The Mandatory Bid Rule in China

Abstract

Takeover has been widely accepted as a necessary method to improve the performance of certain inefficient firms. However, strict enforcement of the Mandatory Bid Rule (MBR) would make takeovers impossible in China. As a result, its operative effect has been diluted through a series of measures. First, the China Securities Regulatory Commission has always granted exemptions from mandatory bid obligations to avoid the detrimental effects of strict enforcement. Second, in practice, certain firms that do not apply for exemptions or fail in their applications are able to circumvent their mandatory bid obligations by launching takeovers within an appropriate time period when the market is booming. Third, this circumvention is facilitated by rules allowing for the adjustment of the bid consideration. Fourth, the proportional partial takeover bid rule was introduced in 2006, further weakening the regime. These realities make the MBR exist in name only in China, yet it can still create obstacles to takeovers. Therefore, it should be abolished.