shares of this company; (3) To award the employees of this company with shares;
or (4) It is requested by any shareholder to purchase his shares because this shareholder objects to the company's resolution on merger or split-up made by the assembly of shareholders.” 387 Afterwards, the repurchased share should be either written off within ten days of the purchase or transferred to employees with n one year.
shareholding is subjected to similar disclosure requirement, and the investor is not allowed to purchase any shares of the company within two days of the report period.389 Article 75 of the Measures for the Administration of the Takeover of Listed Companies defines the consequence of breaking the disclosure requirement:
“[t]he CSRC shall order him to make corrections, and take supervisory measures such as supervisory talks, issuance of warning letters, ordering to suspend or stop the takeover. Before the correction, the related information disclosure obligors may not exercise the voting right of the shares as held or actually controlled thereby.”390
In practice, this seemingly comprehensive, seamless article has raised many questions. First, what kind of gesture could account for corrections? To submit the disclosure materials although it is already too late? To pay the fine which is insignificant comparing to the advantages from increasing shareholding secretly? Second, after the investor “corrects” his wrongdoing, can he exercise the voting rights of the shares normally? If slight administrative penalty could justify the investor’s misbehavior, is not the price of breaking the disclosure requirement too low?
In fact, the CSRC has a long history unwilling to severely punish investors or acquirers breaking the disclosure requirement. In September 1993, China Baoan Group (hereinafter “Baoan”) initiated a takeover attempt of Yanzhong Industrial Ltd (hereinafter “Yanzhong”), which is the first hostile takeover in China. The Securities Law at that time is even stricter, requiring investors with more than 5% shareholding to report and announce every 2% increase or decrease in their shareholding. On September 29th, Baoan and its concert party holds only 4.56% shares of Yanzhong, still below the 5% trigger. On September
389 Id, Art. 86.
390 Measures for the Administration of the Takeover of Listed Companies, Art. 75.
30th, Baoan and its concert party suddenly purchased a huge amount of Yanzhong shares and accumulatively held 15.98% shares of the company. In its reports and announcements to the officials and the public, Baoan used a blur expression that it held “more than 5% shares” of Yanzhong. Yanzhong immediately filed complaints to the CSRC and Shenzhen Stock exchange, accusing Baoan of malpractice in the securities market.391 On October 26th, the CSRC released its report of the investigation, affirming Baoan was illegal to break the disclosure requirement. In this report, the CSRC “severely condemned” Baoan Group’s wrongdoing, but only imposed a slight 1000,000 RMB fine. Moreover, the CSRC pointed out that, mass share transfer is normal in any capital market and the shares obtained by Baoan is valid.392 Because of this, Baoan eventually achieved its control over Yanzhong. A more recent case is in 2017, when Hu brothers obtained 9.59% shares of Tibet Tourism without fulfilling any disclosure obligation. Anhui Dispatched Office of CSRC settled this case by a 900,000 RMB fine.393 Previous experiences illustrate that, the CSRC was very tolerant of disclosure law violation, and it has never restricted the voting rights of the illegally obtained shares, despite the vigorous stipulations in the Securities Law.
Like the Securities Exchange Act, the Chinese Securities law also strictly prohibits false statement, fraud and misleading behavior – which are known as the three original sin in Chinese securities market394.
Issuance of new shares is another huge thing in Chinese Securities domain.
391 See Junfeng Huang. Baoyan Takeover: the First Takeover in the Capital Market (Baoyan Fengbo:
Zibenshichang Binggou Diyian). China Securities Daily, Sep 1(2008).
392 Linyao Tang. Power Allocation in Hostile Takeover Regulation: Rethinking Chinese Fiduciary Duty, Board Neutrality Rule and Shareholder Rights. TOHOKU Law Review 47 (2017):155.
393 Cui Yan. The Bid for Tibet Tourism Violating the Disclosure Requirement (Weigui Jupai Xizang Lvyou Hushi Xiongdi Bei Zhengjianhui Chufa). China Securities 05 (2017), available at http://cs.com.cn/ssgs/gsxw/201705/t20170508_5273073.html (last accessed 29 July 2017).
394 Id, Art. 77, 78, 79.
Article 13 requires the company who makes public issuance of new shares meet certain conditions: “(1) having a sound and well-functioning organizational structure; (2) having sustainable profitability and being financially sound; (3) having had no false entries in its financial and accounting documents for three years immediately preceding the application, and no other major illegal activities attributable to it; and (4) such other conditions as may be so prescribed by the securities regulatory authority under the State Council and so approved by the State Council”. 395
These rules on share insurance makes it almost impossible for management to frustrate a hostile takeover by issuing new shares. The target company has to achieve very good business performance in order to issue new shares. Most of the up-mentioned conditions are difficult to meet for companies under takeovers;
if they are really so profitable, their share price would be high enough to ward off the corporate raiders in the first place. Moreover, in China, even if insurance of new shares does not have to meet the merits-review requirements, the board still cannot count on defending the barbarians through issuing new shares as it would still take longer than expected to obtain approval from the governmental authority. According to the Securities Law: “[t]he securities regulatory authority under the State Council shall establish an issuance examination commission which shall, pursuant to law, examine the applications for share issuance.” 396
Tender Offer regulation is a major part in the Securities Law, and so is the Mandatory Bid Rule. In China, an investor may acquire a listed company through tender offer, negotiations or other lawful means.397 Tender offer provides shareholders with adequate protection and certainty. Just like the Williams Act of in the U.S., the Chinese securities law also prohibits coercive
395 Id, Art.13.
396 Id, Art.22.
397 2014 Securities Law, Art.85.
tender offers. To achieve so, the law states that, the price of the shares must not be lower than the highest price at which the purchaser obtains within 6 months before the tender offer398, and shareholders can choose either cash or equitable legal transferable securities at their will399. Normally, the open term for the tender offer is no less than 30 days and no more than 60 days.400When the term of tender offer expires, the purchaser have to purchase all the preliminarily accepted shares. In partial tender offers, if there are more accepted shares than needed, the purchaser shall purchase the shares according to the sellers’
shareholding ratio.401 Those safeguarding provisions in Chinese law aim at protecting shareholders from coercive tender offers and ensuring all shareholders are treated equally in takeovers. Comparing to tender offer, share-purchases through negotiations or other lawful means are usually more private, and do not necessarily have to alarm the public shareholders until the transaction is done or is inevitably to be done. In this way, it is more efficient and of lower cost for the acquirers.
Through whatever means of acquisition, when an acquirer or investor holds 30% of the issued shares of a listed company, further acquisition of the company shares must via tender offer402. China transplanted this Mandatory Bid Rule from the U.K. to protect the lawful rights and interests of the minority shareholders.
If an investor adopts the means of tender offer to purchase shares of a listed company on his will, he may choose to either send out a general tender offer for all outstanding shares of the company, or send out a partial tender offer for part of the company shares. Either way the tender offer is to all shareholders of the
398 2014 Takeover Measure, Art. 35.
399 Id. at Art. 27.
400 Id. at Art. 37.
401 Id. at Art. 43.
402 2014 Securities Law, Art.88. See also infra part VII for a detailed explanation of the complexity of the current Chinese Law.
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.