Research On The Rules For Corporate Takeover Defense

In recent years,corporate takeover defense has become a hot and thorny issue in the practice of corporate transaction.Due to various aspects and parties involved and novel legal rules in corporate takeover defense,it would inevitably raise different opinions.Even for the same defensive tactic,explicit opinions for or against it would very likely appear.The bidder defended could be barbarians at the gate or value discoverer.So we should judge those defensive rules from a neutral prospective,and analyze it from the perspective of agency costs,to balance the interest of all relevant parties in the process of takeover defense.In the future,there would be more practice of hostile takeover and takeover defense in China,especially for hostile takeovers of listed companies.Because these companies are often leaders in different industries,significant negative effect would be brought to the development of the whole industry if the defense is improperly conducted.Thus we should further set up and improve relevant rules aiming at these takeover defenses.Chinese Securities Law refers to many securities rules of other countries,especially to rules of United State.Similarly,the rules of takeover defense in United States are more mature.However,subject to the corporate law practice based on the centralism of boards of directors,instead of duplicating those mature regulations,we should research these rules and adoptedthem in accordance with our national conditions.Differ from agency problem between shareholders and managers as the main issue in American corporate governance,theagency costs between dominant shareholder and minority shareholders in China take the place of manager’s agency costs,becoming the most important issue in the governance of listed companies.In view of that,this paper chooses to demonstrate takeover defense rules from the perspective of dominant shareholder’s agency costs.The first chapter is about basic theories of takeover defense.Takeover defense is a sophisticated phenomenon which involves multi-parties.When we analyze a problem from a legal sight,we need to find basic legal relation from numerous and complicated representation and analyze rights and obligations of different parties around that basic legal relation.All basic conclusions result from analysis and demonstration of the aforesaid legal relation framing.This paper combines Chinese practice and legislation system and chooses the relation between dominant shareholder and minority shareholders as the basic relation of takeover defense rules analysis.Between dominant shareholder and minority shareholders there are contractual relationship,which includes agency relationship.Dominant shareholder elects managers through the majority rule while minority shareholders are often rational apathy.Therefrom,principle-agent agreement is formed between dominant shareholder and minority shareholders through majority rule.When we choose dominant shareholder’s agency relationship as the basic legal relation to analyze takeover defense rules,we should choose interest measurementas the standard of evaluation of appropriateness of rulesfrom a neutral perspective and control dominant shareholder’s agency costs in a reasonable scope.The second chapter classifies the defensive tactics according to their basic functions and analyzes the reason of the emergence of dominant shareholder’s agency costs.According to the aforesaid analysis,this paper discusses conventional strategies of refraining agency costs and applies them in the field of takeover defense to analyze the applicable range of different strategies.The strategies of refraining agency costs include regulating strategy,governance strategy and litigation strategy.Supervision strategy contains rules,standards,admittance,withdrawal strategies while governance strategy includes appointment,removal,proposal,denial,trust,rewards,strategies etc.Litigation strategy works as post facto relief and makes the connotation of rules clearby litigation,which reversely instructs practice.Among the aforesaid strategies,governance strategy is at the core.Although rules,standards,admittance and withdrawal in regulating strategy provide basis for the game for corporate governance,excessive dependent on regulating would result in unnecessarily strict and harsh regulations and solidifyingloopholes.Thus,takeover defense rules should maintain necessary flexibility on the basis of clearance and reflect the interests of different parties by reasonable game mechanism in corporate governance.Among governance strategy,methods of appointment and dismissal are at the core.Takeover defense is usually performed as contest of control,which performed as contest of appointing and removing managers.Moreover,the confronting and neutral judgment mechanism,which is unique to litigation,could usually clarify interests of different parties more precisely,and litigation mechanism could keep takeover defense in reasonable field of business dispute resolution.In future,China would need “Delaware-style” courts.The third chapter emphasizes on dominant shareholder’s code of conduct.In order to set up and improve the rule of refraining agency costs,we should focus on dominant shareholder’s code of conduct from three directions,which are,alleviating information asymmetry,clarifying fiduciary duties of dominant shareholder and establishing conflict avoidance mechanism.One of the reasons for agency costs is information asymmetry,which should be