CHINA Law and Practice Contributed by: Bing Zhai, Commerce & Finance Law Offices
ers can file lawsuits against directors or manag - ers for actions that harm the company’s interests due to conflicts of interest. Regulatory Scrutiny The CSRC actively monitors conflicts of interest, especially in listed companies, and may impose penalties such as fines, warnings or market bans. Directors and managers must disclose potential conflicts of interest, where failure to do so can result in regulatory action. Hostile tender offers are not prohibited under Chinese law but are not common in practice. The regulatory environment, cultural preferences for consensus and significant presence of SOEs create substantial barriers to such transactions. While not prohibited, hostile bids are rare and often face scrutiny from regulators like the CSRC to ensure alignment with national economic poli - cies and public interests. 9.2 Directors’ Use of Defensive Measures 9. Defensive Measures 9.1 Hostile Tender Offers Directors in China are permitted to use defensive measures to protect the company from hostile takeovers, provided such measures comply with legal and regulatory requirements. However, the use of defensive measures must be justified as being in the best interests of the company and its shareholders. 9.3 Common Defensive Measures Common defensive measures include: • poison pills (issuing new shares to dilute the acquirer’s stake) – however, the implementa - tion of poison pills in China is restricted due
to limitations on preferred shares and other legal constraints; • white knight strategies – seeking a friendly alternative buyer; • golden parachutes – implementing costly executive compensation packages to deter acquirers; and • shareholder rights plans – adopting plans that grant existing shareholders special rights in the event of a takeover bid. 9.4 Directors’ Duties Directors owe fiduciary duties to the company and its shareholders when enacting defensive measures. These duties include: • duty of loyalty – acting in the best interests of the company and avoiding conflicts of inter - est; • duty of care – making informed and reason - able decisions to protect shareholder value; and • compliance with laws – ensuring that defen - sive measures comply with Chinese laws and regulations, including antitrust and securities rules. 9.5 Directors’ Ability to “Just Say No” Directors cannot unilaterally “just say no” to a business combination without valid justifica - tion. Any decision to block a transaction must be based on a thorough evaluation of the offer’s impact on the company and its shareholders. Directors must demonstrate that their actions are in the company’s best interests and comply with legal requirements. Failure to do so may result in regulatory penalties or shareholder law - suits.
469 CHAMBERS.COM
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