The Protection of Minority Shareholders under the new Company Law of the People’s Republic of China

Table of Content

1. Introduction

2. The Relevant Laws and Regulations

3. The Protection of Minority Shareholders
3.1. Joint Stock Company
3.2. Limited Liability Company

4. Conclusion

5. Bibliography

Protection of Minority Shareholders under the new Company Law of the People’s Republic of China

1. Introduction

It is a quite obvious equation, that countries with high standards of protection of minority shareholders attract more investors and capital, than countries with lower standards.^[1] As the economist Rafael La Porta pointed out, there is also a significant difference in the structure of the ownership of companies between countries with a higher protection standard and countries with a lower protection standard. In countries with a lower standard more companies are under control of one single big investor. An example is Germany.^[2]

China is in a very unique position; the main purpose of the Company Law of 1994 was to prepare the legal background for the transformation of state owned companies into stock companies. Later on, as more and more stocks were in private possession, the law had to be changed and more protection methods for minority shareholders needed to be established. This happened when the major laws concerning corporate governance were amended in October 2005.^[3] This situation reflects the work of La Porta, as long as the overwhelmingly greatest part of the Chinese companies were purely state owned companies, and under direct control of the state, there was no need for a strong protection of minority shareholders. But as the situation changed, the requirements changed and the relevant laws needed to be amended to raise the standard of minority shareholders protection.^[4]

For foreign investment it is necessary to note that all investment vehicles with legal person status are limited liability companies, but there is also the possibility for foreigners to invest into joint stock companies, foreign invested joint stock companies.^[5] There are four ways for foreign investment in China:^[6]

(1) A Sino-foreign equity joint venture,
(2) A Sino-foreign cooperative joint venture,
(3) A wholly foreign-owned enterprise and
(4) A foreign-invested joint stock company.

2. The Relevant Laws and Regulations

a. The Company Law of the People’s Republic of China

b. The Securities Law of the People’s Republic of China

c. Law of the People’s Republic of China on Chinese-Foreign Contractual

Joint Ventures

d. Law of the People’s Republic of China on Chinese-Foreign Equity Joint

Ventures

e. Regulations for the Implementation of the Law of the People’s Republic

of China on Chinese-Foreign Equity Joint Ventures

f. Detailed Rules on the Implementation of the Law of the People’s

Republic of China on Sino-Foreign Joint Cooperative Ventures

g. Code of Corporate Governance for Listed Companies in China

h. Provisions of the Supreme People’s Court about Several Issues

Concerning the Application of the Company Law of the People’s

Republic of China (I)

i. Provisions of the Supreme People’s Court about Several Issues

Concerning the Application of the Company Law of the People’s

Republic of China (II)

3. The Protection of Minority Shareholders

3.1. Joint Stock Companies

The most general rule is provided by the Code of Corporate Governance for Listed Companies in China, which states that ‘ a listed company shall establish a corporate governance structure sufficient for ensuring the full exercise of shareholders rights ’ and that ‘ the corporate governance structure of a company shall ensure fair treatment toward all shareholders, especially minority shareholders. All Shareholders are to enjoy equal rights and to bear the corresponding duties based on the shares they hold. ’ Further it statues, that shareholders shall have the right to be informed about the important affairs of the company and that they have the right to engage civil litigations. ^[7] Also controlling shareholders are obliged to act in good faith and do no harm to the company and the other shareholders.^[8]

[...]

^[1] Minority Shareholder Protection in China’s Top 100 Listed Companies, Roman Tomasic and Neil Andrews, p. 2

^[2] Does Legal Protection of Minority Shareholders Affect the Variation of Ownership Concentration in China?, Nianhang Xu and Shinong Wu

^[3] Protecting Minority Shareholders in China: A Task for Both Legislation and Enforcement, Tang Xin, p. 3; in A Decade after Crisis: Transforming Corporate Governance in East Asia, Taylor & Francis Books 2008

^[4] Also Prof. Tang Xin noted on page 2 of his already mentioned essay (Protecting Minority Shareholders in China: A Task for Both Legislation and Enforcement), that one of the reasons why the minority shareholders protection needed to be strengthened was that ‘ the number of individual shareholders exploded due to the rapid expansion of the securities market ’

^[5] Concise Chinese Law, Law Press China 2007, p. 188ff

^[6] Invest in China – A Practical Legal Guide to Mergers and Acquisitions, Jerry Z. Li, Law Press China 2006, p. 4

^[7] Chapter 1, pt. 3 and 4 Code of Corporate Governance for Listed Companies in China

^[8] Chapter 2, pt. 19 Code of Corporate Governance for Listed Companies in China