Is China's modification of the mandatory bid rule truly inappropriate : a legal and economic analysis

Abstract

This study uses empirical evidence to give a relatively convincing answer to the heated debate as to whether China’s modified Mandatory Bid Rule (MBR) is truly Inappropriate. After transplanting the MBR from the UK in the early 1990s, China amended this rule and grants exceptions on the basis of a much broader scope of grounds, and most acquirers who triggered the mandatory bid obligation could obtain the China Securities Regulatory Commission’s dispensation. Moreover, after modifications, China also created a unique ‘two-category’ mandatory bid regime. The ‘two-category’ mandatory bid regime leaves room for bidders to set low offer prices which contain no premium and thus prevent the offers from being accepted by public minority shareholders, and the co-existence of the MBR and the fully-permitted partial offer regime makes it possible for bidders to use the unique ‘mandatory partial offer’ to circumvent the mandatory full offer obligation. Therefore, after the modification, China’s MBR has diverged from the UK’s original path. Some criticise that China’s modified MBR cannot achieve its legislative purposes, i.e., to promote takeovers and promote company efficiency, and to maximise minority shareholders’ economic benefits. The negative critiques of China’s modified MBR seem to be based on the static-model theory, but if the dynamic-model theory could really explain China’s MBR, such critiques would be invalid. While there is a large body of literature discussing whether this modification can achieve its legislative purposes, however, none of them provides convincing empirical evidence, so the lack of empirical evidence makes either the advocators’ or objectors’ claims unpersuasive. This study seeks to address the current deficiency in research on empirical evidence. By using quantitative evidence, this study finds that China’s modified MBR can significantly facilitate better performance by listed companies, and minority shareholders’ economic benefits were not undermined even though there were no material mandatory offers. Therefore, China’s modified MBR can achieve its legislative purposes. This study also uses China’s empirical evidence to prove that the dynamic-model theory can explain China’s MBR, and contribute to the battle between the static-model theory and dynamic-model theory in the western world.