The regulation of takeovers represents an important event-based test of CG practices. The board of the target company will normally be placed in a position of special knowledge, raising the question of how they exercise their powers, particularly as regards decision-making, the extent to which shareholders have a voice in decisions, and the transparency of information afforded to their shareholders. The position of a controlling shareholder or shareholders or directors that are connected to the offeror will also be relevant to consider as regards similar concerns where the acquisition is significant relevant to the offeror. Conflicts of interest among the key actors may also represent an issue of concern.
The company seeking to acquire control is also a matter of interest in takeover regulation as regards the protection of shareholders in the target company, primarily because shareholders may receive unequal treatment in terms of information sharing and the offer made for their shares - however, strictly speaking, this is not a CG concern as traditionally conceived as it involves the relationship between a shareholder and a third party. The topic more properly falls under the broader topic of protection of investors and will not be further considered here.
Takeovers of public companies in the UK have long been subject to the Takeovers Code, a code widely regarded as being successful in balancing commercial interests with regulatory objectives. As a result of the introduction of the CA 2006, the Takeovers Code, together with the powers of the Takeovers Panel provided for therein, was given statutory effect. For the purposes of the present CG discussion, the essential principle of that Code is that the function of the board is to act as a conduit of information to enable the shareholders to decide whether or not to accept the offer. To implement this principle, once an offer has been received the board is required to form an independent board committee who will manage the offer and who will also appoint an independent financial adviser to advise the minority shareholders whether the offer is fair and reasonable.
Hong Kong
This position in Hong Kong is set out in the Code on Takeovers and Mergers, which is historically based on the UK Takeovers Code. As with the UK code, the role of the target board is to facilitate shareholders reaching an informed decision as to whether they wish to accept or reject an offer. As with many other pieces of law and regulation in the territory that have been imported during Hong Kong's period as a British colony, the details of the Code have over time evolved in different ways from its UK origins. The most notable distinction is that the code in Hong Kong does not possess statutory backing. However, this lack does not appear to impact on the effectiveness of the Code on Takeovers and Mergers in practice.
The strong-shareholder model in Hong Kong as based on the UK approach can be contrasted with the strong board model adopted in the United States. Notwithstanding the recent changes in the UK, the former approach (in both jurisdictions) is essentially based on an industry-supported code enforced by a practitioner-based panel as an accepted check-and-balance on takeover activity. In the latter case it is backed by laws based around fiduciary duties - the United States does not have a specific takeovers code.
The approach taken in the United States may seem adverse to shareholder rights insofar as it permits the concentration of power in a takeover scenario to reside in the board rather than mandating decision making to be passed to the shareholders. In a takeover scenario in the United States the board will have considerable power to determine the progress and outcome of the takeover as compared to the shareholder-based model in Hong Kong and the UK.
However, there is a counterpoint to the fundamental distinction between Hong Kong and the United States that is not to be underestimated, namely, the strength of oversight and accountability able to be applied under each system. For example, whereas a takeover in the United States is undertaken in view of judicial enforcements of directors' duties in takeover situations (primarily under State law), in Hong Kong it is in practice undertaken in view of the Takeovers Code and the rulings, decisions and powers of the Executive and the Panel. Hong Kong does have laws governing director duties but they are less commonly in the forefront of considerations. While in both cases the regulator has tools at its disposal to correct or punish bad CG, the tools differ in their approach and their consequences - this impacts on their effectiveness, as discussed in Appendix III.6.6. Moreover, each system puts the investor in a different relationship to the question of corporate behaviour and the exercise of shareholder rights, as discussed in Appendix III.7.3.
Singapore also adopts the UK model of the Takeovers Code, being also a former British colony. Hostile takeovers are basically absent (see Appendix V.1.1). The Code on Takeovers and Mergers is issued by the Ministry of Finance (MoF) under the Companies Act and applies to listed corporations including corporations incorporated outside Singapore. The Securities Industry Council administers and enforces the Code independently of the MAS (see Appendices V.2.1 and V.4.1) and its decision is final without possibility of appeal to the court, though judicial review is possible.
In Mainland China, there are not many hostile takeover activities due to the state controlled ownership in the listed SOEs. The Recent failed attempt by Baoneng to takeover China Vanke is a rarity.
Discussion
The different legal standing of the UK and Hong Kong takeover regulations offers up the question whether the Hong Kong code should also be given statutory backing. The changes to the legal standing of the UK code cannot be understood in isolation. As discussed in Appendices II.3 and II.4.1, significant changes to the regulatory architecture of UK have taken place since 2000. This includes the creation of a statutory regulator for the listed market in the form of the UKLA, and the adoption of a twin peaks model in the creation of the Prudential Regulation Authority (PRA) and FCA. The change to the legal standing of the UK Takeovers Code is therefore part of a general policy shift in the UK toward statutory regulation. These more fundamental changes to regulatory architecture have not been followed in Hong Kong, as discussed in Appendices I.1.1 and I.4.1. The takeovers code in Singapore being issued by the MoF and the measures in Mainland China being issued and administered by the CSRC have a strong element of government regulation, even though the code is administered in Singapore by the Securities Industry Council, an independent body. In that sense, the position in Singapore and Mainland China is quite different from Hong Kong and in certain regards similar to the UK, which has moved away from self-regulation and toward statutory regulation.
Nevertheless, it is suggested that in the absence of (1) a broader policy change toward statutory regulation and (2) any clear indication that the Hong Kong Code on Takeovers and Mergers is lacking in effectiveness, there is no mandate for recommending any similar change to the legal standing of the Code. Should either one of these factors change, a review may then be warranted.
The different approaches of the UK/Hong Kong model (regulating via a code and an administrative tribunal, i.e. the takeover panels) and the United States model (regulating via the application of law, particularly fiduciary concepts, in the State courts) are not merely superficial. Rather, they arise out of a fundamentally different understanding of the role of the board in relation to managing the affairs of the company. Whereas the United States places the reigns firmly in the hands of the board and its directors - but always subject to their fiduciary duties - Hong Kong instead follows the UK model of requiring the board at critical times to step aside to allow shareholders to decide matters of importance. What is of interest to note is that UK corporate law is steeped in a rich tradition of fiduciary law yet this does not often come to the fore in a takeover scenario - this is perhaps in large part due to the effectiveness of the UK Takeovers Code. Being based on the same UK common law system, the same could be said of Hong Kong. However, as discussed in Section 3.7.6 «Role of fiduciary law», that fiduciary law is a tool actively used in the United States courts (i.e. Delaware) but less so in Hong Kong, may be of relevance to the CG debate beyond the borders of the takeover context.