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Posted: August 1st, 2022
Corporate Law and Governance Mechanisms
The mergers and acquisitions (M&A) market has been growing at unparalleled rates in the recent years. The development in the M&A market has been accompanied by the formulation of regulatory rules. In the area of corporate law and governance, a most crucial legislation is the Measures for the Administration of the Takeover of Listed Companies 2006; this has been slowly formulated since the dissemination of Provisional Regulations for the Administration of Stock Issuance and Transaction. The Takeover Regulation 2006 focuses on a certain type of M&A transactions, i.e., takeovers. Takeovers refer to transactions that involves an individual gaining control of a listed company via directly or indirectly obtaining voting shares of the target corporation (Dessaint, Golubov & Volpin, 2017). Notably, the characteristics of takeover transactions, like targeting listed companies, obtaining publicly traded shares, and leading to a change of corporate control, presents a lot of challenges. Therefore, to deal with the intricate legal issues involved in takeovers, many Asian countries have resorted into legal transplantation, which mainly entails borrowing rules from other jurisdictions, particularly the Western countries. Therefore, this essay seeks to look into the matter of transplantation of takeover regulation from the West to Asia and provide an opinion on whether the transplant has been on balance, good or bad for bad for corporate governance in Asia.
Opinion on transplantation of takeover regulation from the West to Asia
Many Asian jurisdictions have heavily embraced and adopted rules and regulations governing takeovers from the West without taking into consideration the underlying dissimilarities between nations of origin and the host nations. In addition, literature on takeover in the legal academy is grounded on Western discourse (Varotill & Wan, 2017). This is aimed at influencing readers to perceive takeovers in Asia via a different lens altogether. In this light, the transplantation of takeover regulation from the West is bad for corporate governance in Asia. This is because in Western jurisdictions, focus is mainly put on voluntary offers as a way of enabling acquirers to gain control over targets. Therefore, conflicts arise since the board of the target decides to frustrate an offer; regulatory approaches seek to attain a suitable balance utilizing minority shareholder protection as the main touchstone (Varotill & Wan, 2017). Unfortunately, in Asia, no such market for corporate regulation exists at all, and the consequences of this volume do not arouse much confidence that will develop in any useful way in the future. This is attributable to the concentration of shareholding and other aspects, such as culture.
Going further with the discussion, it is evident that in the course of transplanting takeovers from the West, most Asian jurisdictions perceive the market for corporate control as a mechanism for improving corporate governance. This is true. Therefore, the takeover regulation is thus narrowed to assisting organized changes of control between parties in a way that does not challenge the interests of minority shareholders, thus leading to good corporate governance in Asian jurisdictions (Varotill & Wan, 2017). It is, however, important to note that the effect of the regulation is essentially different because of the nature of shareholders (i.e. concentrated versus dispersed). Good corporate governance in Asian countries has further been enhanced by modifying the transplanted takeovers. In some Asian countries (e.g. China, India and Japan), takeover regulations borrowed from western countries such as the UK have been adopted with modifications. In many cases, these modifications have been influenced by the interest group theory (Varotill & Wan, 2017). According to the theory, particular interest groups have a high likelihood of exercising their influence of takeover regulation in every jurisdiction. For example, in India domestic business groups which are established in the country and the state have assisted in steering the direction of takeover regulation, mainly in a way that protects their own interests (Varotill & Wan, 2017). Countries like Japan and China even put their respective cultures into consideration when adopting certain takeover regulations.
Hostile takeovers by Asian countries have in a way served to promote good corporate governance in these countries. This is because such takeovers prompt Asian jurisdictions to transplant takeover regulations that pertain to favourable shareholding structures and depressed share prices relative to the values of assets. The latter is mainly a function of the business cycles and markets. Whereas the shareholding structures of corporations within the Asian economies are hugely concentrated, an optimal takeover regulation matters. For instance, widely held corporations do really exist in these economies, and in the actual sense, such corporations are susceptible to hostile takeovers. In a nutshell, it is not the general concentration of shareholdings in an economy that matters, but the individual, granular, corporation-wise approach that is vital. Although shareholdings on average may be concentrated, individual corporations may be dispersedly held hence exposing them to the possibility of a hostile takeover.
