CHINA LEGAL SCIENCE 2020年第2期 | 中国权益披露规则的反思与完善：以公开和效率为视角
日期:20-04-13 来源:CHINA LEGAL SCIENCE 2020年第2期 作者:zzs
THE BALANCE OF TRANSPARENCY AND EFFICIENCY IN CHINA’S OWNERSHIP DISCLOSURE RULE
Zhao Wenbing
The hostile takeover wave that emerged in 2015 had vividly unveiled a significant loophole in China’s ownership disclosure regime and provided us with an opportunity to examine the existing ownership disclosure rule in China. The publication of article 71 of the Securities Law of the People’s Republic of China (Draft for the Third Deliberation) in 2019 further spurred the debate on the ownership disclosure rule. Tracing the history of hostile takeover both in China and the US, this paper believes that an appropriate ownership disclosure rule must strike a balance between the regulatory objectives of market transparency and market efficiency. The beneficial effect of article 71 of the Securities Law of the People’s Republic of China (Draft for the Third Deliberation) is that it better serves the market transparency objective due to the enhanced punishment for the violator. However, the over-drastic slow walk rule embraced in article 71 of the Securities Law of the People’s Republic of China (Draft for the Third Deliberation) may hamper the efficiency of the securities market. And this paper will propose a recommended amendment that will be beneficial to investors, issuers and the market as a whole.The concept of ‘merger and acquisition (M & A)’ is primarily used as a business term, not a legal term. It is not sharply defined, instead referring to fuzzy sets of similar transactions. As commonly understood by practitioners, the core of M & A is a deliberate transfer of control and ownership of a business organized in one or more commercial entities. There are at least five major ways of acquiring control of a corporation: (i) merger; (ii) purchase all or substantially all of the target’s assets; (iii) tender offer; (iv) negotiated stock purchase; and (v) open market stock purchase.Based on the attitude of the management of the target company towards the M & A proposal, all the M & As can be classified into two categories. Friendly M & As are those in which the target is willing to be bought. Hostile M & As are those in which the board of the target is unwilling to be acquired. That is the reason why hostile M & As have always been described as takeovers or hostile takeovers. Because merger and asset sales require approval by the board of the target company, which creates insurmountable barriers for the acquirer if his M & A proposal is refused by the management. Therefore, open market purchase and tender offer provide the only measure that the buyer can employ to bypass the board of the target and obtain control directly from the shareholders of the target.Hostile takeovers are a rare phenomenon in China. They only take place in companies with dispersed stock ownership. If there is a controlling shareholder who does not want to sell his shares, then the company controlled by him is almost immune to hostile takeovers. It is well known that a concentrated corporate ownership structure characterizes China’s securities market. Consequently, the pervasive list of companies with controlling shareholders makes it impossible for hostile takeover activities to prosper in China.A hostile takeover has long been a matter of enormous debate all over the world. Manne’s seminal ‘corporate control market theory’ argued that hostile takeovers could keep the capital market competitive, and constrain managers to work in the shareholder’s interest. Inspired by Manne’s theory, although hostile takeovers seldom happened in China, some Chinese commentators maintained that China should establish a regulatory framework that facilitated the development of an active corporate control market. It seems that the corporate control market can function as an ‘invisible hand’ to efficiently allocate scarce resources and discipline incompetent management.However, the hostile takeover wave that emerged in 2015 in China has provided us with a real opportunity to examine the benefits and costs of hostile takeovers. Wu Xiaoling, the former Vice President of People’s Bank of China, believed that these five factors could explain the emergence of China’s hostile takeover wave in 2015: First, China was facing an increasingly recessionary pressure in the economy; second, China’s banks were facing a high pressure to pay the high rate return to their investors; third, there was a shortage of profitable and investable assets in the market; fourth, many companies were seriously undervalued; fifth, a variety of regulatory policies in China were encouraging the M & A activities.Unlike the simple deduction in Manne’s paper, the real world is rather complicated. Both in the US and China, the stories of hostile takeover regulations are similar. The first such hostile takeover was highly controversial, which is a new departure for much of the business community and workforce. Moreover, the existing regulatory framework typically was inadequate to address the legal issues that these new challenges for corporate control raise. The advent of the hostile takeover was, therefore, a stimulus for the development of new regulatory regimes.Particularly, in China, most commentators maintained that these hostile takeover cases had clearly illustrated that the existing ownership disclosure rule could not provide sufficient remedies for the target companies. Responding to these controversies caused by hostile takeovers, China then undertook a comprehensive reform of the ownership disclosure rules. Although the recommendations in which the punishment for the violators of the ownership disclosure rule should be enhanced were adopted, the forthcoming ownership disclosure rule was widely criticized for its detrimental effect on market efficiency. Some critics believed that this over-draconic ownership disclosure reform was all but ‘throw out the baby with the bathwater’.All these controversies demonstrated the huge dissonance regarding the ownership disclosure rule, and also the importance of a comprehensive examination of the ownership disclosure rule in China. Responding to the broad divergence among Chinese commentators, this paper is aimed at proposing a compromise solution by which China can balance the benefits and costs of the ownership disclosure rules. This paper’s analysis is organized as follows.Part I of this paper introduces two high-profile and typical hostile takeover cases that happened in China in 2015. These two cases unveiled that the lack of remedies and protections for the listed company and its shareholders seriously hindered the effectiveness of China’s ownership disclosure rule. As a result, following the suggestions from most Chinese commentators, a forthcoming new ownership disclosure rule intensified the punishment for the violators. However, there was still criticism of the over-drastic character of these new rules. Part II of this