, in respect of tender offer. The federal statutes in the U.S., such as the Securities and Exchange Act of 1934,, mainly addressed the procedural and form requirements for tender offers. The U.K.’s City Code on Takeovers and Mergers (hereinafter the City Code) in 1968 adopted systematic regulations on tender offers. Based on the City Code as well as the preliminary drafts of the Council Directive, the European Council also established strict rules for the tender offer.

All technical rules for tender offers have one purpose in common – to protect the lawful rights of the shareholders. In China, where individual investors accounts for the majority of the stock market players, tender offer is especially important. China established its national stock exchange in 1993; in the same year, the State Council clarified tender offer as a major way of company acquisitions in Interim Provisions on the Management of the Issuing and Trading of Stocks. Thereafter, the State Council and the China Securities Regulatory Commission successively promulgated the Chinese Company Law, Securities Law and Measures for the Administration of the Takeover of Listed Companies (hereinafter the Takeover Measure). After several amendments and revisions, China has developed a complicated regulatory scheme on tender offers.

Like the U.K. and most E.U. member states, China has a mandatory bid rule stipulating that acquirers whose already-owned shares exceed a certain percentage of a listed company’s total equities must issue an overall tender offer to all other shareholders of the said listed company. The U.K.’s mandatory bid rule will be triggered when the acquirer holds 30% or more voting rights, which is the same as the majority of E.U. member states’. The trigger point in China is 30% as well, which, however, may refer to both 30% of the issued shares and 30% of the total shares. Consequences under these two scenarios are also different according to how the acquirer crossed the 30% line.

Besides the overcomplicated mandatory bid rule, the sell-out right in Chinese tender offer is even more problematic. Sell-out right originally comes from the E.U., which was provided to minority shareholders in The Directive 2004/25/Ec of The European Parliament And of The Council on Takeover Bids (hereinafter the European Directive). If a bidder has obtained securities representing 90% of the capital carrying voting rights and 90% of the voting rights in the target company, the minority shareholders can require him to buy out all of their securities. Drawing on the experience of E.U., the Chinese Securities Law stipulates that the shareholders can sell their shares to the acquirer whose takeover bid causes the target company losing its listing status. In China, the equity distribution requirement for listed company is very strict ; small listed companies must have their public-offered shares more than 25% of its total shares, while companies with registered capital over 400 million must have more than 10% public-offered shares. The prevalent non-public shares in Chinese listed companies give rise to the fact that the sell-out right trigger is much lower than 90% in China.

As deficient as the Chinese sell-out right is the derogations of mandatory bid rule in China, which includes application-based derogations and non-application-needed derogations. Under extreme circumstances, acquirers do not even have to apply to get derogations from the mandatory bid rule. In conditions where the acquirer do have to apply to the China Security Regulatory Commission (hereinafter CSRC) for the derogation, relevant regulations are loose and vague. Investors with ulterior motives can easily exploit the loopholes, and once an applicant obtained derogation from the mandatory bid rule, he could find a way to circumvent tender offer forever. This leaves abundant room for majority shareholders to outsmart and outmaneuver minority shareholders.

In all, current Chinese tender offer regulation incorporates an intricate mandatory bid rule and a sell-out right triggered too low; in addition, regulations on derogations of the mandatory bid rule in China are riddled with ambiguous statutes as well as confusing interpretation. This article deeply examines the Chinese tender offer regulations, compares its substances with its counterpart in U.K. and E.U., and offers material suggestions for future improvement. Part II of this article briefly introduces three statutory ways of acquisition in Chinese law. Part III gives a thorough review of the mandatory bid rule in China. Part IV illustrates the deficiency of Chinese sell-out right. Part V carefully analyzes the derogations of tender offer in China. Part VI discusses the possible improvements of tender offer regulation in China and Part VII concludes.