Lifting the Veil of Words: An Analysis of the Efficacy of Chinese Takeover Laws and the Road to the Harmonious Society

Abstract:     
Empirical evidence shows that takeovers are value-maximizing events for target firm shareholders and enhance social efficiency. Takeovers are commonly thought to play a key role in reducing managerial slack in corporate governance through the replacement of inefficient management. Additionally, a multitude of economic literatures indicate that the value of combined firm is greater than the value of two separately by means of a synergy gain. Yet despite being a value-creation event, takeovers rarely happen in China’s capital market. One reason for this phenomenon is that Chinese takeover laws have a chilling effect towards potential corporate raiders. And naturally, since the takeovers play a role in reducing managerial slack, inefficient management of listing company can be observed more frequently as a result. Such problems are worse in State-owned Entities.

Given the awkward past legal positions, as well as the administrative features, of the China Securities Regulatory Commission (CSRC), the Chinese capital market supervisory agency, it is hard to believe that CSRC is not influenced by the central government or that the rules it promulgates are unbiased. In fact, under CSRC’s pro-government philosophy, CSRC’s SOE-friendly approach has a chilling effect on potential takeovers. This approach is at the cost of the Non-SOE shareholders’ opportunities for value maximization. Since the Chinese government has changed its policy focus from State-owned Assets protection to promotion of social equity, we can easily predict that CSRC’s regulatory approach, which has dominated for over a decade, is facing a significant modification. With the change in the government’s core value, many provisions need to be remade into efficient regulations that allow for both SOE and Non-SOE shareholders opportunity to value creation events, particularly as they relate to takeovers.

Number of Pages in PDF File: 42

Keywords: China, CSRC, corporate law, securities regulation, takeover law reform

JEL Classification: K22, K23, K33, K41, K42

Accepted Paper Series