paper sketches the history of hostile takeover regulations in the US in the 1960s. The Williams Act underwent extensive revisions during its journey through the Congress because the Congress had sought to avoid tipping the balance of regulatory burden either in favor of management or the offeror. This story provides us with a salient lesson that China’s new ownership disclosure rule should balance the scales equally to protect the legitimate interests of the corporation, management, and shareholders. Part III of this paper, based on the hostile takeover conflicts that happened both in the US and China, sheds light on two significant securities market regulatory objectives which concern the ownership disclosure rule, the objectives of market transparency and market efficiency. Then, this paper proposes an appropriate ownership disclosure rule which can strike a balance between these two objectives in China. Part IV of this paper is a conclusion.II. THE HOSTILE TAKEOVER IN CHINADespite the absence of takeover activities, the institutional landscape for a hostile takeover in China is far from barren. In 1993, China promulgated its first fundamental securities law, the Interim Provisions on the Management of the Issuing and Trading of Stocks of 1993 (hereinafter referred to as the Stocks Provisions), which was derived from securities regulation in the UK. In 1998, China promulgated the Securities Law of 1998, which largely took the place of the Stocks Provisions and became the fundamental securities law in China. The Securities Law of 1998 devoted a whole chapter to the issue of takeovers and authorized the China Securities Regulatory Commission (CSRC) to promulgate detail rules about takeovers. In 2002, after systematic investigations, the CSRC promulgated the Measures for the Administration of the Takeover of Listed Companies of 2002, which for the first time formally established the framework of China’s takeover regulation. Now the Measures for the Administration of the Takeover of Listed Companies of 2014 (hereinafter referred to as the Takeover Measure of 2014) is currently the centerpiece of China’s takeover regulation.A. The Framework of China’s Ownership Disclosure RegimeIn China, the ownership disclosure rule was first adopted in the Stock Provisions. Article 47 of the Stock Provisions required that (i) when an investor comes to hold 5 percent shares of a listed company, the investor must file the required documents within three workdays of such acquisition. Additionally, that investor who held more than 5 percent shares of a listed company, must file the required documents within three working days of that transaction when his shareholding increased or decreased every 2 percent shares of this listed company; and (ii) before the required documents were filed as well as two working days after such disclosure, the investor could not trade any shares of that listed company.However, to encourage M & A activities and promote the efficiency of the capital market, China loosened the requirement of the ownership disclosure rule in the Securities Law of 1998. Now, under article 86 of the Securities Law of 2014, ‘When an investor, through securities trading on securities exchange, comes to hold, individually or with other people through any agreements, 5 percent of the shares issued by a listed company, the investor shall, within three days after the acquisition of such shares, submit a written report to the securities regulatory authority under the State Council and to the stock exchange, notify the listed company, and make a public announcement. Within the aforementioned prescribed period, the investor may not purchase or sell any shares issued by the listed company. An investor who comes to hold, individually or with other person through any agreements, 5 percent of the shares issued by a listed company shall, pursuant to the provisions of the preceding first paragraph, submit a report and make an announcement when the investor’s shareholding increases or decreases every 5 percent of the shares issued by the listed company. Within the aforementioned prescribed period as well as two days after the date when the investor submits the report and makes the announcement, the investor may not purchase or sell any shares issued by the listed company.’In short, when the investor’s shareholding reaches the threshold, he must file the required documents and cannot trade any shares of the target company in a period of time. The latter requires that the investor cannot trade any shares of the target in a period of time that has always been described as the slow walk rule in China. For concreteness, according to the slow walk rule in article 86 of the Securities Law of 2014, within three days of the triggering transaction, an investor has to file the documents and cannot trade any shares of the target (ex-ante no trading period), and after the submission of the documents, the investor still has to be enjoined from trading any shares of the target for two days (ex-post no trading period).If article 86 of Securities Law of 2014 is violated either by the acquirer’s failure to file the required documents or to refrain from purchasing any shares in the no trading period, the obligations to take the corrective action and pay the fine will be imposed on that acquirer. For concreteness, under article 193 of the Securities Law of 2014, ‘Where an issuer, a listed company or other party who has obligations to make disclosure fails to disclose according to the relevant provisions, or where there is any false record, misleading statement or major omission in the information it has disclosed, it shall be ordered to correct, given a warning and fined between 300,000 yuan and 600,000 yuan. The person directly in charge and other people directly responsible shall be given a warning and fined between 30,000 yuan and 300,000 yuan. Where an issuer, a listed company or other party who has obligations to make disclosure fails to submit relevant reports in accordance with the relevant provisions, or where there is any false record, misleading statement or major omission in any report it has submitted, it shall be ordered to correct, given a warning and fined between 300,000 yuan and 600,000 yuan. The person directly in charge and other people directly responsible shall be given a warning and fined between 30,000 yuan and 300,000 yuan. If the illegal conduct prescribed in the preceding two paragraphs is instigated by the controlling shareholder or actual controller of an issuer, listed company or other parties who has obligations to make a disclosure, it shall be punished as prescribed in the preceding two paragraphs.’And, under article 213 of the Securities Law of 2014, ‘Where a purchaser fails to fulfill its obligations to make disclosure concerns the acquisition of a listed company and make a tender offer according to the relevant provisions, it shall be ordered to correct, given a warning and fined between 100,000 yuan