Takeover Tactics | People’s Republic of China | Global Public M&A Guide

6. Takeover Tactics

[Last updated: 1 January 2025, unless otherwise noted]

In public takeovers, there are limitations on the board of directors of a public company.

The Acquisition Measures state that:

“[D]ecisions made and measures taken by the board of directors of the target company regarding the acquisition shall be conducive to maintaining the rights and interests of the company and its shareholders. Improper barriers shall not be established to the acquisition by abusing powers, no financial assistance in any form shall be provided to the purchasers by using the resources of the company, and the lawful rights and interests of the company and its shareholders shall not be harmed.”

Moreover, if the purchaser acquires the public company in a tender offer, after the purchaser makes a brief announcement but before the tender offer is completed, the target company may continue to conduct normal business activities and implement resolutions made by the shareholders’ general meeting. However, the board of directors of that company shall not do anything, without approval of the general shareholders’ general meeting, to cause a major impact on the company’s assets, debts, rights and interests, or business operations by disposing of the company’s assets, causing it to invest in other companies, adjusting its main business, providing guarantee or taking out loans, or by any other means. During the tender offer period, the directors of the target company shall not resign.

These limitations on the public company’s board of directors restrict its takeover defense mechanisms.

The table below contains a summarized overview of the mechanisms that can be used by a target company as a defense against a takeover bid:

Mechanism	Assessment and considerations
1. Poison pill The target company issues securities to dilute the purchaser’s shares.	The issued securities should be approved by the general shareholders’ meeting, or the board of directors authorized by articles of association or the shareholders' meeting. This should meet the conditions for the public issuance of securities. The CSRC must approve the decision of the company to issue securities.
2. Share buyback Share buyback from the target company’s shareholders, other than the purchaser, to decrease the number of issued shares and increase the share price.	The share buyback is only allowed to: (1) reduce the registered capital; (2) merge with another company that holds its shares; (3) acquire its own shares for employee stock ownership plans or equity incentives; (4) acquire a shareholder’s shares if the shareholder objects to a resolution made at the general meeting on the merger or division of the company; (5) acquire its own shares to convert any of its corporate bonds that are convertible into shares; (6) maintain its value and the rights and interests of shareholders. In item (1) , more than two-thirds of shareholders present with voting rights must approve the capital decrease at a shareholders’ general meeting. In items (3), (5) and (6), the company may, pursuant to its articles of association or according to the authorization granted by the general meeting, proceed with such acquisition upon a resolution adopted at a meeting of the board of directors that is attended by at least two-thirds of all directors.
3. Sale of crown jewels An arrangement affecting the assets of or creating a liability for the target company. It is triggered by a change in control or the launch of a takeover bid.	Requires prior approval by the shareholders’ general meeting.
4. White knight Target company invites a friendly purchaser to acquire the target company to end the original purchaser’s takeover bid or to drive up the price.	As long as the target company does not violate the Acquisition Measures, this defense mechanism is allowed.
5. Golden parachute An agreement to compensate senior managers if the control of the target company changes.	PRC law does not explicitly prohibit it, but the target company’s board of directors may not violate the limitations in the Acquisition Measures.
6. Cross shareholding Cross shareholding means a public company owns shares in another public company. Once one of the companies faces a hostile takeover, the other company provides assistance to help defend against this.	PRC law does not explicitly prohibit this.
7. Staggered board provision A staggered board means a board of directors whose members are grouped into classes. Each class represents a certain percentage of the total number of board positions. During each election term, only one class is open to elections, thereby staggering appointments to the board.	PRC law does not explicitly prohibit this. In the Company Law of the People's Republic of China, the board of directors should have 3 or more members, and the term of the board of directors shall be specified in the company's articles of association, subject to a maximum member term of 3 years. The staggered board provision can be specified in the company’s articles of association. It requires more than two- thirds of all shareholders with voting rights to approve the articles of association at a shareholders’ general meeting.

Global Public M&A Guide

People’s Republic of China

Select a Topic