Both Australian company law and Chinese company law have been dramatically changed in the last decade and are still being changed. The CLERP Act 1999, which came into force on 13th March 2000, made significant changes to the Corporations Law (CL). While the Securities Law of China, which commenced on 1st July 1999, is a milestone in the development of Chinese company law. Both the CLERP Act of Australia and the Securities Law of China changed the takeover provisions in respective jurisdictions. This short essay is to outline these changes and their impacts and interactions.
CLERP Act 1999: takeover law reform and its impacts in Australia
The takeover legislation in Australia can be traced back to the takeovers code introduced by the Uniform Companies Code in 1961. This legislation was significantly revised in 1971 with the introduction of the Eggleston Principles. The Eggleston Principles was subsequently carried forward into the Companies (Acquisition of Shares) Act 1980, and the provisions of this legislation were largely re-enacted in CL.
Before the CLERP Act was enacted, CL had been changed more than a dozen of times, but takeover provisions were almost the same although the Simplification Task Force had planned to reform them relating to relevant interests, associate relationships and entitlements.(1) After the CLERP replaced the Corporate Law Simplification Program, the endeavour to reform the takeover provisions continued, and the emphasis was moved to facilitate a more efficient market for corporate control because the objective of the CLERP was "to ensure that business regulation is consistent with promoting a strong and vibrant economy and provides a framework which assists business in adapting to change".(2) The CLERP brings an economic focus to corporate law reform. As a part of the CLERP, takeover law reforms accordingly were designed to achieve an appropriate balance between facilitating efficient corporate control while ensuring a sound investor protection regime, particularly for minority investors.
The CLERP Act has repealed the whole of Chapter 6 of CL, and inserted new Chapter 6 together with Chapters 6A, 6B, 6C and 6D, of which Chapter 6 deals with the acquisition of shares and takeovers, Chapter 6A deals with compulsory acquisitions and buy-outs. Chapter 6 begins with the purposes of the takeover rules with Eggleston Principles incorporated. It also extends takeover regulation to listed managed investment schemes and listed bodies. The main reforms are summarised as follows.
The CLERP Act makes the Corporations and Securities Panel the primary forum for the resolution of takeover disputes during the bid period. All interested parties may bring matters before the Panel, not just the ASC. Any aggrieved party has a right of appeal from a Panel decision to an appeal division of the Panel. The Panel is empowered to make a declaration of unacceptable circumstances having regard to the public interest, and to review ASIC's administrative decisions.
Before the reform, the courts were the principal forums for resolving takeover disputes. Targets in hostile takeover bids often resorted to litigation that can result in bids being delayed, sometimes for tactical reasons. And the court proceedings arguably were used as a method of creating financial disincentives for takeovers to proceed. The advantages of an effective panel for dispute resolution are obvious. A Panel comprised of experts in the field will make decisions quickly and efficiently. The removal of the capacity of the court to grant injunctions other than on the application of the ASC will remove the major source of current tactical litigation. And the Panel applying a single standard instead of the different approaches taken by different judges also can minimise tactical litigation.
Before the reform, a compulsory acquisition is available only when 75% by number of the outstanding shareholders sell their shares during the bid. If the takeover relates to a particular class of shares then it is only the remainder of that class that may be acquired. Now, compulsory acquisitions can be made for all class of securities. The 75% rules are changed to be based on the value of shares subject to acquisition under the takeover, rather than numbers of shareholders. This overcomes the problem of a single shareholding being distributed among several people to deliberately increase the number of shareholders to oppose the bid.
In addition, a person who has relevant interests in at least 90% by number of the securities in that class is able to achieve 100% control of that class. This helps companies overcome any limitations on acquisitions flowing from the Gambotto(3) decision. If 10% by value of the minority holders of any class dissented, the acquisition of that class would only be able to proceed with court approval of the fairness of the price.
This reform is designed to make takeover easier and prevent greenmail, and will result in better and more efficient management of company groups and reducing the administrative and reporting requirements of associated companies. Where a parent company has compulsorily acquired outstanding minorities, there is more flexibility in distribution of funds between subsidiaries, the confidential information is better protected and conflicts of interest in dealings between group companies are avoid. However, it is also criticised as both unfair and unnecessary for hurting minority shareholders.
The CLERP Act also makes significant reforms on the disclosure requirements for takeover offers. The disclosure rules are consistent with the fundraising disclosure rules and have regard to the extent to which reliable information is available and useful. A bidder has liability to make supplementary disclosures. The procedure rules relating to off-market bids and market bids are brought into line. Part A and Part C statements are merged into a bidder's statement and a target's statement replaces Part B and Part D statements.
It is worth noting that the most striking and radical of the CLERP's proposals for takeover law reform was to introduce a mandatory bid rule. Acquisitions that would exceed the statutory threshold 20% would be allowed as long as that the acquisition was immediately followed by the announcement of a full takeover bid. The bid would be unconditional and for cash of an amount at least equivalent to the highest price paid by the bidder in the last four months.
The CLERP believed that there were potentially significant benefits associated with introducing a mandatory bid.(4) It would promote certainty in the takeover process, cut down the bid costs for removal of an auction and smooth the bid process for minimisation of directors' defensive behaviour. It was expected that more bids would take place as a result of greater certainty of outcome, providing greater incentives for efficient management under the increased prospect of a takeover.
However, it was inconsistent with the first three Eggleston Principles, and the removal of an auction would result in some reduction of market transparency. It would also harm the target shareholders because they would be forced to accept the same price that was offered in private negotiation. At last, the mandatory bid proposal was deleted from the CLERP Bill when it was opposed in the Senate.
The reforms are potentially very important to the shape of takeover law and company law generally. As takeover is much easier and more efficient than before, the reforms also will promote efficient management and confident market, which will ultimately lead to greater wealth creation and better competitive capacity in globe market.