and 300,000 yuan. Before any corrections are made, for the shares a purchaser acquires individually or with other people through agreements, the voting right shall not be exercised. The person directly in charge and any other person directly responsible shall be given a warning and fined between 30,000 yuan and 300,000 yuan.’According to article 213 of the Securities Law of 2014, if the shares are purchased when the required documents have not been timely filed or in the no trading period, the acquirer cannot exercise the voting right of these ‘tainted’ shares unless he makes the corrections. At first sight, we can say that China has already built its ownership disclosure regime. However, if we refer to some hostile takeover cases which involve the violation of article 86 of the Securities Law of 2014, we can find a significant loophole in China’s existing ownership disclosure regime.B. Li Qin v. Chengdu Road & Bridge Engineering Co., Ltd.It is important to note at first that, according to articles 37 and 99 of the Company Law of 2018, all the issues that have significant effects on the company such as issuing stock must be approved by the shareholders’ meeting. As a result, the poison pill, the most effective anti-takeover device in the US, is not allowed in China. Consequently, amending the charter, for example, to deprive the voting right of the hostile acquirers may be a feasible way for the target company to resist the hostile takeover. However, it is questionable whether these Chinese style shark repellents will be accepted by the court.On August 26, 2015, Li Qin started to acquire the shares of Chengdu Road & Bridge Engineering Co., Ltd. (hereinafter referred to as Chengdu Road & Bridge) in the open market. From August 26, 2015, to December 29, 2015, Li Qin’s shareholding of Chengdu Road & Bridge reached 5.0176 percent. On January 14, 2016, his shareholding rose to 10.035 percent. From January 21, 2016, to January 26, 2016, he increased his shareholding to 15.054 percent. From February 2, 2016, to February 17, 2016, Li Qin totally held 20.0554 percent shares of Chengdu Road & Bridge. On February 22, 2016, the CSRC Sichuan Securities Regulatory Bureau announced that Li Qin had violated article 86 of the Securities Law of 2014 on the ground that he did not stop his purchase conduct in the no trading period when his shareholding reached 5 percent, 10 percent, 15 percent, and 20 percent shares of Chengdu Road & Bridge, respectively.On March 11, 2016, the board of Chengdu Road & Bridge adopted a resolution which deprived Li Qin of the voting rights of all the Chengdu Road & Bridge shares he had because of his illegal purchase conduct. And on the same day, the board of Chengdu Road & Bridge convened a special shareholders’ meeting. In this special shareholders’ meeting, forbidding Li Qin from voting, Chengdu Road & Bridge passed a resolution to insert into its charter a new provision which required that the violator of article 86 of the Securities Law of 2014 could not exercise his voting right and the board was entitled to refuse all the claims of the violator except the right to receive dividends. Li Qin brought a lawsuit against Chengdu Road & Bridge and alleged that the resolution which deprived his shareholder rights was invalid.Although article 213 of the Securities Law of 2014 requires that a purchaser who fails to meet the disclosure obligations cannot excise the voting right of these ‘tainted’ shares unless he makes corrective disclosures, the Wuhou District People’s Court argued that Li Qin had corrected his illegal conduct because he had submitted the required documents, the Detailed Equity Change Report of the Chengdu Road & Bridge, according to the requirement of CSRC Sichuan Securities Regulatory Bureau on March 21, 2016.In addition, article 4 of the Company Law of 2018 declares that shareholders are entitled to receive the earnings, make significant decisions, and select the managers. Moreover, the Company Law of 2018 also confers on shareholders a variety of other shareholder rights, such as the right to convene and participate in the shareholders’ meeting, to have access to the accounting books, to dissolve the company and so on. Consequently, the Wuhou District People’s Court held that without the authority of law or the consent of the shareholder himself, these shareholder rights of the violator could not be deprived.In the end, the Wuhou District People’s Court invalided the resolution which amended the charter to deprive Li Qin of his shareholder rights. Chengdu Road & Bridge then appealed against this judgment. However, the Chengdu Intermediate People’s Court, the appeal court, argued that the original judgment was supported by the clear facts and the correct application of law, and then made a judgment to dismiss the appeal.Li Qin v. Chengdu Road & Bridge case clearly illustrates that China’s courts tend to regard the shareholder rights stipulated in the Company Law of 2018 as the ‘intrinsic rights’ which are inalienable. Without the stipulation of law, the courts cannot support any charter provisions which restrict the shareholder rights of the hostile acquirer. If the anti-takeover charter amendment cannot be supported by the existing law, can a lawsuit brought by the target company for the violation of article 86 of the Securities Law of 2014 be an effective way to resist the hostile takeover?C. Shanghai Xingsheng v. Wang BinzhongOn October 23, 2013, Wang Binzhong, via 15 securities accounts controlled by him, held 5.53 percent shares of Shanghai Xinmei Real Estate Co., Ltd.(hereinafter referred to as Shanghai Xinmei). On November 1, 2013, these accounts rose their shareholding to 10.02 percent. By November 27, 2013, Wang Binzhong actually controlled 14.86 percent shares of Shanghai Xinmei. In 2015, the CSRC Ningbo Bureau held that Wang Binzhong had violated article 86 of the Securities Law of 2014 on the ground that he did not submit the required documents when his shareholding reached the 5 percent and 10 percent threshold. According to article 193 of the Securities Law of 2014, Wang Binzhong was required to make corrective disclosures and pay 500,000 yuan in fines.In 2017, Shanghai Xingsheng which held 11.19 percent shares of Shanghai Xinmei and used to be the controlling shareholder of Shanghai Xinmei, brought a lawsuit against Wang Binzhong. Shanghai Xingsheng claimed that the owners of these securities accounts could not exercise their shareholder rights, especially the voting and proposal rights, and should be enjoined from disposing of all their Shanghai Xinmei shares except that they could sell their shares in the open market.According to article 213 of the Securities Law of 2014, when a purchaser fails to meet the disclosure obligations, he cannot exercise the voting right of these ‘tainted’ shares unless he makes corrective disclosures. However, the Shanghai First Intermediate People’s Court insisted that Wang Binzhong had corrected his illegitimate