Company Charter Drafting Guide - Company and Property Rights Legal Practice 11 (Bonus Value 28 Yuan CD-ROM, Download and Print for Use)

Author: Li Yulong
Publisher:
Publish Date: 2006-09-01
Features: According to the content of transactions, the "Accounting Standards for Business Enterprises—Disclosure of Relationships with Related Parties" lists 11 types of related-party transactions: purchasing or selling goods; purchasing or selling assets other than goods; providing or receiving services; agency; leasing; providing funds; guarantees and mortgages; managerial contracts; transfer of research and development projects; licensing agreements; and compensation for key managerial personnel. The appendix of China's new "Company Law" provides authoritative definitions for entities related to related-party transactions and relationships: "Senior management personnel" refer to the company's general manager, deputy general manager, financial officer, board secretary of a listed company, and other personnel stipulated in the company's articles of association. "Controlling shareholder" refers to a shareholder whose subscribed capital constitutes more than 50% of the total capital of a limited liability company, or whose held shares constitute more than 50% of the total share capital of a joint-stock company; a shareholder whose subscribed capital or held shares are less than 50%, but whose voting rights derived from such subscribed capital or held shares are sufficient to have a material impact on resolutions of shareholders' meetings or general shareholders' meetings. "Actual controller" refers to a person who is not a shareholder of the company but can actually exercise control over the company's actions through investment relationships, agreements, or other arrangements. "Related-party relationship" refers to the relationship between a company's controlling shareholder, actual controller, directors, supervisors, and senior management personnel and the enterprises directly or indirectly controlled by them, as well as other relationships that may lead to the transfer of company interests. However, enterprises under state control do not necessarily have a related-party relationship solely because they are both under state control.
(2) Forms and Roots of Unfair Related-Party Transactions
Generally, when a transaction between a company and a related party violates the principle of good faith and harms the company and other shareholders, it should be deemed an unfair related-party transaction. The main forms of unfair related-party transactions include:
- Fabricating false profits and assets;
- Providing guarantees for related parties;
- Misappropriating company funds or failing to pay due invoices without compensation;
- Unfair asset transactions between controlling shareholders and the company;
- Distorted pricing in the acquisition or transfer of equity;
- Settling the debts of controlling shareholders with the company's claims;
- Controlling shareholders exploiting company profits.
Unfair related-party transactions severely undermine the independence of the company and the integrity of its assets, harming the interests of creditors. Why do unfair related-party transactions occur? On the surface, they result from the abuse of control or significant influence by controlling shareholders and senior management. However, this only sees one side of the issue. Unfair related-party transactions have profound institutional roots. The essence of the corporate legal person system is the separation of shareholder property from company property. The company has independent property, shareholders bear limited liability, and the company has independent legal personality. The legal person system essentially erects a "limited liability wall" between investors and the creditors of the invested enterprise, and the primary beneficiaries of this system are the company's shareholders, who "enjoy profits when business is booming and escape when operations fail." It can be said that the inherent flaws in principles such as "limited liability" and "separation of ownership and management" in the modern corporate legal person system are a major reason for the occurrence of unfair related-party transactions.
(3) Regulation of Unfair Related-Party Transactions Between Enterprise Groups
China's new "Company Law" prohibits controlling shareholders, actual controllers, directors, supervisors, and senior management personnel from harming the company's interests by exploiting related-party relationships. It also stipulates that these individuals shall bear liability for damages caused by violating the law. Since the institutional roots of unfair related-party transactions between enterprise groups lie in the inherent flaws of the corporate legal person system, the fundamental approach to regulating such transactions should focus on appropriately restricting actions that abuse the basic principles of the corporate legal person system (though the status and role of these principles as the soul of modern corporate systems will not change). Precautionary measures can be taken before transactions, such as establishing a cumulative voting rights system and a shareholder voting rights exclusion system, to prevent unfair related-party transactions from arising due to the abuse of capital majority voting. For shareholders whose interests are harmed by unfair related-party transactions, corresponding remedies can be provided, such as the right to request courts to invalidate resolutions of shareholders' meetings or board meetings, the representative lawsuit system for shareholders, the doctrine of piercing the corporate veil, and judicial protection in both procedural and substantive aspects. These systems have been elaborated on by the author in earlier chapters of this book and will not be repeated here. P199-200