further alleviated in takeover defense.Both former dominant shareholder and acquirer should enhance information disclosure,while keep information understandable and accessible.Due to the complexity of practice,besides binding rules,what is more important is to clarify the standards of dominant shareholder’s conduct,which isfiduciary duties.Fiduciary duties of dominant shareholder only refers to duty of loyalty,which means dominant shareholder should bear duty of loyalty to the company and other shareholders in self-dealings,which should be evaluated by entire fairness test.Since takeover defense rules involve conflict of interest,defense conducted by dominant shareholder may be either for protection of corporate policy or for self-protection.How to judge the purpose of such defense? We should make a concrete analysis case by case,for which the minority shareholders involved should be the best judges.Therefore,theborder of takeover defense rules is that the rules shall not substantially deprive minority shareholders’ chances to take part in the game for company governance.The excessive rules,such as,severe super-majority,nominating procedure and qualifications for directors,shall not be allowed.Meanwhile,no matter what the defense is aiming for,the defense itself can maintain the control of dominant shareholder in company,which constitutes self-dealing.Now conflict of interest occurs,so dominant shareholder should withdraw from voting and minority shareholders would decide whether the company should adopt the proposed defensive tactics.The fourth and fifth chapter respectively analyzes specific defensive tactics conducted in different stages.Takeover defense includes advance defense and in-process defense.Advance defense is to make defensive strategies in advance to prevent hostile takeover.In-process defense is the specific actions and strategies used by different parties against acquirer after the takeover actually emerges.The fourth chapter mainly discusses advance defense.Advance defense is the best strategy for dominant shareholder in that it makes potential acquirer not able to carry out hostile takeover.Since both hostile takeover and takeover defense are usually performed as contest of control,especially for the power of appointment and removal,thus the strategies of advance defense would focus on the power of appointment andremoval.So far,there is no dual class share structure in China.Even if dual class share structure is introduced in future,it shall be decided by unanimity of all shareholders,instead of majority rules.The special arrangements in the voting mechanism,such as super-majority,shall not materially deprive minority shareholders’ chances to take part in the game for company governance,the qualification of directors as well.There are two kinds of directors,independent directors and employee directors,to whom needs our attention during the process of board replacement.If independent directors are expected on behalf of minority shareholders to protect their interests in board,the existing mechanism of appointment and removal should be reorganized according to the basic agency structure in corporate governance.Minority shareholders shall become principals to appoint independent directors.Meanwhile,in order to preventunstability of independent directors subject to the frequently replacement of minority shareholders,the independent directors can only be dismissed with cause.Thus,the conditions of appointment and removal of independent directors are different.The original intention of employee director mechanism is to let employees participate in corporate governance,however,such mechanism is now exploited as an important strategy in takeover defense.Likewise,since shareholders are not entitled to appoint and remove employee directors,which contrary to the basic agency structure in corporate governance,thus the application of employee directors shall be strictly limited.The fifth chapter is mainly analysis of in-process defense rules.Coming down to in-process defense,it is inevitable to discuss the involvement of board of directors.In practice,some companies authorize board of directors the power to implement takeover defense,which is stipulated in articles of association.Under US laws,there are two basic rules about the involvement of board of directors in takeover defense,namely Unocal rule and Revlon rule.In China,the board should handle all acquirers fairly.So we could appropriately refer to non-frustration doctrine in British Law and define the boarder of directors’ actions.This paper also analyzes the Poison Pills prevailing in United States and compares it with the application under Chinese law.Besides,other strategies of in-process takeover defense,such as increasing shares,white knight,greenmail,etc.,are also discussed.In view that in-process defense may give rise to illegality,this paper also analyzes the consequence of illegal defensive action,including whether the increased shares can be held and the restriction of the voting right of such shares.In order to solve these issues,this paper proposes to modify the existing laws to further limit the voting right of illegally increased shares.Also,this paper discusses the constraint of minority shareholders’ conduct in defense based on shareholder activism.This paper briefly summarizes the legitimacy basis of takeover defense rules and proposes the modification of existing law.It also expects that takeover defense rules could be further verified and improved in future practice.