Financing Hostile Takeovers: Chinese Legal and Policy Implications

With Professor Yan Liu, Peking University 

Baoneng’s attempted takeover in 2015-2017 of Vanke, one of China’s largest developers, was by all accounts the first hostile leveraged take-over attempt against a giant listed company in China. It is well-accepted that China’s Company Law and Securities Law are designed to encourage hostile takeovers, and the infrequency of such takeover had been mainly due to obstacles in financing: unless a deal was orchestrated or sponsored by the government, potential raiders were unable to raise enough money from the highly regulated financial system to sustain a time-consuming and expensive takeover effort. The financial liberalization and innovation beginning in 2012 in China, however, changed this. Among all the new financing vehicles provided by the liberalization and innovation, structured assets management plans (structured AMPs) was perhaps the most powerful, and played a role comparable to junk bonds in the 1980s’ US takeover markets. Not surprisingly, AMP-fueled leveraged takeovers quickly showed the potential risk of excessive financial innovation and demonstrated tensions between the financial sector and the real economy. The lack of clear understanding of the legal nature of AMPs also resulted in public fear of and anger against Baoneng. Although the policy concern that “finance shall serve the real economy” eventually doomed Baoneng’s undertaking, the sense of mystery surrounding structured AMPs remains to be dispelled. That is the purpose of this presentation.

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