Augmenting employee protection during hostile takeovers of private sector companies in China: lessons from the German co-determination model

Abstract

China is currently undergoing a wave of corporate takeovers and accordingly, hostile takeovers are projected to rise. The term “corporate takeover” is a reference to the “means of one company acquiring control over another,” whilst hostile takeovers are those opposed by the incumbent management of target firms. In hostile takeovers, workers are especially vulnerable to adverse treatments by the new managerial team. The thesis uses three theories to examine this vulnerability. First, the new management tends to seek to improve the efficiency of the acquired firm, sometimes at the expense of the workers’ interests. Second, hostile takeovers constitute the breach of implicit contracts between the employer and employees of the target firm. The implicit contract is maintained based on the workers’ trust in the incumbent management. This breach of trust leads to the shareholders’ expropriation of the employees’ wealth. Third, it is generally agreed that Chinese firms adopt the corporate governance model of shareholder primacy, which inappropriately prioritises shareholder interests over other stakeholders, including the employees. Therefore, workers are in urgent need of a mechanism that can safeguard their interests.

On the other hand, the thesis uses approaches of theoretical analysis and qualitative studies to argue that better employee protection positively relates to firm value. This can be examined using the development of corporate governance models that are distinguished from shareholder primacy. For instance, according to enlightened shareholder value, to protect workers’ interests positively relates to the long-term value of the firm and shareholders. Moreover, the stakeholder theory highlights their importance in corporate governance, which arises from business ethics and its functions in value creation. In this case, workers’ interests deserve to be considered in hostile takeovers. From the economic perspective, an enhanced labour protection and involvement mechanism in takeovers is expected to usher in benefits from three perspectives. First, an enhanced employee protection and involvement mechanism is expected to improve employees’ productivity, which positively relates to firm value. Second, in the face of uncertainties and risks of a breach of implicit contracts, employees tend to be reluctant to invest in firms, adversely affecting firm value. An enhanced employee protection mechanism and deeper employee participation in takeovers may effectively impede this problem. Third, in hostile takeovers, the employees’ involvement in the takeover decision can reduce the leeway for managerial opportunism, which reduces the shareholder-manager agency costs. Additionally, it helps establish high trust workplace relationships, which reduce the employeremployee agency costs.

Since employees are vulnerable to adverse treatments in takeovers and improving worker’s protection and participation is positively related to firm value, it is necessary to establish an effective mechanism in Chinese firms, especially considering that institutions such as trade unions and the Workers’ Congress were embedded in the old planned economy and cannot be adjusted into modern corporate governance. This thesis attempts to draw lessons from the German co-determination mechanism to resolve the Chinese problems by adopting the approach of “legal transplants.”

The grounds for the introduction of the German co-determination mechanism can be examined from the perspective of Chinese economic development. Under the varieties of contexts of capitalism which focus on the firms’ coordination with other economic factors, Chinese firms are highly similar to their German counterparts, in terms of ways of coordination among firms and other institutions. However, they demonstrate a distinguished landscape in terms of worker’s treatment. The Chinese employeremployee relationship leads to institutional incoherence, which hinders their economic transition to a more innovative one. The most direct and effective way to solve this issue is to alter the Chinese firm-worker relationship to that of the German style. This introduction of the German model is more likely to adhere to the Chinese economy. In addition, this compatibility with demands for economic development align with the interests of the party-state that have the dominant control over industrial relations in China. Therefore, this German system is more likely to be adopted.

It should be noted that German workers’ co-determination rights exist at the board as well as the establishment levels. Inspired by this system, the thesis attempts to improve the Chinese mechanism at both levels. The thesis adopts a comparative study to examine the difference of corporate structures and ideologies underlying corporate laws between these two countries. Thereafter, the thesis provides suggestions for certain adjustments in order to make the German model concurrent with the Chinese context.