On Civil Relief Of Violating Beneficial Ownership Reporting Obligation In Hostile Takeover

Through the channel of open and centralized price bidding on secondary market is a typical way for a bidder to carry out with a hostile takeover.However,A bidder has a tendency to delay in disclosing investment information to the public or even conceal information that they want to make a tender offer.Usually,information required by public investors includes the identity of a bidder,any consensus action person who corporates with the bidder to push forwards the takeover,source of funds by which the bidder purchases shares on the secondary market,bidder's future plan for the management and business of the target company when successfully taking control of the company.Without disclosure of such information,public investors may suffer from inadequate or untrue information which may lead them to irrational investment decisions,undergoing direct damage or loss of business opportunities.Mechanism of large holding disclosure or beneficial ownership reporting is designed to handle the problem by standing on the side of public investors to force bidders to disclose necessary information.Considering the benefits brought by hostile takeovers such as reducing agency costs and improving management and efficiency of target companies,federal legislators of the United States hold a neutral attitude towards bidders and target companies,as well as their controlling shareholders and themanagement.Although Chinese legislators didn't declare their legislation purposes in Chinese securities law,protecting investors must consist large part of such purposes.Whether the Mechanism of large holding disclosure can function well on protecting invertors' right to know and avoiding the risk of illegal takeovers,highly depends on the efficiency of its enforcement.Compared with the United States,China has a notable weakness on civil enforcement.To make the situation worse,the other two pillars are not as solid as we thought.Administrative liabilities are far away from deterring bibbers before they violating reporting obligation and may not be extended within a short period of time,while criminal punishment is rarely applied to bidders who deliberately violate their obligations.Faced up with the tough situation,it is time for us to look back on civil enforcement once ignored by Chinese legislators in that civil enforcement seems to be the only breakthrough we can make to effectively hold back the trend of violation.Unfortunately,in civil actions discussed in this article,most plaintiffs fail to get what they want from the bidders.Although the mechanism of large holding disclosure is designed to protect public investors,those people don't have so much motivation to bring law suits versus bidders.On the contrary,controlling shareholders and target companies rush to courts to prevent bidders from seizing control of or substantively influence business of target companies.Their claims contain denying the shareholder qualification of bidders and limiting bidders' shareholder rights.Notably,they seldom allege for monetary damages.To make a clear guidance for qualified plaintiffs to carry out with civil actions against bidders who violate the reporting obligation,this article makes conclusions as below: First of all,a bidder' violation of reporting obligation is not the same as inside dealing and misrepresentation under the context of Chinese securities law.Which means rules applied to inside dealing and misrepresentation shall not be directly applied to this condition.Violation of reporting obligation shall be viewed as a kind of specific tort.Besides,qualified plaintiffs can be divided into four groups,including public investors who don't hold shares of a target company at all,non-tending shareholders,tending shareholders and the target company.While public investorscan only bring a law suit before a bidder full filling its obligation after its violation.upon the finish of reporting,public investors no longer have right to bring lawsuit against a bidder.Last but not the least,plaintiffs' claims shall be different according to their identities.Shareholders can allege for monetary damages,while they cannot allege for injunctions which limit bidders' rights of shareholder or force them to sell their shares acquired by violating the reporting obligation,except the condition when a shareholder's derivative action is carried out by a shareholder for the benefits of the company.Target company can allege for limiting shareholder rights attached to shares acquired by violation,as well as prohibiting a bidder from acquiring more shares within a period of time after the disclosure.The efficiency of civil enforcement in China negatively influenced by two factors: One factor is the relatively narrow scope of legal liabilities applied to violation of reporting liability.Another factor is the lack of motivation among public investors to carry out lawsuit.Procedural preservation is probably a solution to break the limitation of liabilities based on substantive law,because it has the same function to prevent bidders from effectively influencing business of the target Company.Meanwhile,shareholders supporting civil action may raise investors' interest in protecting their own rights against bidders who fail to meet the reporting requirements.Certainly,the most effective way to solve the problem is to change securities law and many relevant law and regulations,which shall be a tough work based on more research and practical experience accumulated through practice of civil relief.