listed company. 403 In contrast with the U.K. and the E.U., partial tender offer is an important part of the current Chinese Mandatory Bid Rule. Only in rare situations does the acquirer have to send out general tender offer.
Rules clarifying the availability and extent of the defensive measures are not stipulated in the Securities Law. The whole Chapter four of 2014 Securities Law is about the acquisition of listed companies in China, but not one single rule addresses takeover defenses directly. The Article 101 supplements that
“[t]he securities regulatory authority under the State Council shall formulate specific measures for acquisition of listed companies in accordance with the principles of this Law...” 404 In accordance with this article came the Administrative Rules on Acquisition (also referred to as “the Takeover Measure”
or “Chinese Takeover Measure”), first edition of which was promulgated by CSRC in 2002.
loyalty” and “duty of care”. Correspondingly, the same terminology can be well found in Article 148 of the Chinese Company Law: “[t]he directors, supervisors and senior managers shall comply with the laws, administrative regulations, and bylaw. They shall bear the duty of loyalty and duty of care…”406 The “duty of loyalty” and “duty of care” are sometimes interpreted as “obligation of fidelity” and “obligation of diligence” in Chinese corporate law, but they function equivalently to the “fiduciary duty” in the Anglo-American legal regime. The Company Law uses a series of prohibitive stipulations to define what “duty of loyalty” is. For example, “[n]o director, supervisor or senior manager may accept any bribe or other illegal gains by taking the advantage of his powers, or encroach on the property of the company” 407 and “[n]o director or senior manager may commit any of the following acts: (1) Misappropriating the company's fund…(6) Taking commissions on the transactions between others and the company into his own pocket;(7) Illegally disclosing the company's confidential information…” 408and so on.
The Company Law does not elaborately define the “duty of care”, it only reveals the consequence directors, supervisors or senior managers have to afford when they failing to obey so in Article 150: “[w]here any director, supervisor or senior manager violates any law, administrative regulation, or the bylaw during the course of performing his duties, if any loss is caused to the company, he shall be liable for compensation.” 409
When the Company Law is somehow ambiguous about what “duty of care”
should be, the Guidelines on Articles of Association has reiterate it clearly in its recommended templates of corporate charter for listed companies. For example,
“[m]anagement should exercise their powers prudently, conscientiously, and
406 2014 Chinese Company Law, Art.148.
407 Id, Art.148.
408 Id, Art.149.
409 Id, Art.150.
diligently, and ensure all commercial activities of the company conforms with the law，administrative rule and national economic policy, and commercial activities of the company should not exceed its scope of business” 410, and
“[m]anagement should provide the board of supervisors with information and materials in need, should not hinder them performing their duty” 411. At the same time, the Guidelines on Articles of Association has made it clear that companies can add by their own the “duties of care” that the directors shall comply in their company bylaw. 412
2. Board Neutrality Rule in Chinese Law
Article 33 of the 2014 Administrative Rules on Acquisition provides some guidance for the Board Neutrality Rule: “[D]uring the period after the announcement of a takeover bid and before the completion of the takeover bid, except for continuing ordinary business and executing resolutions made by the general meeting of shareholders, target company management, without the ratification of the general shareholders’ meeting, should not cause major impacts on the assets, liabilities, entitlements or business performances of the target company by disposing of assets, engaging in external investments, adjusting the main businesses, providing guarantees or loans and others.”413
Although it can be interpreted from several perspectives, the basic principle in this article was supposed to be, without shareholder approval, directors of the board should not take any action in response to an imminent threat. As we will discuss in the next chapters, this Chinese Board Neutrality Rule has very big loopholes thus does not function well in takeovers.
3. Sell-out right in Chinese Law
Under certain conditions, a full-scope general tender offer may become
410 2016 Guidelines on Articles of Association, Art.98.
411 2016 Guidelines on Articles of Association, Art.98.
412 2016 Guidelines on Articles of Association, Art.98.
413 2014 Administrative Rules on Acquisition, Art. 33.
mandatory after a partial tender offer takeover. The Takeover Guideline and the 2014 Securities Law simultaneously endow minority shareholders with the right to empty their shareholdings when the equity distribution of the target company does not conform to the requirements for listing in stock exchanges any more.
