Hostile takeovers in China and Japan

SEIKO FUJIMOTO

Introduction ：Hostile takeovers occur frequently in the world. However， there have been few hostile takeovers in China and Japan. This report will compare hostile takeovers in both countries and analyze differences. The report consists of four sections. The first section will define what a hostile takeover is. This definition will make the exploration in this report clearer. In the second section， Chinas current situation will be explored by referring to two famous cases. This section will clarify why hostile takeovers are few in China. The third section will introduce the reason why hostile takeovers are not popular in Japan. And it will also analyze one famous case there. Finally， based on the discussion about situations of the two countries， differences with two countries will be discussed.

1 Definition of “hostile takeover”

Takeover can be either “friendly” or “hostile”. A hostile takeover is a corporate acquisition that is strongly resisted by the target firms top management and board of directors. It is opposite of a friendly takeover.

2 Hostile takeovers in China

a. Reasons

There have been few hostile takeovers in the past. Furthermore， there have been very rare successful cases in history. There are two main reasons.

First， Chinese companies have unique ownership structures. There are a few shares that investors can actually buy in Chinese stock market. Therefore， without consensus between concerned shareholders， it is impossible to get enough share to take over a company.

In China， the largest shareholder in listed companies is the government. The state-owned shares， including both of the share which is owned directly by government and the share which is owned indirectly， account for forty-percent of all the share in average. To be the largest shareholder， investors need to acquire more than forty-percent of all the shares of the company. It is nearly impossible for investors to purchase the amount of shares in stock market without agreement of a target firm.

In the past， state-owned shares could not be bought in Chinese stock market. However， there was a reform regarding non-traded shares which investors cannot buy in the stock market in 2005. A lot of state-owned shares was changed into traded share from non-traded one. Because of the reform， the percentage of non-traded share owned by state had declined from seventy percent in 2005 to fifteen percent in 2017 in Shanghai Stock Exchange. However， despite the reform of share ownership structure， few state-owned shares have actually been sold. Therefore， people still cannot buy those in the stock market. It can be said that there has been no striking change in cooperate ownership structures after the reform in 2005.

Second， Chinese law is hostile to hostile takeover. There is a rule that regulates the parties who try to purchase huge amounts of shares in a short period of time. The article13 of “The Measures for Administration of Takeovers for Listed Company 2014” sets “five percent rule”. It requires an investor who acquired five percent of the share of a listed company not only to submit a report to the CSRC（China Securities Regulatory Commission） and the stock exchange but also to notify the listed company within three days. And it is also required that the investor publish an announcement and do not trade the stock of the listed company within the aforesaid period. During this period of time， the investors cannot buy any more shares of the same company in the market. Moreover， when the investor， acquire additional five percent shares， they have to take the same procedures within two days after the acquisition. For example， if an investor tries to hold thirty percent of the share， it was required that the investor submit six reports and spend at least thirteen days.

Therefore， it takes long time to collect enough shares to be the largest shareholder. This time consuming process is costly for the “hostile” investors， because other investors realize someone is buying huge stock and aim profit. And they also try to buy same name of stock， because they expect that price of the stock is going to skyrocket in a short period of time. Consequently， the share price rises sharply. To succeed a hostile takeover， it is unavoidable to pay huge amount of money. Hostile takeovers in China are costly and difficult. This is one reason that there are few hostile takeovers there. The following cases are unique.

b. Case of China Vanke

China Vanke was one of the largest property developers in China. Baoneng Group was an insurance company. In December 2015， Baoneng Group bought up share of China Vanke. Baoneng Group demanded China Vanke to control over management. Eventually， Baoneng Group acquired twenty-five percent of all the share of China Vanke.

Shenzhen Metro Group Company （Shenzhen Metro） was a state-owned subway operator. China Resources was the China Vankes second shareholder. In March 2016， China Vanke intended to make Shenzhen Metro its largest shareholder， and thereby dilute Baoneng Group， China Resources and other minority shareholders in the process. China Vanke and Shenzhen Metro agreed to swap twenty-percent of China Vankes new share and the usage right of land which Shenzhen Metro owned. Not surprisingly， both Baoneng Group and China Resources expressed their opposition to the deal.

The Evergrande Group was the second-largest property developer in China and was a rival company of China Vanke. The Group participated in the battle. Finally， they got fourteen-percent of China Vankes share.

