China’s meteoric rise as a global economic powerhouse has thrown its financial market regulations into sharp focus. In particular, the country’s antitakeover laws have been the subject of intense scrutiny. My recent paper examines these laws and the issues surrounding them, highlighting their shortcomings and underscoring the pressing need for reforms. Furthermore, it provides comprehensive insights into several key facets of China’s securities regulatory system, emphasizing the need for more effective regulation and enforcement and making a persuasive case for reform.
The study begins by exploring the legacy of legal transplantation, a process through which Chinese capital markets inherited their securities regulatory system from the UK and Hong Kong. Despite this inheritance, the paper points out that the transplanted rules have not been strictly adhered to in practice in China. A glaring example of this divergence is the Mandatory Bid Rule (MBR), a crucial component of China’s antitakeover regulation. While the China Securities Regulatory Commission (CSRC) formally validates the MBR, it is rarely enforced in practice.
A unique aspect of China’s MBR is the provision for ‘immunization tactics,’ allowing financially stressed firms to apply for an exemption from the MBR during hostile takeovers. While this provision offers a lifeline for struggling businesses, it paradoxically weakens the strength of the antitakeover legislation and opens the door for potential misuse.
The paper argues that China’s enforcement of corporate directors’ fiduciary duty, a key aspect of financial and securities market regulation, is not as effective as in the Western jurisdictions from which it borrowed its regulatory framework. The effectiveness of this aspect plays a pivotal role in shaping a firm’s antitakeover profile and incorporating antitakeover provisions (ATPs).
The study further highlights the concentrated ownership structure in China, which weakens the bargaining power of minority shareholders and undermines the democratic ethos at the heart of corporate governance. This issue is exacerbated by the lack of robust regulatory guidelines addressing the legality of ATPs.
The insufficiency of these guidelines, along with the peripheral role that courts play in antitakeover securities regulation, results in less effective enforcement of fiduciary duty compared to jurisdictions like the US or the UK. The enforcement decisions of the CSRC primarily focus on ensuring managerial disclosure compliance, often overlooking managerial entrenchment in control contests. This situation leaves minority shareholders at a disadvantage and indicates a regulatory framework that is inadequate in ensuring prudent managerial compliance.
Given these circumstances, the article argues that it is imperative to enhance the regulatory oversight of antitakeover laws. This should be prioritized on the regulator’s agenda for investor protection in China. The authorities must recognize the need for a robust and effective antitakeover lawmaking process that safeguards the interests of minority shareholders and promotes an equitable corporate environment.
As China’s influence on the global financial landscape continues to expand, it is essential for its regulatory framework to be robust, fair, and transparent. This not only protects shareholders’ interests but also enhances the credibility of China’s financial markets on a global scale. A solid antitakeover regulation contributes to the stability of China’s financial markets by preventing unwarranted hostile takeovers, protecting minority shareholders, and ensuring that companies are not subject to unregulated changes in control. This, in turn, bolsters investor confidence and contributes to the overall health of China’s economy. As China charts its course in finance, it must seize this opportunity to instil greater efficacy and transparency in its securities regulation. This will require a commitment to legislative reform, stringent enforcement mechanisms, and a willingness to adopt international best practices. The path toward reform may be complex, but the end goal – a robust, fair, and transparent financial market – is worth the effort.
Dr. Sirui Han is an Assistant Professor (Research) and In-residence CURI Research Fellow at the School of Accounting and Finance of the Hong Kong Polytechnic University.
This post was adapted from their paper, “Self-regulatory Measures as Securities Regulation: The Saga of Antitakeover Regulation in China,” available on SSRN.