Thesis_%28Xiaofan_Wang%29.pdf - TAKEOVER LAW IN THE UK US AND CHINA A COMPARATIVE ANALYSIS AND RECOMMENDATIONS FOR CHINESE TAKEOVER LAW REFORM Xiaofan

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Unformatted text preview: TAKEOVER LAW IN THE UK, US AND CHINA: A COMPARATIVE ANALYSIS AND RECOMMENDATIONS FOR CHINESE TAKEOVER LAW REFORM Xiaofan WANG Salford Law School College of Arts & Social Sciences and Business & Law University of Salford, Salford, UK Submitted in Partial Fulfilment of the Requirements of the Degree of Doctor of Philosophy, July 2013 Table of Contents List of Statutes .................................................................................................................... x List of Figures and Tables ................................................................................................ xi List of Cases ......................................................................................................................xii Acknowledgements ......................................................................................................... xiv Abbreviations .................................................................................................................. xvi Abstract ...........................................................................................................................xvii Chapter 1 Introduction...................................................................................................... 1 1. Research Purpose ...................................................................................................... 2 2. Research Scope ......................................................................................................... 3 3. Research Questions ................................................................................................... 5 4. Research Methods ..................................................................................................... 6 4.1 Comparative Law and Objectives ....................................................................... 6 4.2 Comparative Law in Legal Reform..................................................................... 8 4.3 Comparative Research Methods ....................................................................... 11 5. Research Structure .................................................................................................. 12 6. Conceptual Background .......................................................................................... 15 6.1 Mergers and Acquisitions ................................................................................. 16 6.2 Friendly and Hostile Takeovers ........................................................................ 17 6.3 Takeover Devices .............................................................................................. 19 6.3.1 Mergers ....................................................................................................... 19 6.3.2 Open Market Purchases .............................................................................. 20 6.3.3 Tender offers / Takeover bids ..................................................................... 20 July 2013 ii 6.4 Takeover Defences ............................................................................................ 22 7. Corporate Governance and Takeover Regulation ................................................... 27 7.1 Corporate Ownership ........................................................................................ 28 7.2 Agency Costs .................................................................................................... 29 7.3 Directors’ Fiduciary Duties ............................................................................... 31 7.4 Market for Corporate Control ........................................................................... 33 7.5 Takeover Regulation ......................................................................................... 36 Chapter 2 Takeover Regime in the United Kingdom ................................................... 39 1. The City Code and the Takeover Panel .................................................................. 39 1.1 History of the City Code ................................................................................... 40 1.2 Implementation of the Takeover Directive ....................................................... 43 1.3 Overview of the City Code ............................................................................... 45 1.3.1 Structure of the City Code .......................................................................... 45 1.3.2 Jurisdiction of the City Code ...................................................................... 46 1.3.3 Enforcement of the City Code .................................................................... 48 1.3.4 Relationship between the Takeover Panel and the Courts .......................... 49 2. Shareholder Protection Rules .................................................................................. 51 2.1 Sufficient Time and Information ....................................................................... 51 2.1.1 Sufficient time ............................................................................................. 52 2.1.2 Sufficient information ................................................................................. 53 July 2013 iii 2.2 Equal Treatment ................................................................................................ 55 2.2.1 Equality of the Offer Price .......................................................................... 55 2.2.2 Partial Offers Restriction ............................................................................ 56 2.2.3 Mandatory Bid Rule .................................................................................... 60 3. Directors’ Duties and Takeover Defences .............................................................. 62 3.1 Directors’ Fiduciary Duties under the Common Law ....................................... 63 3.2 Codified Directors’ Duties under the Companies Act 2006 ............................. 65 3.3 Non-Frustration Rule under the City Code ....................................................... 67 3.4 Directors’ Duties as to Information................................................................... 70 3.5 Takeover Defences ............................................................................................ 72 Chapter 3 Takeover Regime in the United States ......................................................... 