Do Auctions Matter? Assessing the Chinese Auction Promotion Institution of Takeover Law

This research examines the traditional wisdom of takeovers and regulations. Generally, takeovers have a value adding effect, but need to be regulated in order to curb excesses. Auction promotion rules are efficient in maximizing social wealth and reducing non-value maximizing takeover deals when shareholders fail to coordinate in the face of a coercive offer. China has adopted such a rule. The application of the rule nevertheless is far from satisfactory. The rule is not only ineffective in terms of the application ratio, but also reinforces controlling shareholders' power, which makes minority shareholders even more vulnerable to controlling shareholders' expropriation. This research first conducts an empirical study on Chinese shareholder distribution in listed firms. Based on these up-to-date results, this article then analyzes, from an agency problem perspective, the utilities of different types of controlling shareholders in the market. This paper concludes that the current auction promotion rule, the “5% rule,” is not efficient in light of the Chinese ownership structure. An ex ante announcement institution is suggested in order to compensate for the missing functions due to the deactivation of the rule. Finally, the paper introduces an opt-in legislation mode for the sake of the minority companies with dispersed shareholder distributions