In these situations， Baoneng Group and Evergrande Group received order from Chinese Insurance Regulatory Commission. The order made them motionless. Both Baoneng Group and Evergrande Group have insurance companies. Therefore， China Insurance Regulatory Commission could regulate them. The president of Baoneng Group was ordered not to touch any insurance work for another ten years. The insurance company of Evergrande Group was ordered not to invest in stock another one year and not to hold the stock larger than twenty-percent of its assets. Since the insurance companies were crucial money source for both of Baoneng Group and Evergrande Group. Baoneng Group and Evergrande Group could not spend money to get share anymore. Therefore， they could not participate in the takeover against China Vanke， finally.

In January 2017， China Resources sold all the shares of China Vanke to Shenzhen metro， which held fifteen-percent of all the China Vankes share. After five months， In June 2017， Evergrande Group sold its fourteen percent stake in rival developer China Vanke to Shenzhen Metro. Therefore， Shenzhen Metro became the China Vankes largest and stable stockholder. The hostile takeover ended up in failure.

Unexpected regulation was one decisive and characteristic reason that this hostile takeover ended unsuccessful. When Chinese administration judge that a company is unwelcomed， they occasionally build a new regulation that targets only at the company. This kind of regulation was also seen in the Starwood case.

Starwood and Marriott were one of the world largest hotel companies in the world. Chinas Anbang Insurance Group Company （Anbang Insurance） was Chinese holding company subsidized mainly from insurance， banking， and financial services. On 16th November 2015， Marriott offered Starwood to buy 63.74 dollars a share and started negotiations for consolidations. On 14th March 2016， Starwood received an unsolicited bid for the company at 76 dollars a share in cash from Anbang Insurance. After four days， Anbang Insurance offered Starwood 78 dollars a share. On 20th Marth， Marriott announced that they are going to buy 79.53 dollars a Starwoods share. After eight days， Anbang offered Starwood 82.75 dollars a share. Eventually， Anbang offered the highest price.

At this point， it was expected that Anbang Insurance would succeed in the takeover against Starwood. Finally， Anbang Insurance withdrew the takeover， because Anbang Insurance received order from Chinese Insurance Regulatory Commission. The order said that foreign investors cannot hold more than fifteen percent of any insurance company. At that time， Anbang Insurance has gone over the fifteen percent. Therefore， they could not purchase Starwoods stock any more.

3 Hostile takeovers in Japan

a. Reasons

Although hostile takeover has not been common in Japanese market， the number of hostile takeovers is now gradually increasing. The reason is that typical ownership structure of Japanese companies has been changed. During the period of rapid economic growth， affiliated companies hold their issued share one another， which is called cross holding， because they needed stabilize. And banks had held customers issued share as security. After the bubble economy collapsed in Japan， there was a sharp fall in stock price. Companies and their main banks can no longer afford to hold shares each other， part of the shares were released in stock market. Therefore， the amount of cross holding became smaller. Tradable share has increased there. These changes made ownership structure of companies less stable. It becomes easier that people buy a large amount of share in a short period of time in stock market without target companys agreement. In this present situation， a hostile takeover could succeed easier than before.

b. Case of Hokuetsu Corporation

Hokuetsu Corporation was the sixth largest paper manufacturing company in Japan. Oji Paper Company was the largest Japans paper manufacturing company. In March 2006， Oji Paper Company sounded Hokuetsu Corporation out about the consolidation of two companies. On 3rd July 2006， Oji Paper Company officially offered Hokuetsu Corporation the consolidation. Immediately， president of Hokuetsu Corporation visited Niigata， the hometown of the company. Some of shareholders of Hokuetsu Corporation were in Niigata. And he lobbied local governments， the local Chamber of Commerce and Industry office for asking them not to sell Hokuetsu Corporations share to others.

On 19th July 2006， Hokuetsu Corporation took a defensive measure against hostile takeover. Two days after， on 21th July， Hokuetsu Corporation announced that they were going to issue a large amount of new stock to Mitsubishi Corporation. Mitsubishi Corporation was Japan's largest trading company. Mitsubishi bought 607 yen a share， and then held approximately twenty-four percent of all share of Hokuetsu Corporation in total. Immediately， Oji Paper Company announced that it will launch a takeover bid （TOB） for Hokuetsu Company. The per-share price of the takeover bid was 860 yen， up 35% from 21th July's closing price of 635 yen.