76 1. Takeover Law at the Federal Level ........................................................................ 76 1.1 SA 1933 and SEA 1934 .................................................................................... 77 1.2 Williams Act of 1968 ........................................................................................ 78 1.2.1 Creation of the Williams Act ...................................................................... 79 1.2.2 Effect of the Williams Act .......................................................................... 81 1.3 Tender Offer Rules ............................................................................................ 84 1.3.1 Definition of Tender Offer .......................................................................... 85 1.3.2 Information Disclosure ............................................................................... 87 1.3.3 Procedural Requirements ............................................................................ 91 July 2013 iv 2. Takeover Law at the State Level ............................................................................ 94 2.1 State Anti-takeover Laws .................................................................................. 95 2.1.1 First Generation........................................................................................... 96 2.1.2 Second Generation ...................................................................................... 97 2.1.3 Third Generation ......................................................................................... 99 2.2 Directors’ Roles in Takeover Defences .......................................................... 100 2.2.1 Directors’ Fiduciary Duties…………………………………………….. 101 2.2.2 Delaware Court’s Decisions ...................................................................... 102 Chapter 4 Comparative Analysis of the Divergence between the UK and US Takeover Regimes .......................................................................................................... 114 1. Two Sets of Conflicts of Interest .......................................................................... 114 2. Conflict between the Target Board and Target Shareholders ............................... 114 2.1 UK’s Response ................................................................................................ 117 2.2 US’s Response ................................................................................................ 118 3. Conflict between the Bidders and Target Shareholders ........................................ 119 3.1 UK’s Response ................................................................................................ 120 3.2 US’s Response ................................................................................................ 121 4. Explanation of the Divergence.............................................................................. 122 4.1 Fundamental Principles ................................................................................... 122 4.2 Effective Lobbying Power .............................................................................. 124 4.3 Functional Counterbalance.............................................................................. 129 July 2013 v 5. Evaluation of the Different Approaches ............................................................... 136 5.1 Theoretical Debates ......................................................................................... 136 5.2 Effect of Two Takeover Rules ........................................................................ 139 Chapter 5 Takeover Regime in China ......................................................................... 143 1. Institutional Background ....................................................................................... 143 1.1 Transformation of State-Owned Enterprises ................................................... 144 1.2 Transformation of Shareholding Structure...................................................... 148 1.2.1 Unique Shareholding Structure ................................................................. 149 1.2.2 Shareholding Structure Reform ................................................................ 153 1.2.3 Impact on Takeover Market in China ....................................................... 160 1.3 Concentrated Ownership of Chinese Listed Companies ................................. 163 1.3.1 Path Dependent Theory ............................................................................. 168 1.3.2 Impact on Takeover Market in China ....................................................... 171 2. Overview of China’s Takeover Regime ............................................................... 174 2.1 Shaping the Takeover Framework -- Company Law and Securities Law ...... 175 2.2 Forming the New Regime for Takeover of Listed Company – Takeover Measures 2002 and 2006 ......................................................................................... 178 3. Shareholder Protection Rules ................................................................................ 181 3.1 Sufficient Information to the Market .............................................................. 182 3.1.1 Disclosure of Substantial Shareholdings................................................... 182 3.1.2 Tender Offer Report .................................................................................. 183 July 2013 vi 3.2 Equal Treatment of Shareholders .................................................................... 184 3.2.1 Bid Prices and Methods of Payment ......................................................... 184 3.2.2 General Offer and Partial Offer ................................................................ 186 3.2.3 Mandatory Bid Rule .................................................................................. 187 4. Directors’ Duties and Takeover Defences ............................................................ 190 4.1 Directors’ Fiduciary Duties ............................................................................. 190 4.2 Directors’ Role in Takeover Defences ............................................................ 191 Chapter 6 Promotion of Takeovers and Non-Frustration Rule ................................ 196 1. Literature Review – who decides to accept or reject a takeover bid? ................... 196 1.1 Two Schools of Thought ................................................................................. 198 1.1.1 Shareholder Primacy ................................................................................. 198 1.1.2 Director Primacy ....................................................................................... 