The Divergent Designs of Mandatory Takeovers in Asia.

• Author: Varottil, Umakanth

TABLE OF CONTENTS I. INTRODUCTION II. A FRAMEWORK FOR THE MBR A. Objectives and Utility of the MBR B. Dissemination of the MBR Worldwide III. MBR IN ASIA: STRUCTURE AND OPERATION A. Evolution of the MBR in Asia B. Weak Form MBR in Asia? C. The Trigger Thresholds D. The Attractiveness of Partial Offers E. Pricing Considerations F. Creeping Acquisitions G. Waivers and Exemptions from the MBR IV. RATIONALIZING THE DIVERGENCE OF THE MBR IN ASIA A. MBR and the Theories of Legal Transplant B. The Political Economy of the MBR in Asia C. Functional Substitutes to the MBR D. Addressing the Objectives: A Normative Analysis of the MBR in Asia V. CONCLUSION I. INTRODUCTION

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. (1) At the same time, it also bears a commitment to protect the interests of the target's shareholders. (2) The goal of takeover regulation is to strike an appropriate balance between these two objectives. (3) Translated into efficiency terms, this suggests that optimal takeover regulation must promote efficient changes of corporate control while curbing inefficient takeovers. (4)

Viewed from a comparative perspective, the Anglo-American prototypes of takeover regulation spearhead not only the discourse but also the dissemination of takeover regulation globally. (5) The law in the United States follows the "market rule," whereby transfers of corporate control benefit from a regulatory free hand. (6) Controlling shareholders are not required to share with minority shareholders certain benefits, such as control premiums they may obtain during control transfers. (7)

At the other end of the spectrum lies the "mandatory bid rule" (MBR), epitomized by takeover regulation in the United Kingdom. (8) Under the United Kingdom's version of the MBR, an acquirer who acquires de facto control (represented by 30 percent of 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. (9) The MBR deprives controlling shareholders of their exclusivity to the control premium, as they must share it with the minority shareholders. (10) It also enables the minority to exit the company in the event of a change in control of the target at a reasonable price. (11) Although the MBR has its benefits, it makes takeovers costly, thereby impinging upon the market for corporate control (12) and, in turn, arguably entrenching controlling shareholders and management of target companies. (13)

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. (14) For example, the UK takeover regulation has influenced the adoption of the MBR in continental Europe. (15) Outside Europe, the MBR has taken root globally, including in several jurisdictions in Asia. Significant Asian economies, including China, Japan, South Korea, India, Singapore, and Hong Kong have adopted varying versions of the MBR. (16)

This Article aims to analyze how and why these six Asian jurisdictions adopted the MBR and its variants. This is puzzling because the jurisdictions display considerable differences in terms of structural, legal, and institutional foundations, not only with their Anglo-American counterparts but also even among themselves. Several questions emerge. Does the rationale for adopting the MBR, which originated in the United Kingdom, where public companies display dispersed shareholding, apply equally in the Asian jurisdictions where concentrated shareholding is the dominant characteristic? If the MBR tends to stymie takeovers and entrench controllers, why do regulators in the Asian jurisdictions veer toward the MBR more than the market rule? Why do controlling shareholders, an influential group in the context of Asian corporate governance, still favor a version of the MBR if it means that they must pay a higher premium to consolidate their control and, when they sell, share their control premiums with minority shareholders?

This Article challenges 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 United Kingdom's stringent approach using the MBR for effecting transfers of control or, in some cases, the United States' light-touch approach of the market rule. (17) Some jurisdictions in Asia, such as Singapore and Hong Kong have faithfully transplanted the United Kingdom's version of the MBR in its essence and in practice. (18) 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. (19) South Korea's version of the MBR is closer to the market rule than the UK MBR. (20)

The thesis of this Article 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 Anglo-American discourse, which is dichotomous, this study demonstrates that the Asian analysis displays greater divergence. (21) 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, this Article challenges 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. This study also establishes the unintended consequences of the implementation of the MBR.

This Article claims 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 that the MBR curbs the market for corporate control, the intermediate positions seek to balance these somewhat conflicting objectives. Any form of the MBR operates as a signaling effect that takeover regulation in a jurisdiction comports with international practice, (22) but the deviations from the rule tend to be material enough to provide incumbents with the necessary protection against hostile takeovers while obtaining control premiums. (23) 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 a manner that favors the incumbents.

This 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. (24) Although the inclusion of the MBR in the EU Takeover Directive spawned several studies of the MBR in the 2000s, (25) 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, (26) and others have focused on comparing specific aspects, such as partial offers, in a handful of Asian jurisdictions. (27) Through the broader study of six jurisdictions with varying legal traditions and economic landscapes, this Article seeks to more extensively tease out the distinctions in the design and implementation of the MBR in Asia.

The choice of China, Hong Kong, Japan, India, South Korea, and Singapore for this study merits explanation. They are six of the most significant economies in Asia, which also represent the largest takeover markets in the region. (28) This list of jurisdictions covers the hugely populated growth economies of China and India, the leading Asian financial centers of Singapore and Hong Kong, and the established economies of South Korea and Japan. (29) This combination also includes a balanced representation of both common law (India, Hong Kong, and Singapore) and civil law (China, Japan, and South Korea) jurisdictions, although the influence of legal tradition (30) on takeover regulation in the context of the MBR and the market rule is tenuous. (31) A study of takeover regulation in these six jurisdictions provides a substantial and representative understanding of takeover regulation in Asia.

Part II of this Article sets out the broad features of the MBR and examines the dissemination of the rule worldwide, particularly in Asia. Part III analyzes specific features of the MBR in the six Asian jurisdictions and demonstrates how it is different from the Anglo-American approach. It also identifies the divergence among these six jurisdictions. Part IV rationalizes the divergent designs of the MBR in Asia using several well-established comparative law tools, including legal transplantation and the political economy of regulation. It also seeks to provide some normative observations regarding the MBR as well as takeover regulation more generally. Part V concludes.

2. A FRAMEWORK FOR THE MBR

   Before embarking on an analysis of takeover regulation in the Asian jurisdictions, it is necessary to consider the evolution of the MBR as well as its objectives. This better enables an examination of the comparison between the MBR and the market rule across theoretical and efficiency considerations. Finally, the dissemination of the MBR into other jurisdictions, including through the EU Takeover Directive and further into various Asian jurisdictions...