On The Protection Of Minority Shareholders Of Target Companies During Acquisitions

Acquisitions of publicly held corporations are acts that aim to obtain control of listed companies. From the beginning of the nineteenth century to now there were on total of five large-scale waves of corporate mergers and acquisitions. Studies show that through the activities of acquisitions, the quality of publicly held companies often will be upgraded, the industrial structure will be improved and to a certain extent, the productive forces also will develop after the transfer of controlling power. And the acquisitions of publicly held companies and the market of listed companies control can also at a certain extent, become the supervision of listed companies on the management as external forces. However there are also negative effects in the acquisitions of the listed companies. That is, small and medium-sized shareholders tend to use their positions in the acquisition process to damage the interests of small shareholders. And in reality, it is very common that small and medium-sized shareholders are violated in the acquisition process. And in our country, at the newly emerging security market, things become even worse. As an integral part of the security market, small and medium-sized shareholders are very helpful for the stock market to achieve its fundamental purpose and to raise funds more efficiently. They are an important guarantee for the prosperity and development of the economy. Therefore the protection of the rights of small shareholders of listed companies has become an important aspect of the acquisition system. China's security market has moved in to the latter split share structure of full circulation. Liquidity of shares of listed companies is bound to lead to the happenings of more acquisitions of publicly held companies. Moreover, in the time of the full circulation of shares, the acquisitions of listed companies will show different characteristics. If there is no corresponding system for the protection of the tights and interests of small shareholders, they would be more vulnerable. Therefore, in our country there is a need to set up a better system of acquisition of listed companies to protect small and medium-sized shareholders in the target company on the base of redefining the rights and obligations of the target company's controlling shareholders.This article is divided in to four parts.The first part is about the concepts and definitions about acquisitions of publicly held companies and the right and interest of small shareholders of the target company. It discussed several different theories about whether acquisition of listed companies will create profit and value. Through the analysis of empirical data, the author finally achieved the conclusion that acquisitions of listed companies in the overall are able to create value, and it is very cost-effective. The definition of acquisitions of listed company is: behavior which can directly or indirectly get a listed company's shares to a certain level through the transfer of shares in the Stock Exchange or other lawful activities for the purpose of controlling the target company. Then in section II the definition of the right of control of listed companies given by the author is: the rights to decide, directly or indirectly, a listed company's management policies through a variety of legal means. And in fact, the corporate control is essentially a way of existence of the benefits, that is, control over benefits. The author tends to use the substance stander to define controlling shareholders, and the core is the controlling shareholder must have control over the company, and can give a significant impact to the company's management and policy. Small and medium-sized shareholders are those that hold a relatively low proportion of shares, and can not have a significant impact on the company's management and operational decision-making. The rights and benefits of the small shareholders of listed companies in relation to the controlling shareholder during acquisitions were discussed. And in acquisitions of listed companies, the main rights of small shareholders relative to the control shareholders of the target company are: the right to transfer shares, the right to initiate derivative proceedings and the right to know; and the most important interests of shareholders is economic interests; and the way to ensure the rights of small shareholders should be adopted to protect small shareholders reasonable interests.In the second part the author analyzes the reason of protecting rights and interests of small and medium-sized shareholders in the target company during the acquisition of listed companies. The main purpose of the system of transferring corporate control is to achieve the maximization of the entire socio-economic benefits through more efficient allocation of resources. And with this main purpose, it is to maintain the main interests of the parties to a relative fair level that becomes an important aspect of the legislation of company acquisition. Protecting relative fair is means and improving economic efficiency is the goal. Therefore, during the course of transferring corporate control, the primary value orientation of protecting small and medium-sized shareholders in target companies should be efficiency. That is, the fundamental purpose of designing this system is to ensure the overall and long-term efficiency in the acquisition of listed companies. And secondly it is fair. That is, during acquisitions we should treat every party in relative fairness especially the small and medium-sized shareholders. And this relative fairness is the guarantee of high efficiency in transferring control rights of listed companies. In addition to efficiency and fairness, the author also considered about the conflict of freedom and fairness in the acquisition of listed companies, and draw the conclusions that in the acquisition of listed companies to use the idea of fairness to protect the interests of small and medium-sized shareholders and restrict controlling shareholder of the right to freely transfer control right must be a great care, and we should reduce the restrictions on freedom to a reasonable scope. A "Clever Pig Game" can be set up between the controlling shareholders and small shareholders, and the interest gotten by small and medium-sized shareholders in companies is far less than the controlling shareholder's. So the small shareholders usually choose to wait for the controlling shareholder's action in monitoring the behavior of the operators, and become a "free-rider." In the face of whether or not to transfer controlling right of the company, the relationship between controlling shareholders and small shareholders shift into a non-cooperative "Clever Pig Game". After the transfer of control there is not common interest between the original controlling shareholders and small shareholders. It can be at ease to damage the interests of small shareholders by use of small shareholders'lack of information and the "cold doctrine". The author also discussed the disadvantage of the small and medium-sized shareholders in comparison with the controlling shareholder and its causes. The author finally achieved the conclusion that legislators need to come through the development of relevant laws to protect small and medium-sized shareholders to balance the two sides at the status of the acquisition of listed companies so as to achieve the maintenance of a relatively fairness. Finally, the author also cite some typical domestic and foreign cases that controlling shareholders damage the rights and interests of small and medium-sized shareholders for their own interests during acquisitions to show that there is a realistic need to protect the rights and interests of small shareholders during acquisition. In the third part the author talked about the basic theory to protect small and medium-sized shareholders of the target company during acquisitions. First of all, as to the theory that shareholders are equal, the author believes that this equality is not an absolute equality, but a relative and real equality. This principle of equality is not a general prohibition of all the unequal treatment between shareholders, but to prohibit those who do not have the justification of unequal treatment. Therefore, the author endorse that the premium of the right of control should be enjoyed by the controlling shareholder. The author then discussed the disadvantages of the capital majority principle, such as by controlling the Board's decision-making bodies the controlling shareholders used to make the company in full accordance with themselves in action, and completely ignore the will of small and medium-sized shareholders', and deprive small and medium-sized shareholders of the management of companies and are against the legitimate interests of small shareholders. Then the author discussed the fiduciary duty to control shareholders, including the origin of fiduciary duty, the necessity to give fiduciary duty to the controlling shareholders; and described the specific content of fiduciary duty to controlling shareholders, including the controlling shareholder's duty of loyalty and care.In the fourth part the author talks about the specific system which should be set up to protect small and medium-sized shareholders in the target company during acquisition of the listed companies, including the information disclosure regime which are related to the controlling shareholders and happened before and during acquisitions, and also the system of shareholder's litigation occurred after acquisitions. During the discussion about information disclosure system, the author described the history of information disclosure system, determined the basic principles which should be followed by the regime of information disclosure and also talked about the time which information disclosure obligations of controlling shareholders happened, the contents should be disclosed, the procedures of disclosure and the legal responsibility of non-disclosure. Shareholder's litigation system includes shareholder's direct litigation and derivative litigation. The author talked about the distinction between them, and the different times at which shareholders'direct action or derivative proceedings should be applied according to different circumstances in which the rights of small and medium-sized shareholders'are invaded during acquisitions of listed companies. In the end of this part, the author also reflect on our current system of mandatory tender offer and consider that we should not adopt this system at the current stage of our country.