conduct because, by January 22, 2015, he had paid a 500,000 yuan fine required by the CSRC Ningbo Bureau and published the Detailed Equity Change Report of the Shanghai Xinmei.It is interesting to note that, the Shanghai First Intermediate People’s Court declared that the aims of article 86 of the Securities Law of 2014 was to (i) enable the securities market regulator, the stock exchange, and the listed company to be aware of the changes of the ownership structure of the listed company, and (ii) facilitate the effective regulation of the block trade, and prevent the investor from engaging in insider trading and market manipulation, and provide the retail investors with adequate information so that they could make informal decisions. Moreover, the Shanghai First Intermediate People’s Court admitted that Wang Binzhong had violated article 86 of the Securities Law of 2014 and this illegitimate acquiring strategy, which was inconsistent with the principles of transparency, fairness and justice of the Securities Law, deprived the retail shareholders of the opportunity to make informed decisions, and to some extent interrupted the corporate governance of Shanghai Xinmei. However, because the existing rules could not support the petition of Shanghai Xingsheng to restrict the shareholder rights of the defendant, the Shanghai First Intermediate People’s Court dismissed the complaint of Shanghai Xingsheng. D. A Response to the Controversy: Article 71 of the Securities Law of China (Draft for Third Deliberation)Most Chinese commentators were unsatisfied with the results of these hostile takeover cases. At the heart of the problem is the absence of any meaningful remedies provided by the existing rules. Under article 213 of the Securities Law of 2014, if the violator pays a fine and submits the required documents, both the court and the target company can no longer restrict the voting right of these ‘tainted’ shares. For example, in Shanghai Xingsheng v. Wang Binzhong, after submitting the required reports and paying 500,000 yuan in fines, Wang Binzhong legitimately became the controlling shareholder and could effectively exert influence on the governance of Shanghai Xinmei. Among these cases, we can find a mismatch between an illegal conduct and its punishment, and this mismatch will provide hostile acquirers an incentive to employ this ‘profit by wrongdoing’ strategy on the ground that even if their violation is detected, all that will happen as a practical matter is that they will be forced to disclose their unlawful acquisition of shares and pay a fine. This painless remedy only ‘closes the barn door after the horse has bolted’ and undermines the effectiveness of China’s ownership disclosure regime as a whole.Therefore, most commentators consensually recommended that China should devise a new rule to restrict the shareholder rights of the violator. The underlying principles behind these holdings seem to be that a wrongdoer should not be allowed to use a block of illegally obtained stock as a base from which to seek control of the target; and the ownership disclosure rule would be wholly ineffective if a deliberate wrongdoer could be allowed to retain the proceeds of malfeasance merely by filing a curative amendment if and when the misrepresentation is discovered, without regard to the injury to shareholders. Responding to the controversies caused by hostile takeovers, China published the Securities Law of China (Draft for Third Deliberation) in 2019. And the Securities Law of China (Draft for Third Deliberation) which fully accepted these recommendations put forward a new and much more rigorous ownership disclosure rule. Particularly, under article 71 of the Securities Law of China (Draft for Third Deliberation), ‘When an investor, through securities trading on the securities exchange, comes to hold, individually or with other people through any agreements, 5 percent of the voting shares issued by a listed company, the investor shall, within three days after the acquisition of such shares, submit a written report to the securities regulatory authority under the State Council and to the stock exchange, notify the listed company, and make a public announcement. Within the aforementioned prescribed period, the investor may not purchase or sell any shares issued by the listed company. Where the securities regulatory authority under the State Council makes other provisions, such provisions shall prevail. An investor who comes to hold, individually or with other person through any agreements, 5 percent of the shares issued by a listed company shall, on the next day of the acquisition of such shares, notify the target listed company and make an announcement when the investor’s shareholding increases or decreases every 1 percent of the voting shares issued by the listed company. An investor who comes to hold, individually or with other person through any agreements, 5 percent of the shares issued by a listed company shall, pursuant to the provisions of the preceding first paragraph, submit a report and make an announcement when the investor’s shareholding increases or decreases every 5 percent of the voting shares issued by the listed company. Within the aforementioned prescribed period as well as three days after the date when the investor submits the report and makes the announcement, the investor may not purchase or sell any shares issued by the listed company. Where the securities regulatory authority under the State Council makes other provisions, such provisions shall prevail. Where the voting shares are bought by the means that violate the provisions of the preceding three paragraphs, after the share purchase is completed, the voting right of these shares shall not be exercised for 36 months.’Although article 71 of the Securities Law of China (Draft for Third Deliberation) deprived the voting right of these ‘tainted’ shares for 36 months, some commentators were still unsatisfied with the forthcoming ownership disclosure rule and argued that the slow walk rule should be abolished, rather than being supplemented.Most Chinese practitioners and commentators oppose the slow walk rule for its detrimental effect on market efficiency. Suppose an acquirer is engaging in an open market purchase campaign which makes his shareholding crosses the 5 percent, 10 percent, 15 percent, 20 percent, and 25 percent threshold successively. Under article 86 of the Securities Law of 2014, each time the acquisition triggers the threshold, the acquirer has to file the documents and stop his purchase conduct in the no trading period. Indeed, the slow walk rule gives the market sufficient time to assimilate the information. However, on the other hand, it may seriously delay the completion of the M & A deal and raise the share price of the target company dramatically, and may make the open market purchase difficult, expensive, and impossible. Furthermore, some Chinese commentators noted that the slow walk rule was