The shareholders other than the acquirer who still holds shares of the target company have the right to sell their shares to the acquirer who caused the alternation of equity distribution under the same conditions in the partial tender offer and the acquirer must purchase all those shares.414 In other words, if the acquirer purchases the shares of a listed company through partial tender offer to the extent that the company is no longer eligible for listing, then the partial tender offer ultimately becomes a general tender offer, and the acquirer is responsible for all the shares that other shareholders want to sell. Those shares remained in other shareholders’ hands are either the shares shareholders did not plan to sell originally, or the preliminarily accepted shares that exceeds the acquirer’s designated amount in the previous tender offer; and now, they all become the acquirers’ liability.
The Chinese stipulation is quite similar to the sell-out right specified in the European Directive. The European Directive offers minority shareholders a sell-out right enabling them to require the majority shareholder bidder to buy their securities following a takeover offer if the bidder holds securities representing 90% of the capital carrying voting rights and 90% of the voting rights in the target company. This sell-out right goes hand in hand with a squeeze-out right that allows a majority shareholder bidder to require the remaining minority shareholders to sell out their shareholdings at a fair consideration. 415 Under either situation, the acquirer (or the majority shareholder) must pay for a reasonable share price in cash or the same
414 2014 Securities Law, Art. 97. See also 2014 Takeover Measure, Art. 44.
415 Council Directive 2004/25, Art. 15, Art.16, 2004 O.J. (L142) 8 (EC).
transferable security in the previous tender offer. The right of sell-out and squeeze-out is a preemptory norm for all Member States. Shareholders can exercise these rights within three months after the tender offer takeover. In practice, while most Member States has a 90% threshold for the sell-out and squeeze-out right, over one fourth Member States increased their threshold to 95%416; Latvia and Luxenberg set a 90% threshold for the sell-out right and 95%
threshold for the squeeze-out right. 417
In China, the sell-out right does not have a squeeze-out right correspondingly, and the sell-out right itself is not entitled directly to shareholders. Every member state of the E.U. has a specific threshold for shareholders to exercise the sell-out right, but in China, the sell-out right triggers “automatically” once the company loses its listing status, regardless of the bidder’s shareholding percentage, nor the public shareholders’ will.
The Securities Law mandates the requirement of equity distribution if a company wants to be officially “listed”. The public-offered shares shall be more than 25% of the total shares of the company; and for companies with a registered capital over 400 million RMB, the percentage of its public-offered shares shall not be less than 10% of its total shares.418
The public-offered shares refer to shares held by public individuals rather than legal persons or institutions.419 Suppose a small listed company with 100%
circulating shares (an “absolute public” company). According to the Chinese
416 Austria, Czech Republic, Cyprus, Denmark, Estonia, Greece, Finland, Hungary, Ireland, Malta, Poland, Portugal, Spain, Slovenia and Sweden have a 90% threshold for both the sell-out and the squeeze-out right, while Belgium, Germany, France, the Netherlands, Italy, Lithuania and Slovakia have a 95% threshold for both the sell-out and the squeeze-out right.. See COMMISSION OF THE EUROPEAN COMMUNITIES. Report on the implementation of the Directive on Takeover Bids.
Brussels, 21.02.2007.SEC(2007)268. Annex 4.
417 COMMISSION OF THE EUROPEAN COMMUNITIES. Report on the implementation of the Directive on Takeover Bids. Brussels, 21.02.2007.SEC(2007)268. Annex 4..
418 2014 Securities Law, Art. 51 (3).
419 In China, institutional investors are not regard as the general public, only individual stockholders are deemed as the public stockholders.
Law, if any acquirers obtained 75% of the company share, the company is no longer eligible for listing, and the acquirer has to afford all the remaining shares of the company. In this case, the threshold for shareholders exercising their sell-out right is 75%. However, in most listed companies in China, legal persons and institutional investors usually possess a certain percentage of shares, and most listed companies more or less have some non-public shares420, thus the threshold for exercising the sell-out right of public shareholders is even lower than 75%. In extreme situations, a company may not be eligible for listing if any acquirers obtained even less than 30% of the issued shares.421