In order to complete the theme about takeovers of listed companies, it is necessary to spend some words about “takeover defenses,” so today this entry is dedicated to this topic which is of extreme importance in this context.
Under Article 67 of the Securities Law (
http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/200904/t20090429_102757.htm
), if a “major event” occurs which may impact the trading price of the company’s shares and which is not known to the investors, the listed company shall report such event to the CSRC (http://www.csrc.gov.cn/pub/csrc_en/) and to the Stock Exchange, and announce the same. A special takeover committee is established by the CSRC to assist in dealing with the transaction; the committee provides consultation opinions on whether or not the takeover of a listed company is constituted, whether or not there is any circumstance under which a listed company may not be taken over, as well as other related matters.
Once the bid is announced, the target’s ability to engage in frustrating action is constrained (Article 33 of the Takeovers Code, available at:
http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/200910/t20091028_166902.htm
).
The Takeover Code further requires that any defenses adopted by the Board of Directors must be in the interests of the company, and the shareholders, and the board may not abuse its powers by improperly obstructing the takeover. Generally, the directors have to remain in a neutral position, and they do not have the right to jeopardize the bid by making acts of extraordinary administration just to create obstacles. Article 8 of the Takeovers Code provides that when taking defensive measures, target directors must meet their fiduciary duties owed to their company, and that the defensive measures should be beneficial to the target company and shareholders and must not pose an inappropriate obstacle to the attempted takeover.
The board is required to investigate the bidder and report to the CRSC within 20 days after the bid is announced. In particular “the board of directors of the company under takeover shall make investigation into the capacity, credit status and purpose of takeover of the purchaser, analyze the conditions for tender offer, bring forward suggestions on whether or not the shareholders should accept the tender offer, and employ an independent financial consultant to issue professional opinions,” moreover, “in case the purchaser makes any major alteration to the conditions for tender offer, the board of directors of the company under takeover shall, within 3 working days, submit the supplementary opinions of the board of directors and of the independent financial consultant on the alteration of conditions for tender offer, and give a report and make an announcement” (in this sense, Art. 32, Takeovers Code). This report is likely to be influential, and obtaining CSRC approval may be more difficult if the takeover is hostile.
Under Article 33 of the Takeovers Code, after the bidder announces its offer, the target may not dispose of assets, undertake external investment, change the company’s principal business or change any security arrangements for loans if such actions would materially affect the company’s assets, liabilities, rights and interests or results of operations, unless the shareholders’ general meeting approves. These transactions will usually have a significant effect on the company’s financial condition and business performance thus influencing the price of the shares at the stock exchange.
These restrictions do not apply to carrying on normal business activities or enforcing the resolutions of the shareholders’ general meeting, although they would rule out the possibility of issuing shares or disposing of crown jewels to the preferred bidder in order to frustrate a hostile bid, unless such action is approved by the shareholders’ general meeting. In other words, there could be some provisions with the effect of anti-takeover preloaded in the company’s article of association if adopted by the shareholders’ general meeting. It has become even more feasible where the amended Company Law which took effective on January 1, 2006, granted more autonomy towards the article of association. In the 1998 case of
Shanghai Ace
, a provision for the staggered board was considered to be against the compulsory Company Law format and deemed invalid. But within the new Company Law regime, things such as staggered board, gold parachute, voting rights restriction, and super-majority vote, etc., have been added into some listed companies’ article of association. It should be noted that such provisions are still uncommon in general and have not yet been contested in court, largely due that the hostile takeover is rare in China.
It is necessary to specify that according to the takeover rules when taking over a listed company, the purchaser shall hire a professional institution which is registered in China and has the qualification for financial consultancy qualification to be the financial consultant. Otherwise, the purchaser may not take over the listed company. The financial consultant shall be diligent and dutiful, accord with business criteria and professional ethics, keep his/her independence, and ensure the truthfulness, accuracy and integrity of the documents as it has made and issued thereby. In case the financial consultant considers that the purchaser has damaged the legitimate rights and interests of a company under takeover or its shareholders by making use of the takeover of a listed company, it shall refuse to provide financial consultation services to the purchaser (see Art. (, Takeovers Code).
In this entry I introduced the techniques of defense from a takeover, but the theme must be completed with some words about the
“prohibited trading activities when acquiring a listed company” so in the next entry I will examine more in detail this topic.
Cristiano Rizzi
(Some of my entries are extracted from my work titled M&A and Takeovers in China, so if you are interested in this topic, please visit:
http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484
).