rarely seen around the world.A famous article was written by Gao Xiqing, the chief lawyer of CSRC at that time, also demonstrates that the slow walk rule in China is obsolete. In his influential article, Gao Xiqing interpreted that the reason for the Stocks Provisions’ adoption of the slow walk rule was to provide unsophisticated market participants, especially the numerous retail investors who accounted for a substantial part of the investor population in China with an opportunity to assimilate the information that had a great influence on the market. Acknowledging that, due to the undeveloped market communicate and analysis systems, most investors could not be sensitive to the prices change in the market, Gao Xiqing argued that we should let the large shareholders ‘walk’ slowly so that most of the retail investors, especially those who lived far away from the stock exchange, could have enough time to make an informed decision. Gao Xiqing admitted that when sophisticated or institutional investors accounted for a significant proportion of the stock ownership in China, the slow walk rule would be canceled. Considering that China’s securities market has been well developing in these years, it seems that all the premises that in favor of the slow walk rule have no longer existed.The slow walk rule, however, has become more drastic in this reform. Besides the disfranchise punishment, article 71 of the Securities Law of China (Draft for Third Deliberation) not only prolonged the ex-post no trading period but also added a new requirement that the block-holder must file documents when his shareholding increased every 1 percent. Taken together, it seems that the purpose of article 71 of the Securities Law of China (Draft for Third Deliberation) is to insulate listed companies from hostile takeovers. Some commentators criticized that article 71 of the Securities Law of China (Draft for Third Deliberation) was all but ‘throw out the baby with the bathwater’.All these debates about whether the forthcoming ownership disclosure rule is desirable clearly illustrate that, before evaluating article 71 of the Securities Law of China (Draft for Third Deliberation), a comprehensive examination of the ownership disclosure rule is necessary. In order to fulfill this task, this paper believes that, by tracing the history of the ownership disclosure rule in the US, we can fully understand why we have the ownership disclosure rule in the first place.Although China’s takeover rules, with the Takeover Measure of 2014 as its core, is a mixture of experiences transplanted from overseas jurisdictions, this paper still stresses the importance of regulatory history in the US for us to comprehend the role ownership disclosure rules may play in the securities market. First, the main idea of the ownership disclosure rule in most other jurisdictions is much similar. The investor must file the required documents within a required period when his shareholding reaches the threshold. Second, the regulatory rules of the securities market in the US have long been studied by Chinese practitioners and commentators. Last but not least, the history of the ownership disclosure rule in the US is really illuminating. In particular, when the hostile takeover first emerged in the US in the 1960s, people started to realize that the existing law in the US could not fully address the new problems caused by a hostile takeover. Moreover, it was the hostile takeover that happened in the 1960s that spurred the birth of the ownership disclosure rule in the US. Similarly, the hostile takeover wave that happened in 2015 also well demonstrated the loophole in China’s ownership disclosure regime imported from other developed countries and provided us with an opportunity to systematically examine the ownership disclosure rule.
III. THE HISTORY OF HOSTILE TAKEOVER REGULATIONS IN THE US
When Robert Young launched a hotly contested and ultimately successful proxy contest for control of the New York Central Railroad in 1954, the Young proxy contest was viewed as an assault on existing norms of the Wall Street behavior, which discouraged public challenges to corporate directors. Although Young’s campaign was a spectacular success, and the 1950s also saw several other prominent battles, proxy contest was an unwieldy and usually ineffective mechanism for obtaining control, since the success depended on the bidder’s powers of persuasion and the extent of dissatisfaction among the company’s shareholders.A. The Hostile Takeover in the 1960s in the USIn the late 1950s and early 1960s, corporate raiders devised a more powerful strategy, the tender offer. In general, tender offers are public offers, usually made to all shareholders of the target corporation, to purchase any or all target corporation shares. Tender offers can be stock tender offers or cash tender offers. Stock tender offers are those in which the tender offeror proposes to exchange its shares to target’s shares. Cash tender offers are those in which the tender offeror provides cash to acquire the shares of the target corporation.The 1960s saw the cash tender offers had become an increasingly favored method of acquiring corporate control. In 1960 there were only 8 such offers involving listed companies as compared to 107 in 1966. Hayes and Taussig attributed four developments to this trend: (i) superiority of the cash bid over other devices in the event of resistance, at a time when the supply of willing merger partner had shrunk; (ii) increasing corporate liquidity; (iii) readily available credit; and (iv) a new ‘respectability’ for cash bids.In the typical cash tender offer of the time, (i) the offeror publicly proposed to buy a certain percentage of the outstanding securities of the target corporation with the aim of acquiring control; (ii) newspaper advertisements were published inviting current shareholders to tender their stocks to the offeror and announcing the offer at a price which included a certain premium above the current market price; (iii) the offeror’s obligation to purchase tendered shares was typically conditioned on the tender of a set minimum number of securities; and (iv) the offer established the period during which the offer would remain open and shareholders could tender shares. If the minimum number had not been tendered during this period, the offeror could extend the time during which shareholders could tender their shares, increase the premium, or make a new offer at a higher price after the initial one had expired.Criticism of the tender offer technique had developed along two lines. One line directly attacked the desirability of permitting transfers of control to be accomplished by this route. Senator Harrison Williams analyzed the problem in this way: ‘In recent years we have seen proud old companies reduced to corporate shells after white-collar pirates have seized control with funds from sources which are unknown in many cases, then sold or traded away the best