Foreign solutions for local problems? The use of US-style fiduciary duties to regulate agreed takeovers in China

Abstract

The private sale of corporate control, or agreed takeover, of listed companies has been the primary form of control transactions in China. However, such takeovers have, in many cases, presented an opportunity for the control buyer and seller to extract value from the company at the expense of the target company's non-insider minority shareholders. One key legal development that attempts to address this issue is the imposition of US-style fiduciary duties on both incumbent and new controllers. This article argues that placing controllers under fiduciary duties has largely failed to protect the minority shareholders of Chinese listed companies from the exploitation of both the seller and buyer of corporate control. The failure is partly due to the weakness of the requisite complementary legal institutions, and partly due to the absence of a supporting social context.

Keywords:

• fiduciary duty
• corporate control transactions
• company law
• China

JEL Classifications:

• D82
• G28, K22, K42, P31

Acknowledgements

The author would like to thank Guy Liu, Michael Palmer, Laixiang Sun, Damian Tobin and two anonymous reviewers for their valuable comments and suggestions. The usual disclaimer applies.

Notes

Notes

1. Shangshi Gongsi Shougou Guanli Banfa, promulgated by the CSRC on 28 September 2002, and effective on 1 December 2002 [hereinafter the 2002 Takeover Measures], repealed and replaced by the 2006 Takeover Measures (issued by the CSRC on 31 July 2006, and effective on 1 September 2006.

2. It is true that there were a very small number of listed companies with an exceptionally dispersed ownership structure. However, some earlier attempts of raiding these companies were thwarted by the stringent disclosure rules (Chun 1998).

3. These provisions can now be found in the 2005 Securities Law (Arts. 55 and 56).

4. Zhou Xiaochuan, former Chairman of the CSRC, once likened the Chinese stock market as a primary school, in which the misbehaviours of some pupils encourage many others to follow suit. See Zhou (2001).

5. This is the case especially when the target company is in a state of financial distress and the acquirer attempts to rescue it via a takeover.

6. Gongkai Faxing Zhengquan de Gongsi Xinxi Pilu Neirong yu Geshi Zhunze Di 18 Hao: Bei Shougou Gongsi Dongshihui Baogaoshu [Code of the Contents and Format of Information Disclosure by Listed Companies No. 18: the Report of the Board of the Target Company], issued by the CSRC on 28 November 2002 [hereinafter, 2002 Code of Target Board Reports].

7. See the Preamble of the Code.

8. Gongkai Faxing Zhengquan de Gongsi Xinxi Pilu Neirong yu Geshi Zhunze Di 16 Hao: Shangshi Gongsi Shougou Baogaoshu [Code of the Contents and Format of Information Disclosure by Listed Companies No. 16: the Report of the Listed Company Takeover], issued by the CSRC on 28 November 2002 [hereinafter, 2002 Code of Takeover Reports].

9. Zhongxiao Qiyeban Shangshi Gongsi Konggu Gudong Shiji Kongzhiren Xingwei Zhiyin [Behavior Guideline on the Controlling Shareholder and De Facto Controller of Companies Listed on the Small and Medium Enterprise Board], promulgated by the Shenzhen Stock Exchange on 17 May 2007, and effective on 1 June 2007.