At the core of takeover law and regulation lie two, sometimes contradictory, objectives. On the one hand, takeover regulation is facilitative in nature, as it enables a market for corporate control. At the same time, it also bears a commitment to protect the interests of the target’s shareholders. The goal of takeover regulation is to strike an appropriate balance between these two objectives. Translated into efficiency terms, this suggests that optimal takeover regulation must promote efficient changes of corporate control while curbing inefficient takeovers.
Viewed from a comparative perspective, the Anglo-American prototypes spearhead not only the discourse but also the dissemination of takeover regulation globally. At one end of the spectrum, the law in the United States (US) follows the ‘market rule,’ whereby transfers of corporate control benefit from a regulatory free hand. Controlling shareholders are not required to share with minority shareholders certain benefits such as control premiums they may obtain during control transfers.
At the other end of the spectrum lies the ‘mandatory bid rule’ (MBR), epitomized by takeover regulation in the United Kingdom (UK). Under the UK’s version of the MBR, an acquirer who acquires de facto control (represented by 30% voting rights) over a target must make a general offer to the remaining shareholders to acquire all of their shares at the same price it paid to acquire the controlling block. The MBR deprives controlling shareholders of their exclusivity to the control premium, as they must share it with the minority shareholders. It also enables the minority to exit the company in the event of a change in control of the target at a reasonable price. Although the MBR has its benefits, it makes takeovers costly, thereby impinging upon the market for corporate control and, in turn, arguably entrenching controlling shareholders and managements of target companies.
Conventional wisdom indicates that the MBR and, to a very limited extent, the market rule have formed the models for minority exit and protection worldwide. For example, the UK takeover regulation has influenced the adoption of the MBR in continental Europe. Outside Europe, the MBR has taken root globally, including in several jurisdictions in Asia. Six significant Asian economies of China, Japan, Korea, India, Singapore, and Hong Kong, among others, have adopted varying versions of the MBR.
In our paper ‘The Divergent Designs of Mandatory Takeovers in Asia’ (forthcoming in the Vanderbilt Journal of Transnational Law), we aim to analyze how and why these six Asian jurisdictions adopted the MBR and its variants. This is puzzling because the jurisdictions display considerable divergence in terms of structural, legal, and institutional foundations, not only with their Anglo-American counterparts but also even among themselves. In our paper, we challenge the prevailing notion that the binary Anglo-American approach constitutes the framework for the dissemination of takeover regulation globally. Existing literature largely focuses on how jurisdictions have either adopted (with or without variation) the UK’s stringent approach using the MBR for effecting transfers of control or, in some cases, the US’s light-touch approach of the market rule. Some jurisdictions in Asia such as Singapore and Hong Kong have faithfully transplanted the UK’s version of MBR in its essence and in practice. Others such as China, Japan, and India have made appropriate modifications, including allowing partial offers in a wide range of circumstances, generous creeping acquisitions, and an array of exemptions from the MBR. Korea’s version of the MBR maintains it closer to the market rule than to that of the UK-style MBR.
Our thesis is that the MBR and its variants are choices that each of the Asian jurisdictions makes as to where its regime lies along a spectrum between a strong MBR (closely resembling the UK version) and a diluted MBR (closely resembling the market rule). Contrary to the Anglo-American discourse, which is dichotomous, our study demonstrates that the Asian analysis displays greater divergence. Although it is enticing to treat this result as a failed transplant of the MBR, the position carries a lot more nuances that receive scant attention in the literature. Arising from Asia’s divergent approaches, we challenge the notion that there can be one size that fits all models for the MBR, not only for all economies that adopt them but also for all companies within the same economy. Our study also establishes the unintended consequences of the implementation of the MBR.
We claim that the political economy of takeover regulation in the Asian jurisdictions suggests that the choice to adopt various intermediate positions is by design and not by default. Given that the market rule provides suboptimal protection to minority shareholders and the MBR curbs the market for corporate control, the intermediate positions seek to balance these somewhat conflicting objectives. Any form of MBR operates as a signaling effect that takeover regulation in a jurisdiction comports with international practice, but the deviations from the rule tend to be material enough to provide incumbents with the necessary protection against hostile takeovers and obtain control premium through exceptional means. As controlling shareholders tend to bear significant influence in the process of carving out takeover regulation in the Asian jurisdictions, it is not surprising that they have advocated for a position that helps moderate the effect of control transfers in that manner that favours the incumbents.
Our study contributes to the wider debate surrounding the appropriate takeover regulation and, more specifically, the claims made by the proponents of the market rule on the one hand and the MBR on the other. Although the inclusion of the MBR in the EU Takeover Directive spawned several studies of the MBR in the 2000s, there is comparatively less traction for the analysis of the MBR in the Asian context. Some studies have focused on the incorporation of the MBR in individual Asian jurisdictions, and others have focused on comparing specific aspects such as partial offers in a handful of Asian jurisdictions. Through our broader study of six jurisdictions with varying legal traditions and economic landscapes, we seek to more extensively tease out the distinctions in the design and implementation of the MBR in Asia. While our earlier edited work ‘Comparative Takeover Regulation: Global and Asian Perspectives’ addresses issues relating to the MBR, this paper builds on it and substantially expands and develops the ideas therein.
Umakanth Varottil is an Associate Professor at the Faculty of Law of the National University of Singapore.
Wai Yee WAN is Associate Dean (Research and Internationalisation) and Professor, School of Law, City University of Hong Kong.