On 17th August， the president of Oji Paper Company visited Niigata and tried to persuade local shareholders. Then， some Hokuetsu Companys employees introduced themselves to him. And they gave a letter of request against takeover to the president. However， he did not receive it. They shouted “Please listen to us！ Listen to Hokuetsu Company！” This scene was recorded and broadcasted in local television program. The video gave local shareholders strong image that Oji Paper Company would not listen to Hokuetsu Company as well as its employees. It made local shareholders angry and they decided to disagree with the takeover.

In August 2006， Oji Paper Company had launched takeover bid. However， during this period， Mitsubishi Corporation was issued new stock by Hokuetsu Company and have held twenty percent of all share. The per-share price was 607 yen. Eventually， Oji Paper Company could get 5.3 percent of all the share by takeover bid. Oji Paper Company failed takeover bid for Hokuetsu Company.

As a matter of fact， the offer of the consolidation by Oji Paper Company was not only reasonable but also benefitable to Hokuetsu Company. For instance， Oji Paper Company officially had announced that no Hokuetsu employee would be fired after consolidation. However， broadcasting of the video had triggered Oji Paper Companys bad image that the company would ignore their employees. Therefore， local shareholders did not sell their share in the market. Eventually， the hostile takeover failed. This case was the first hostile takeover between Japanese companies in history.

There were two characteristic reasons why this hostile takeover ended unsuccessful. First， historically， Japanese society has been where seniority is valued. Seniority-promotion system has been popular among Japanese companies. The system sometimes worsens company performances， because it values employees age rather than their skills. Hostile takeover may change their promotion system. The reason is that a shareholder who takes over a company value cost effectiveness.

Second， Japanese companies normally prefer friendly takeovers. The executives believe that friendly takeover is better than hostile takeover， because Japanese society puts a highest priority on harmony. They think that a hostile takeover is disliked by society. They also believe that not only profits but also being valued by society are important. A friendly takeover takes longer time， because it needs negotiations with companies. When a company offer a consolidation， a target company can have time to consider ways of refusing the offer and taking a defensive measure against hostile takeover. Therefore， a hostile takeover is more likely to success without any negotiation in advance.

4 Conclusion

There are a few hostile takeovers in China and Japan. Furthermore， there are very few successful cases in both countries. Comparing hostile takeovers in China and those in Japan， two main points could be recognized.

First， traditional ownership structures of companies are totally different between China and Japan， although they have same situation that there has been a lot of untradeable share in stock market. Those share in China is owned by the government. Those share in Japan is owned by private citizens. In terms of the share mobility， ownership structure in China is more stable than those in Japan.

Second， Chinese laws and regulations easily intervene the stock market rather than those of Japan. In China， it is very difficult to buy a lot of share in short period of time due to government regulations. In Japan， conditions are different. The company which tries to acquire company can purchase enough share in a brief period of time. However， third party including the employees and local people block the hostile takeover.

It can be said that people in both countries want to avoid becoming unemployment which is occurred by hostile takeovers. To achieve the goals， the government regulates the stock market in China. On the other hand， civilians cry against hostile takeovers in Japan. Although ways are different， they do the things for same goals. However， Chinese regulations which block takeovers have some problems. The regulations are ex post facto. They are made by only to avoid the takeovers on the way. Under the regulations， it is inevitable that the company which tries hostile takeover give the takeover up. Because the company have never expected the regulation. The regulation deprives the company of the interests unliterally. It is unfair. On this point， it seems that Chinese government are going to preserve a balance between social interests which protect employment and the interests of acquiring companies.

參考文獻

[1]Mao Wei Bin （2011）， Empirical analysis of stock ownership structure and shareholder value in listed companies in manufacturing industry of China （Chugoku jojokigyo （seizougyo） niokeru kabushikishoyuukouzou to kabunushikachi tono jisshobunseki ）， p11

[2]Fact book （2015） p18， Shanghai stock exchange， http：//english.sse.com.cn/indices/publications/factbook/c/4316610.pdf

[3]Fact book （2018） p9， Shanghai stock exchange， http：//english.sse.com.cn/indices/publications/factbook/c/4648486.pdf

[4]Kasufumi Kanaoka， A Reconsideration of Chinas Non-Tradable Share Reform （2012） p10，