Securities Law: takeover law reform and its impacts in China
As a securities lawyer identified by China Securities Regulatory Commission (CSRC) and Ministry of Justice, I am more interested in what has happened in China and what should China adopt the Australian experience for her own securities markets related to takeovers.
After the socialization in later 1950s, shares were disappeared in Mainland China.(5) But under the "open-door" policy, shares were re-emerged in China in 1983.(6) Before Shanghai Stock Exchange was established in December 1990, securities were traded on counter in major cities under government supervision.(7) After the foundation of Shanghai Stock Exchange and Shenzhen Stock Exchange,(8) securities trading on counter was no longer legal and all securities should be traded in stock exchanges. There was no nationwide securities regulation until Interim Provisions on the Management of the Issuing and Trading of Stocks (Interim Provisions) was issued by the State Council on 22 April 1993. Chapter 4 of the Interim Provisions focused on listed company takeovers. In the same year, the Company Law was finally promulgated by the National People's Congress.(9) The Company Law includes some provisions on shares transfer and company merger that is related to takeover. Actually, before the Interim Provisions was issued, the Draft Securities Law had been under debate. After several years of debate, the Securities Law at last was enacted at the end of December 1998 and came into force on 1 July 1999.
As I have mentioned above, the Interim Provisions and the Securities Law only cover listed company takeovers, while the Company Law applies to other company takeovers. Due to the word limit, this short essay will mainly focus on listed company takeovers.
Chapter 4 of the Securities Law deals with takeovers, which retains basic takeover provisions in the Interim Provisions; it also makes some changes to make takeover a little easier and more efficient. I would like to summarise as follows the main takeover provisions of the Securities Law as well as the changes it has made. Meanwhile, I would like to compare them with the counterparts in CL, especially in the CLERP Act.
In Interim Provisions, a natural person was not allowed to hold 5 per thousand shares in a listed company, so only a legal person can be a takeover bidder. This limitation no longer exists in the Securities Law. This is a very important reform to the socialist China.
According to Article 78, a listed company may be taken over by bid or by agreement. The latter was not allowed in the Interim Provisions. Only Article 89 is especially about takeover by agreement, that a purchaser can conclude shares transfer agreements with the shareholders of a listed company. After the agreements are made, the purchaser should report to CSRC and the stock exchange and make a public disclosure within 3 days. The agreements shall not be carried out before the disclosure. This provision makes takeover much easier. But it is criticised for little transparency, and unfair to minority shareholders. In practice, if a person wants to take over a listed company by agreement, the person has to negotiate with the controlling shareholders; it is almost impossible to negotiate with thousands of minority shareholders.
The takeover threshold in China is 30%,(10) but it does not mean that a person can trade shares freely before he possesses 30% shares of a listed company. Under Article 79, if a person possesses 5% shares of a listed company on market, he should report to CSRC, the stock exchange and the company, and should make a public disclosure within 3 days. He is prohibited from trading the company's shares in the prescribed period. The rule also applies whenever the person increases or decreases his share possession by 5% point of the total shares in the company. When the person possesses 30% shares of the company, he should make a takeover bid if he wants to make more purchase on market, except that it is exempted by CSRC.(11) A proportional bid is allowed under Article 82.
This provision is similar to the substantial holding provision in section 671B CL. The limitation is loosened greatly compared to the Interim Provisions. In the Interim Provisions, if a person possesses 5% shares of a listed company, he should stop trading within 3 days to report and disclose whenever his possession is increased or decreased by 2% of the total shares in the company.
Article 87 provides that if a bidder has held more than 90% shares in a company when the bid period is expired,(12) other shareholders who did not accept the offer are entitled to sell their shares to the bidder with the same conditions stated in the bid. It is similar to the compulsory buy-out provisions in sections 662C CL, but there is no compulsory acquisition in the Securities Law. In practice, it is almost impossible that a person holds 90%, because according to Article 86, if a bidder holds more than 75% shares of the total, the listed company shall stop listing. In order to keep the company listed, a bidder will not hold more than 75% shares.
In China, there was a committee under CSRC to deal with disputes arising from the securities market. But it was criticised because only judges and arbitrators have the right make a judgement over civil disputes. So the committee was dissolved and the power was returned to the courts.
Legal changes are always accompanied with the growth in the size of markets and the increase in corporate activity. Compared to the securities markets in Australia and other developed countries, the securities market is very young in China, and compared to the complex CL, the Securities Law is also very simple.(13) The Company Law and the Securities Law of China is just like summaries of CL. On one hand, because the market is not mature, it is necessary that the Securities Law leave more space to CSRC to develop the market rules to adapt to the changing circumstances. On the other hand, too simple rules cause more uncertainty that will impede the market development.
In the past few years, there was a new worldwide takeover trend covered almost all industries. Both Australia and China should try to keep up with it. Since takeover legislations and takeover strategies are used in similar ways in different countries, it is easy to China to adopt some Australian experience. China should improve the efficiency of the market while encouraging better management and enhancing investor protection, and achieve an appropriate balance between them. The mandatory bid proposal is quite good to make an easier and more efficient takeover, the provisions that a listed company may be taken over by agreement make takeover much easier than the mandatory bid, but it is also more opaque and more unfair. In my opinion, if it is supplemented with some useful rules from the mandatory bid rule, it will be better. The Panel contributes more to the efficiency, and sufficient disclosure is crucial to equability and market confidence, hence, they should be adopted with some amendment to improve securities laws and regulations of China. In addition, the simple Securities Law should be refined or supplemented by more detailed provisions to make it more certainty. It should be taken into account to adopt some other Australia experience as well as the new reforms.