The Political Economy of Takeover Regulation: What Does the Mandatory Bid Rule in China Tell Us?

The political economy/interest group politics theory has emerged as a powerful analytical tool for approaching the varying evolutionary trajectories of takeover regulation in advanced economies. What is largely missing from the ongoing discourse is the experience of developing and emerging economies, against which the existing theory can be tested and, if necessary, developed. The distinct pattern of evolution of the mandatory bid rule (MBR) in China presents an intriguing case study.Drawing on a unique, hand-collected dataset of all administrative decisions taken by the China Securities Regulatory Commission (“CSRC”) on control transactions which had triggered the mandatory bid obligation under the MBR regime applicable before the 2006 legislative reform, this research reveals the limitations of the existing theory when applied to the case of China. The empirical finding is two-fold. Firstly, the more powerful players (acquirers ultimately controlled by the top levels of the Chinese central and local governments) fared considerably better than the less powerful actors (acquirers controlled by local governments at the lower levels and by private individuals) under the pre-reform MBR regime. Secondly, the CSRC had granted itself a central and pivotal role in the Chinese market for corporate control, and it exercised almost unbridled power over the conduct of any control transactions, in particular, the private sales of control. The MBR reform in 2006, however, ran counter to all powerful vested interests. The conventional political economy theory would find it difficult to explain how a legal reform that major actors disfavored could have taken place. This research proposes that the conventional theory be extended to take into account the state capitalist approach to economic development as adopted by many emerging economies, including China.