Rather than conforming or refuting current academic views on hostile takeover lawmaking in China, this article seeks to understand the factors and reasons behind the legislation process: how local factors and history background matter in the formation of regulatory frameworks? Our analysis has explored the origins and development course of the divergence between the U.S., the U.K.
and the E.U., and seeks the implications for policymakers in China. We suggest the path dependence nature and systemic inertia features behind the existing paradigms are of greater importance to future supply side of the hostile takeover law. In addition, by revealing the imperative role of legislative motivations, this research contributes to an emerging body of comparative corporate law scholarship that suggests the diversification of corporate governance – rather than convergence of it162 – was the trend even within the small scope of Asia.
The balance of this research proceeds as follows.
In the ten chapters of this research, Chapter II to XI introduces and analyses the formation, structure, evolution and impact of the hostile takeover regulatory framework of the U.S., the U.K. and the E.U. On this basis, Chapter VII to X examined the deficiencies of current Chinese law, and come up with
162 Scholars have noticed the convergence of corporate governance because of globalization and other reasons. See La Porta, Rafael, et al. Investor protection and corporate governance. Journal of financial economics 58.1 (2000): 3-27. See also Gilson, Ronald J. Globalizing corporate governance:
Convergence of form or function. The American Journal of Comparative Law 49.2 (2001): 329-358.
practical solutions combining the Western practice with local status quo.
Chapter I introduces the research value and backgrounds of the topic. The literature review stretches from the “Shareholder Centrism” over “Board Centrism” debate, and reveals the ladder of associated research from the 1960s to now.
Chapter II begins with the basic theories of hostile takeovers. Hostile takeover is sometimes good and sometimes bad – this two-sided nature determines that, the goal of takeover regulation should be to facilitate value-adding takeovers while mitigating the agency costs between the corporate insiders and the shareholders. Consistency is the foremost merit in hostile takeover regulation.
Chapter III introduced in details the widely divergent hostile takeover regulatory framework of the U.S., the U.K. and the E.U. The U.S. framework is divided into two pillars – the federal pillar and the State pillar, and there are three main resources of takeover law – federal Status, judicial decisions from the Delaware Court of Chancery, and the State Statutes. In the U.K., the City Code on Takeovers and Mergers governs all the takeover activities. It is drafted, revised and carried out by the Panel on Takeovers and Mergers, which consists of part-time and full-time professionals from different industries, representatives of commercial institutions and specialists on secondment from Banks and Industry Associations. The E.U. regulation is divided into two pillars, too: the European Community as the policy-maker and the Member States’
authorities as the policy-operator. The European Community first took each Member States’ concerns into consideration, and then brought up the official blueprint – the European Directive, for the Member States to implement according to its general policies.
Chapter IV intended to seek answers and insights of the divergences of the modes from the historical formation of the laws. The development history of the
U.S. mode is the history of the federal government drawing the rein of the reckless Wall Street. In this history, the supervision of the Securities market were federalized by the populist government, and the directors fiduciary duty was broadened with the development of the general Corporate Law. The development history of the U.K. mode is the history of self-regulation racing with the governmental intervention. Despite the left-leaning Labor Governments being the threat, the Takeover Panel proved its irreplaceability through its impeccable performances and proactive self-improvements. The development history of the E.U.
mode is the history of a scientifically drafted law step by step falling into the victim of pork-barrel politics and exchange of interests. In order for the Directive to be acknowledged by every member state, the European Council had to introduce the Optional Arrangements Rule, which largely undermined the original legislation purpose of the Directive. In conclusion, the formation process of the takeover regulatory framework in the U.S., the U.K. and the E.U.
revealed certain degree of path dependences and endogenous institutional inertias of their own.
After familiarizing with the formation process and the history of the different hostile takeover regulatory frameworks, in Chapter V, the author referred to the theory of Professor John Armour and David A. Skeel Jr., and demonstrated that the different roles of different interest groups, and the contests between them mainly accounted for the nuance and path dependence nature of the different regulatory frameworks. The formation of a director supreme law in the U.S. was because the Wall Street was always regarded as the initiator of evil of market turbulences and financial crisis. As a result, they were constantly constrained by the federal government. The labor union, on the other hand, unanimously supported the federal oversight and governmental reform of the financial system as always. In the formation of a shareholder supreme law of the U.K., the institutional investors were the most important interest group that
favored and promoted the self-regulation system. The industrial associations had given the Takeover Panel and the City Code unanimous and almost unconditional support and corporation, establishing the autonomous supervision as the main regulatory approach in the U.K. In the formation of a swing takeover law of the E.U, the Member States were arm wrestling with each other, and contests were frequent between the interest groups, institutional investors and large conglomerates of different Member States as well. Although their influences were not easy to penetrate the Member States’ shell frame, but the discontents and objections would inevitably influence the transposition process of the final European Directive, causing even larger divergences under a
“uniformed” European Directive.
Chapter XI compares in depth several aspects of the three hostile takeover regulatory frameworks and expounds on four vital questions. First, what are the pros and cons of every mode? Is self-supervisory paradigm certainly better than other modes? Second, what is the legal inclination of each mode? What are the consequences of such inclination? Third, how would the current regulatory frameworks progress forward? Would shareholder activism, expansion of institutional investors and Brexit influence the developing trajectory of the existing norms? Fourth, what are the deficiencies and problems of the European Directive codifying the U.K. and U.K. practice? How do the core rules of the European Directive affect each other?
From Chapter VII and on, the author begins the discussion of Chinese takeover regulatory framework and law. The CSRC and court both participate in takeover dispute resolutions, and several laws and guidelines together deal with different aspects of hostile takeovers, including (but not limited to) the Company Law, the Securities Law, the Administrative Rules on Acquisition and the Guidelines on Articles of Association.
Chapter VIII clarifies the dilemmas in Chinese hostile takeover regulation.
The author concludes nine different types of ex ante takeover defenses in Chinese listed companies’ corporate charters, and points out the CSRC’s over intervention in hostile takeovers from several typical cases in China, including the Baowan Dispute. “CSRC centralism” path dependence has created severe problems in the capital market.
Chapter IX particularly reflects China’s regulatory practice from the social and political aspects through the comparative study of Western countries. In comparison, Chinese capital market is quite young, and the institutional investors are not well established yet. The finite self-regulation of the Stock Exchange and the Securities Association is still in the embryonic stage, too.
Apparently, future regulatory pattern can only step by step break away from the
“CSRC centralism” dependence, to achieve so it needs better legal infrastructures, too.
Chapter X settles down the applicable alternative path for hostile takeover regulation in the future proposes several advices to achieve this goal. Future Chinese lawmaking should model on the U.K. mode, but refer to the E.U’s codifying technique to gradually reform the current U.S. alike regime.
II. Basic Theories of Hostile Takeover
The battle for corporate control may ultimately lead to the improvement of corporate governance, or the plunder of corporate wealth – this two-sided nature of takeover is the foundation to discuss future lawmaking.