Putting emphasis on the protection of minority investors and shareholders in the process of takeover transplantation promotes good governance in the Asian nations. This is because such actions go a long way in developing deep capital markets. By embracing takeover regulations from Western nations, Asian jurisdictions have welcomed the utilization of ex post determinations via courts as a way of controlling takeovers, particularly via fiduciary responsibilities of the target’s board (Varotill & Wan, 2017). This occurrence strengthens the applicability of the legal origins thesis, as it gets support in takeover regulation. Eventually, the explicit situations and aspects present in every individual jurisdiction may explain the regulatory choice it makes regarding takeovers.
Puchniak & Nakahigashi (2018) report that Asian countries such as China and Japan, which have adopted takeover regulations from the UK compared to Asian jurisdictions which have adopted such regulations from the US system have been able to attain good corporate governance. This is attributable to the fact that the UK’s regulations are way much cheaper, quicker and more certain compared to takeover rules in the US system, which mainly relies upon litigation. The UK has a City Code on Takeovers and Mergers that has been developed since the year 1968 to reflect the shared opinion of those individuals professionally involved in the takeover field as to suitable business standards and as to the manner in which fairness to shareholders and a systematic structure for takeovers can be attained (Johnston, 2007). In this regard, the City Code has a “no frustration action rule” which is viewed to benefit dispersed shareholders, as it offers equal treatment, and some practical safeguard, to shareholders. These protections also require implementers to follow and adhere to ethical standards while conducting their managerial responsibilities. As such, Asian countries that have transplanted the UK’s takeover regulations have also been prompted to apply the City Code, and its influence has been so significant that it has utterly changed the system of corporate governance in these Asian jurisdictions (Puchniak & Nakahigashi, 2018). Due to the UK’s rules of restricting defensive tactics when targets get a hostile offer, it is claimed that the managers of companies are forced to put focus on temporary value for shareholders and curtail general management discretion. This, in turn, serves to promote good corporate governance.
The transplant of the takeover law that focuses on a controlling shareholder-centric approach has served Asians countries well by further promoting good corporate governance. Most takeover regulations in Asian jurisdictions have adopted an incumbent friendly approach, in spite of the explicit model in play. According to Puchniak (2012) controlling shareholders have a tendency of playing a key role in embedding themselves further in the corporations they already control. As such, the process of rule making cannot afford to overlook their interest and concerns. Civil law jurisdictions in Asia follow and adhere to a pattern that is predictable and consistent with the interest group analysis of takeover regulation in that the law’s focus and its execution is on offering greater power to the incumbents to safeguard themselves against hostile takeovers, including by creating and raising defences.
Obviously, takeover regulation plays a critical role in the market for corporate control, which is a vital mechanism of corporate governance. However, it is important to note that processes of takeover are marred with legal intricacies and this is why Asian countries have increasingly been prompted to transplant takeover regulation laws from the West. Even so, some of the Asian jurisdictions have strived to modify these laws to fit their systems and cultures. From the above discussion it is evident that the transplant of the West takeover regulation to the Asian countries has resulted in various consequences, mainly attributable to numerous factors encompassing shareholder pattern and capacity.
Dessaint, O., Golubov, A., & Volpin, P. (2017). Employment protection and
takeovers. Journal of Financial Economics, 125(2), 369-388.
Johnston, A. (2007). Takeover Regulation: Historical and Theoretical Perspectives on the
City Code. The Cambridge Law Journal, 66(2), 422-460.
Puchniak, D. W. (2012). The Derivative Action in Asia: A Complex Reality. Berkeley Bus.
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Puchniak, D. W., & Nakahigashi, M. (2018). The enigma of hostile takeovers in Japan:
bidder beware. Berkeley Bus. LJ, 15, 4.
Varotill, U., & Wan, W. Y. (2017). Comparative takeover regulation: The background to
connecting Asia and the west.
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