assets, later to split up most of the loot among themselves.’The second level of attack on tender offers focused on specific aspects of the technique used. The major complaint had been that the offeree shareholder did not receive sufficient information to enable him to make an informed decision about the desirability of selling his stock. In the most extreme cases known as ‘Saturday night specials’, the acquirer announced a tender offer on a Friday for a limited number of shares, stating that the limited offer would be available on a ‘first come first served’ basis and that the tender offer would close on Monday. Shareholders would have to decide in a very short time whether they wanted to tender their shares and take the cash offered or remain shareholders in an entity with an unidentified owner and an uncertain future.B. The Story of the Williams ActOn October 22, 1965, Senator Williams proposed a bill that would have amended the Securities Exchange Act of 1934 (hereinafter referred to as the Exchange Act) to require any person to provide 20 days’ advance notice before acquiring, either by open market purchase or cash tender offer, 5 percent ‘beneficial ownership’ in a company’s equity. This provision would have substantially reduced the viability of the hostile takeover process because the pre-notification requirement would give target boards a built-in delay period during which they could erect defensive strategies. Indeed, Senator Williams acknowledged that the bill would ‘obviously work to the disadvantage of any corporate takeover specialists’ and ‘penalize the raiders.’The bill was soon dropped after it met opposition from the Securities and Exchange Commission (SEC). The SEC characterized the bill as ‘difficult’, ‘burdensome’ and ‘impossible’ due to its advance-notice requirement. Soon after, Senator Williams substantially revised the original bill. The revised bill, which was introduced on January 18, 1967, would have required that a person acquiring 10 percent of the ‘beneficial ownership’ of a company’s equity provide the disclosure within seven days of reaching the threshold. Additionally, any person seeking to make a cash tender offer for a company’s securities would have had to provide five days’ advance notice to the SEC.However, even the revised bill still generated concerns that these excessively stringent anti-takeover measures would make it difficult for shareholders to hold managers accountable. Senator Williams, therefore, proposed a third iteration of the bill, which required that a person acquiring more than 10 percent of a company’s equity had to provide the disclosure within a longer period, ten days, of reaching the 10 percent threshold. Senator Williams stated that the revised bill ‘carefully weighed both the advantages and disadvantages to the public of the cash tender offer,’ took ‘extreme care to avoid tipping the scales either in favor of management or in favor of the person making the takeover bids,’ and was ‘designed solely to require full and fair disclosure for the benefit of investors’ by ‘providing the offeror and management equal opportunity to present their case.’ In 1968, with minor modifications, this third bill finally added Section 13(d) to the Exchange Act.In 1970, Senator Williams proposed and Congress ultimately passed an amendment to the Exchange Act that lowered the threshold for disclosure from 10 percent to 5 percent. Senator Williams explained that ‘stock holdings of between 5 percent and 10 percent in large companies were in many instances a controlling interest’ and therefore ‘the full disclosure requirements of the Exchange Act were necessary for adequate investor protection.’C. Section 13(d) of the Exchange ActCreated in 1968 with the passage of the Williams Act, section 13(d) of the Exchange Act was intended to be an early warning system. Section 13(d) of the Exchange Act requires any person or ‘group’ who acquires ‘beneficial ownership’ of more than 5 percent of any class of registered equity security to file a Schedule 13D with the SEC (electronically), any stock exchange on which the security is traded, and the issuer (at its principal executive office) within ten days of the acquisition. The Schedule 13D must disclose the following information: (i) the purchaser’s identity and background; (ii) the amount and sources of the funds for the purchase; (iii) the purpose of the purchase and any plans or proposals with respect to extraordinary corporate transactions involving the target; (iv) the number of shares owned by purchaser and transactions in the shares during the prior sixty days; and (v) any contracts, arrangements or understandings with others with respect to the securities of the target.The Schedule 13D must be amended promptly, under Rule 13d-2, ‘if any material change occurs in the facts set forth’ therein, including any change in the number of shares held by the purchaser. There is no specific time limit within which an amendment must be filed, although the current practice has set ten days as the outside limit. And Rule 13d-2 states that increases or decreases in beneficial ownership of at least 1 percent are deemed material.IV. TWO REGULATORY OBJECTIVES CONCERN THE OWNERSHIP DISCLOSURE RULEThe mantra of the legislative debates was ‘neutrality’, whether the Williams Act can serve the purpose of ‘leveling the playing field’, however, it is questionable. But there is one thing that can be confirmed that the debates on hostile takeovers both in the US and China reveal two securities regulatory objectives underlying the ownership disclosure rule, the objectives of market transparency and market efficiency. This paper believes that, for a country to devise an appropriate ownership disclosure rule which perfectly fits its regulatory condition, it must take extreme care to strike the balance between these two objectives.A. The Market Transparency ObjectiveMarket transparency is an important regulatory objective for securities regulators around the world. Because the securities have no intrinsic value in themselves, their value depends on the profitability or future prospects of the company and on how much other people are willing to pay for it, based on their evaluation of those prospects. Without the information about the company’s past performance and future prospects, that securities markets, where investors pay enormous amounts of money to strangers for completely intangible rights, whose value depends entirely on the sellers’ honesty, exist at all is magical.What is more, when all the information about the value of the company is fully disclosed, the disparate traders such as savvy stock pickers, arbitrageurs, algo-traders, short-sellers, and others can compete to realize gains from new information. Then, a well-functioning disclosure system increases the securities market’s informational efficiency. And this informational efficiency, on the other hand, can also be relied on to enhance the allocative efficiency, that