199 1.2 Debate about Corporate Models...................................................................... 200 1.2.1 Property Model ......................................................................................... 200 1.2.2 Entity Model ............................................................................................. 201 1.3 Debate about Directors’ Role .......................................................................... 203 1.3.1 Passive Role .............................................................................................. 203 1.3.2 Auctioneering Role ................................................................................... 204 1.4 Empirical Studes ............................................................................................. 206 1.4.1 Expected returns to target shareholders from takeovers ........................... 206 July 2013 vii 1.4.2 Expected returns to target shareholders from takeover defence ............... 208 1.4.3 Concluding Remarks ................................................................................. 209 2. Responses to the Arguments ................................................................................. 210 2.1 Takeovers as a Corporate Governance Mechanism ........................................ 211 2.2 Consideration of Interests of Stakeholders ..................................................... 212 2.3 Target Board’s Situation in Takeovers ........................................................... 213 2.4 Regulatory Choice on Power Allocation......................................................... 216 3. Chinese Approach Comparing with the UK and US’s ......................................... 219 Chapter 7 Protection of Shareholders and Mandatory Bid Rule .............................. 224 1. Costs of Shareholder Protection Rules ................................................................. 224 1.1 Information Disclosure Rules ......................................................................... 225 1.2 Regulatory Response in China ........................................................................ 228 2. Mandatory Bid Rule .............................................................................................. 229 2.1 Rationale for MBR .......................................................................................... 230 2.2 Adverse Effect of MBR .................................................................................. 234 2.3 Modification of MBR ...................................................................................... 237 3. Evaluation MBR’s Effect in China ....................................................................... 238 3.1 Costs Outweigh the Benefits ........................................................................... 238 3.2 Partial Bid Particularly Dilutes Benefits ......................................................... 244 July 2013 viii Chapter 8 Recommendations for Chinese Takeover Law Reform ........................... 247 1. Answering the Research Questions ...................................................................... 247 2. Recommendations on NFR ................................................................................... 251 2.1 Modifying Article 33 of Takeover Measures 2006 ......................................... 251 2.2 Clarifying Directors’ Fiduciary Duties ........................................................... 252 2.3 Enhancing the Protection of Minority Shareholders ....................................... 255 3. Recommendations on MBR .................................................................................. 257 3.1 Abolishing Imported MBR ............................................................................. 258 3.2 Imposing Fiduciary Duties on Controlling Shareholders................................ 262 4. Concluding Remarks ............................................................................................. 270 Bibliography ................................................................................................................... 272 July 2013 ix List of Statutes UK City Code on Takeovers and Mergers Company Act EU European Directive on Takeover Bids US Securities Act Securities Exchange Act Williams Act China Company Law Securities Law Measures for Regulating Takeovers of Listed Companies July 2013 x List of Figures and Tables Figures Figure 1-1 Structure of Thesis ........................................................................................... 15 Figure 4-1 Situation in the UK......................................................................................... 131 Figure 4-2 Situation in the US ......................................................................................... 136 Figure 5-1 Shareholding Structure in China from 1992-2010 ......................................... 160 Figure 5-2 The Difference between the Largest and Second Largest Shareholders from 2004-2012 ............................................................................................. 165 Figure 6-1 Directors’ Role in the UK .............................................................................. 221 Figure 6-2 Directors’ Role in China ................................................................................ 223 Figure 7-1 Companies without Controlling Shareholders ............................................... 230 Figure 7-2 Companies with Controlling Shareholders .................................................... 231 Tables Table 4-1 Effect of Non-Frustration Rule and Mandatotry Bid Rule .............................. 141 Table 5-1 The Largest and Second Largest Shareholder Ownership from 2004-2012 ... 165 Table 5-2 Takeovers of Chinese Listed Companies by Agreement and by Offer from 2005-2011 ............................................................................................... 173 Table 7-1 Listed Companies with the Largest Shareholder Ownership over 30% .......... 240 July 2013 xi List of Cases UK Bamford v Bamford [1790] Ch 212 Bristol and West Building Society v Mothew [1996] 4 AII ER 698 Criterion Properties Plc v Stratford UK Properties LLC [2004] UKHL 28 Great Easter Railway Company v Turner [1872] 68 Ch App 149 Hogg v Cramphorn [1967] Ch 254 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Keech v Sandford [1726] Sel Cas Ch 61 Percival v Wright [1902] 2 Ch 421 Peskin v Anderson [2001] BCC 874 R v International Stock Exchange of the UK and Ireland, ex parte Else [1993] QB 534 R v Panel on Takeovers and Mergers, ex parte D...
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