Takeover Law in the UK, the EU and China

This chapter discusses the political economy of global takeover laws in light of the current power restructuring in the global economy brought about by events such as Brexit and the US-China trade war. It discusses how such changes may give rise to economic nationalism, and analyses how China will react in the global takeover market, in its M&A activities in the US and EU markets, in its regulatory responses to domestic takeover laws, and in its approaches to foreign financial intermediaries providing services in the Chinese market. Neoliberalism has provided the theoretical basis for the development of the takeover market and takeover governance but we may now begin to see more policy-based interventions. Digital economy, tech giants’ governance, and climate change initiatives are areas where policy considerations will shape the market and its governance. The US and EU have been influencing global takeover market and its governance. China will start to be a player—not only as a rule-taker in the global takeover market, but a rule-maker in its governance.

In this chapter, the takeover market is used as an example to examine the extent to which regulatory alignment between the UK and China is possible. The focus is on the role of financial intermediaries in the two markets and how they may influence the governance model of transfer of corporate control by an open offer to the shareholders of the target company (a takeover bid). This chapter argues that the policy goals are very different, making regulatory alignment difficult to be realised. There are differences between the UK and China in their economic model, ownership structure and institutional arrangements, which is reflected in the differences in the interests served by takeover law in the two regimes. The design of the framework for takeover law in the UK empowers financial market participants, so as to attract capital to the London markets. In contrast, China’s takeover law is mainly aimed at facilitating industrial restructuring and creating globally competitive national companies (national champions). Hence, the UK’s shareholder-centred takeover model, with a strong focus on financial intermediaries and international investors, could not easily be replicated in China. However, the UK model could provide lessons for China as it develops its takeover market, extends its market structure reform, develops independent financial intermediaries and attracts an increasing number of investors.

The battle for corporate control may ultimately lead to the improvement of corporate governance, or the plunder of corporate wealth. The goal of hostile takeover regulation is to promote merit-adding takeovers while decreasing as much as possible the agency costs between corporate insiders and shareholders. Different practices in the US, the UK and the EU all have their merits and inadequacies. This research examines the western practices from a path dependence perspective, and offers insights for future Chinese hostile takeover legislation. For complex reasons and institutional factors, amendments to the law would be of little use in improving the hostile takeover regulations in China, and the main priority should be to discard the “CSRC centralism” dependency path that has been active for decades.

There are three different modes of market regulation for corporate control. The US adopts a court-centered mode based on the fiduciary principle which combines court trials of directors’ behaviour with formal federal examination of tender offers. The UK has adopted a self-regulatory mode where the non-governmental Takeover Panel has replaced ex-post adjudication with fair and swift ex-ante conciliation. China operates government CSRC centralism. With the emergence of a series of hostile takeovers in China, CSRC centralism is problematic because the government has a natural bias in favour of state-owned listed companies. The Chinese courts are neither independent, efficient, nor sophisticated enough to handle corporate control disputes. Although the formation of China’s regulatory frameworks has gone through unique historical contexts with political manipulation and institutional evolution, these factors have together shaped legal schemes with different path dependence features and regional characteristics. The result is that the self-regulation institutions have great potential in China. China should learn something from the UK model, it should force considerable change to the institutional environment and make the self-regulatory institutions work in the market for corporate control.

Disclosure rules serve the acquirer to prepare a formal bid or acquisition and the formation of the price. Financial markets regulators have a range of interests in receiving accurate data from listed and unlisted companies and other market players. Presently, legislatures also seek to react to inbound foreign investment reflecting a perceived need to protect domestic industry from foreign takeovers. This involves a flurry of problems ranging from policy formulation to implementation and application of the relevant rules. In this chapter, the author argues that German takeover law suffers from historic fragmentation and a poor formulation of industrial policies and legislative objectives. She suggests a method of reorganising the methodology of legal classification of such rules in four layers. The chapter explains these issues by drawing on a prominent recent example of inbound foreign investment as well as an industrial scandal, both testing the current legislative landscape in Germany.

When two jurisdiction both have public legal instruments such as merger control, how does their practical implementation affect outcomes? Two real cases of substantial investment by Chinese companies in Europe are introduced and then mirrored as an imaginary test case to see what would be the outcome if the European targets had been investors in China, with the Chinese investors now as targets. The cases are CTG/EDP and Geely/Daimler. The tentative conclusion is that practical implementation of legal instruments such as the timing of required approvals (before closing the deal) versus own responsibility (accountable after closing the deal if requirements are not met) result in the difference between “cannot do” in one jurisdiction versus “may not do” in the other.

This paper analyses two particular merger decisions; the EU Commission’s Facebook/WhatsApp decision and the UK OFT’s (now CMA) Facebook/Instagram decision. In analysing these two cases common flaws are discovered. First, a poor or superficial assessment of the relevant market and second, the assumption that rapid growth of entrants in these new product or geographical markets is an indication of low barriers to entry. These miscalculations lead to a mistaken belief that the markets in which the proposed mergers were to be conducted were competitive. It is argued here that once account is taken of these mistakes it becomes clear that the markets had far fewer competitors than originally thought and that they were not characterised by low barriers to entry on an ongoing basis. Policy recommendations are made to remedy these issues for the benefit of global competition enforcement authorities.

Since the implementation of the Anti-Monopoly Law in 2008, China has implemented a review system for the eligible concentration in which structural remedies or behavioral remedies are imposed when certain concentrations are reached by way of restrictive conditions. This is a common principle in almost every jurisdiction, but China’s practice shows that behavioral remedies are used more often than structural remedies, which is different from EU or US practice. Based on the interpretation of the Chinese system and the logic of remedy rules, this article analyses all the remedy cases in China, and makes suggestions for improvement.

This paper discusses the purpose and practice of the mandatory bid rule in takeovers in the UK. A literature review looks at the impact of the mandatory bid rule in a takeover on both bidders and target companies. The origin and evolution of the mandatory bid rule in China are described and cumulative abnormal returns (CAR) used to measure its impact on bidders and target companies. The results show that shareholders of target companies receive a better return when bidders acquire more than 50% of the shareholding in target companies. This suggests that China should reform its mandatory bid rule by restricting the use of proportional partial bids to increase returns to the target shareholders. The results also show that in making a proportional partial bid to take a company over, bidders receive a better return when they aim for corporate restructuring that adheres to the state-led industrial policy. The authors recommend that the law should strike a balance between following the state-led policy of corporate restructuring and protecting the interests of target companies.