Limitations of Legal Transplantation: The Comparison of Tender Offer Regulations between China and Western Countries

• Author: Zhu Ciyun and Tang Linyao
• Pages: 276-295

276 TSINGHUA CHINA LAW REVIEW [Vol.10:2

LIMITATIONS OF LEGAL TRANSPLANTATION: THE

COMPARISON OF TENDE R OFFER REGULATIONS

BETWEEN CHINA AND WESTERN COUNTRIES

ZHU Ciyun

TANG Linyao

Abstract

The current Chines e takeover law transplants prac tices in Western countries, includi ng 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 ac quisitions. 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 b y analyzing the tender offe r 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. 1 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

1

Gupiao Faxing yu Jiaoyi Guanli Zanxing Tiaoli (ÓÂcÙ0:̈È̋ÙÆA) [Interim Pr ovisions

on the Manageme nt of th e Issuing and Tr ading of Stocks] (p romulgated by St. Council, Apr. 22, 1993,

effective Apr. 22, 1993) art. 48(1) (Chinalawinfo).

2018] LEGAL TRANSPLANTATION LIMITATIONS IN TENDER OFFER LAW 277

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.

2

The U.K.’s mandatory bid rule will be triggered when the

acquirer holds 30% or more voting rights,

3

which is the same as the

majority of E.U. member states’.

4

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.

5

Consequences under these two scenarios

are also different according to how the acquirer crossed the 30% line.

6

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.

7

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.

8

In China, the equity distribution requirement

for listed company is very strict

9

; 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

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2

Zhengquan Fa (äWœ) [Securities Law of the People’s Republic of China] (promulgated by Standing

Comm. of Nat’l People's Cong., Dec. 29, 1998, effective July 1, 1999 (2014) art. 88 (Chinalawinfo)

[hereinafter 2014 Securities Law].

3

The Panel on Takeovers and Mergers, the City C ode on Takeovers a nd Mergers (12th ed. 2016), Pa rt

F1, Rule 9 [h ereinafter the Ci ty Code on Take overs and Merger s].

4

See infra note 21. In E.U ., 10 of 27 member states h ave set their trigger of mandatory bid rule at 30 %.

5

See 2014 Securities Law, supra note 2, art. 88. In Chinese law, 30% of the issued shares is different

from the concept of 30% of the total shares. Mean while, there are three statutory ways of acquisition in

Chinese takeovers, see discussion infra Part II.

6

For example, when a purchaser acquires 30% of the issued shares of a listed company through securities

trading on a stock market, further acquisitions shall be in th e form of a tender offer. When an investor

plans to purchase more than 30% of the issued shares of a listed company by agreement, the part of shares

that exceed the foresaid 30% must by means of te nder offer. Wh en an acquirer indirectly obtai ns more

than 30% of the total shares of the listed compan y, the acquirer shall send a general tend er offer to bid

for all outstandin g shares of the listed company, otherwise the acquirer shall reduce its shareholding of

the listed company to 30% or less. About the complexity of the Chinese mandatory bid rule, see discussion

infra Part III.

7

Council Directive 2004/25, Art. 16, 200 4 O.J. (L142) 8 (EC).

8

See 2014 Securities Law, supra note 2, art. 88.

9

Id. art. 51(3) .