is, to ensure that scarce capital is channeled toward the most promising investment projects. The link between those two would be as follows: informationally efficient prices incorporate the estimates about the companies’ profitability that skilled analysts and traders elaborate from publicly available information. The greater the available information, the more accurate such estimates. Within the firm, directors may thus use stock price reactions as guidance for corporate strategy. Then, the efficiency of corporate asset allocation will be approved.Therefore, in order to fulfill the market transparency objective, securities regulators always require that the ‘fundamental information’ which helps the market to precisely predict the future cash flows of the listed company must be disclosed. And there is one important thing that must be advanced at first that, almost all countries require the public company to disclose the identity of its large shareholders. The policy underlying these requirements is that the profound impacts large shareholders will have on the listed company. In extreme cases, a controlling shareholder, if any, can unilaterally decide the result of shareholders’ meeting and the membership of the board. As a result, the investors should be informed who is in charge of the company so that they can make rational decisions. If the market is pessimistic about the future of a company controlled by some shareholders, the share price of that company will be discounted. Conversely, if the investors have confidence in that company, they may be willing to pay more for the shares. The function of ownership disclosure is to enable investors to make their own informed assessment as to how the ownership structure of a particular firm may impact the value of the share.If the information on corporate control is fundamental information, then so must be information on a potential shift in corporate control. For example, if someone is conducting a heavy purchase campaign in the open market, which may make him become the controlling shareholder in a company, that information doubtlessly constitutes fundamental information and should be disclosed. For one thing, for a shareholder of the target makes a rational investment decision about whether to sell his shares and leave the company, the information about the possible transfer of corporate control is inevitable; for another, because the price of the target’s shares will fully reflect the fact that someone is aggressively accumulating the shares of the target, the disclosure will raise share price of the target so that the shareholder can sell his shares at a higher price.Before evaluating article 71 of the Securities Law of China (Draft for Third Deliberation), this paper wants to point out a drawback in the ownership disclosure rule of the US. This paper believes that, if the rationale of the ownership disclosure regime in the US is ‘to alert the marketplace to every large, rapid aggregation or accumulation of securities, regardless of technique employed, which might represent a potential shift in corporate control’, Section 13(d) of the Exchange Act, however, have not well-served this purpose. Because the ten-day reporting lag in section 13(d) of the Exchange Act leaves a substantial gap after the reporting threshold has been crossed during which the market is deprived of material information, and creates an incentive for abusive tactics on the part of aggressive investors prior to making a filing. Such investor may, and frequently do, secretly continues to accumulate shares during this period, acquiring substantial influence and potential control over an issuer without other shareholders (or the issuer) having any information about the acquirer or its plans and purposes at the time stockholders sell their shares. The reason why the threshold of section 13(d) of the Exchange Act is set at 5 percent is that such shareholding in some cases would be sufficient to acquire the effective control of the company. However, in the US, the investors typically wind up holding a stock position of 6 percent to 10 percent as of the time of its Schedule 13D filing. That is to say, the section 13(d) of the Exchange Act failure compels a prompt release of the fundamental information.However, such a delayed disclosure problem has never bothered China’s securities market at all. Because under the slow walk rule in article 86 of the Securities Law of 2014, when the shareholding of an acquirer reaches 5 percent, he must stop his purchase conduct immediately and make a disclosure within three days. Moreover, during both the ex-ante no trading period and the ex-post no trading period, he cannot purchase any share of the target. The slow walk rule not only removes the reporting lag which may facilitate market manipulation and abusive tactics but also guarantees that market participants always promptly make aware of any accumulation of substantial ownership of a target’s voting securities.Last but not least, as demonstrated by these hostile takeover cases in China in 2015, the lack of an effective remedy in such extreme situations will encourage certain investors to flout the rules. Consequently, even if the appropriate amendments were to be adopted, the risk that the forthcoming ownership disclosure rule will continue to be disregarded by sophisticated investors would remain high unless appropriate remedies are made available to issuers and investors. And this paper believes that depriving the violator of the voting right of his ‘tainted’ shares is an effective way to deter the violation of ownership disclosure rule. Being deprived of the voting right of these ‘tainted’ shares, the investor can no longer acquire the corporate control by engaging in this ‘profit by wrongdoing’ tactic.B. The Market Efficiency ObjectiveMarket efficiency is a significant regulatory objective around the world. In China, particularly, one of the main reasons to establish the securities market is to increase the allocative efficiency. Besides the allocative efficiency of the securities market, there are two efficiency explanation of the securities market which are concerned with M & As: to reduce agency costs and to realize synergy gains.The most important agency cost explanation of hostile takeovers is that they reduce managerial slack by replacing inefficient management. In Manne’s prestigious ‘control market theory’, he found the existence of a high positive correlation between corporate managerial efficiency and the market price of shares of that company. He explained that as an existing company was poorly managed, in the sense of not making as great a return for the shareholders as could be accomplished under other feasible managements, the market price of the shares declined relative to the shares of other companies in the same industrial or relative to the market as a whole. Then, he believed that the lower the stock price, the more attractive the takeover became to those who believed that they could manage the company more efficient and that the potential return from the successful takeover and revitalization of a poor run company could be enormous. As a result, he maintained that hostile takeover provided some assurance of competitive efficiency among corporate managers and thereby afforded strong protection to the interests of vast numbers of small, non-controlling shareholders. Therefore, some researchers criticized section 13(d) of the Exchange Act with respect to its deterrence effect on hostile takeovers. For example, in his influential article, Fischel pointed out that, for the market for corporate control to function effectively, the acquirers must have adequate incentives to undertake research to find out a target that was poorly managed by the inefficient management. And he explained that a decision to engage in a hostile takeover only occurred after an acquirer determined that the target would be more profitable in his control and that the takeover was likely to succeed. And he analyzed that these decisions involved research costs and that the benefits of this research were the expected gain from the appreciation of the acquirer’s equity investment after obtaining the corporate control of the target. However, section 13(d) of the Exchange Act which required the acquirer to file the documents and disclose its identity, source of funds and intention, forced an acquirer to share information that he had used resources to produce, without receiving any compensation in return. Therefore, Fischel believed that the Williams Act would increase the costs of a takeover and thereby diminish an acquirer’s incentive.The other value-maximizing efficiency explanation of M & As is to achieve synergy gains: the value of the combined firm is greater than the value of the two firms (target and acquirer) separately. Such ‘synergistic gains’ may be the result of a variety of factors: unique product complementarity between the two companies, specialized resources possessed by the target, economies of scale, cost reductions, lowered borrowing costs, or the capital market’s response to the combined enterprise. Particularly in China, for the purpose of achieving the synergy gains and promoting economic growth, the government has for decades been extensively orchestrating industrial restructuring with the aim to scale up to industrial concentration and to develop larger firms into globally competitive ‘national champions’ in key strategic sectors.In China, almost all practitioners and commentators agree that an appropriate ownership disclosure rule which well fits China’s specific regulatory environment should be established. Considering under the slow walk rule, the acquirer cannot purchase any shares of the target both in the ex-ante no trading period and ex-post no trading period when his shareholding reaches the threshold. Therefore, most of the Chinese commentators believe that the slow walk rule should be canceled for the detrimental effect it would have on both the hostile takeover and friendly open market purchase.This paper here proposes a compromise solution that can balance the benefits and costs of the slow walk rule. Under the proposed solution, on one hand, in order to fulfill the market transparency objective, the slow walk rule should not be abolished because it requires the acquirer must stop his purchase conduct immediately and cannot trade any shares of the target in the ex-ante no trading period when his shareholding reaches the threshold; on the other hand, in order to serve the market efficiency objective, the ex-post non-trading period in which the acquirer cannot purchase any shares of the target after the submission of the required documents should be shortened.To begin with, as mentioned above, only by requiring that an acquirer must stop his purchase conduct and make disclosure promptly when his shareholding reaches the threshold, can we guarantee that the information disclosed by him is accurate and timely. From this perspective, the ex-ante no trading period requirement is desirable. However, the requirement that after submitting the documents an acquirer still cannot purchase any shares of the target until the ex-post no trading period expires has nothing to do with the purpose of ascertaining the disclosure of accurate and timely information. Only the argument that the securities market needs sufficient time to assimilate this information can provide justification for the ex-post no trading period requirement. According to article 71 of the Securities Law of China (Draft for Third Deliberation), after submitting the documents, the block-holder still has to wait an additional three days so that he can purchase the shares of the target. Considering that China’s securities market is well developed and already informational efficient, three days is an eternity. Instead of promoting market transparency, the too-long ex-post no trading period rather than hindering the market efficiency. Consequently, this paper recommends that the ex-post non-trading period should be shortened.At last, someone may argue that the requirement that a block-holder whose shareholding exceeds 5 percent of shares of the target must make disclosure when his shareholding increase every 1 percent may to some extent undermine the efficiency of the securities market. This paper believes that the argument seems to be overstated. First, the obligation to make a disclosure is only imposed to the block-holder whose shareholding crosses 5 percent of shares of the target. And it is reasonable to require the block-holder to make disclose when there are substantial changes in his own on the ground that this information may constitute the fundamental information. Second, considering the slow walk rule does not apply to this situation, the deterrence effect of this requirement would not be so enormous.Accepting the recommendations provided by Chinese practitioners and commentators, Article 71 of the Securities Law of China (Draft for Third Deliberation), which deprived the voting right of the illegally purchased shares for 36 months, enhanced the punishment for the violator and provided more remedies for the target company and its shareholders. This paper believes that this attempt successfully fills the regulatory gap in existing ownership disclosure rules in China. However, this paper argues that the over-drastic slow walk rule may undermine the efficiency of the securities market.This paper proposes a compromise solution that better balances the competing regulatory objectives between market transparency and market efficiency. Specifically, this paper recommends shortening the ex-post no trading period. This compromise solution serves two goals. First, it ensures that the company and its shareholders are more quickly made aware of potential acquisitions. Second, it ensures that China’s new ownership disclosure regime will facilitate the M & A activities and promote market efficiency.
