The Reform of Chinese Corporation Resolution Institution

The Reform of Chinese Corporation Resolution Institution

 

Abstraction: Corporation resolution refers to the decisions made by board or shareholders of a corporation which is binding for the corporation, all its owners and the employee including managers. The legal effect of a corporation resolution is a fundamental problem of corporation internal governance. Provisions of the Supreme People’s Court on Certain Issues Concerning the Application of the “Company Law of the People’s Republic of China” (Ⅳ) is a judicial interpretation issued by People’s Supreme Court of People Republic of China. This judicial interpretation is so important because it has totally reformed the provision system of corporation resolution. This reform is a legal transplantation from the Company Law of German and Japan, and polished the legal system of this problem.

 

 

  1. The corporation resolution and its legally binding force

 

Corporation resolution refers to the decision made by board or shareholders’ meeting in a corporation to decide issues about internal arrangement of company or the external business decision. The issues that should be decided by board or shareholder is decided by the article of corporation. Taking the power of board as the standard, the internal arrangement of a company is divided into directory centralization and plenary session centralization. In the former module of corporation arrangement the main decisive power is hold by the directory board, which is always consisted with professional managers and representative of main shareholders, the centralization of directory board is the result of separation of ownership and management, the professional managers with knowledge of running a business controlled the operation of the corporation(Williams,1985). Powers of making decisions like issuing equities are entitled to directory board. While the centralization of plenary session is the module that crucial issues just like launching equity, increasing or decreasing the registered capital of the company and so on can only be decided by the shareholder’s meeting.

No matter the module of centralization of plenary session or the centralization of directory board, the decisions made by entitled institution is binding for the whole company, including the shareholders, managers and employees. This is the power that is given by the article of corporation. Article of incorporation is the charter to establish the existence of the corporation, which is formulated by company promoter. This is the reflection of company autonomy.

 

  1. The binding force of corporation resolution and the flaw in its legal effect

 

Chinese Company Law stipulated the internal arrangement module of centralization of plenary session, so the profound issues in the running of business is entitled to the shareholders’ meeting to decide. The resolution of plenary session can only have the complete legal force when the due process is accomplished by the entitled institution of the corporation. If there are problems in the process making resolution, the binding force of corporation resolution will turn out to be flaw.

Traditionally, the flaws of legal force of corporation are divided into two types in Company Law of People’s Republic of China, the decisions whose substantial content violating the stipulation of law will be defined as invalid, which mean that it doesn’t have any binding force from beginning. And the decision whose substantial content inconsistent with the provisions of charter of the corporation or the decision whose process of making violated the law or article of corporation will be defined as revocable, which means that it is effective when launched, but if justified entity claims that the decision should be withdraw, the decision will lose its binding force retroactively.

This regime system about flaw corporation resolution has been operating in China since the “Company Law of People’s Republic of China” came into force. However, this scene has changed in 2017. In September 1st , the People’s Supreme Court of China issued the judicial interpretation of Company Law, which is also called as “the forth judicial interpretation of company law”, introduced a new regime system of the effect flaw of the corporation resolution. According to the provision of “the forth judicial interpretation of company law”, there is another type of effect flaw of corporation resolution, the resolution that hasn’t been established. In continental legal family the effect of juristic act can be divided into four statuses: valid, invalid, revocable and unestablished. The unestablished juristic acts are those juristic acts that haven’t fulfilled the condition to make a resolution. Specifically, “the forth judicial interpretation of company law” stipulated that the situation where resolution made by corporation should be defined as unestablished, including not convening a meeting of entitled institution, not taking a vote, the proportion to agree didn’t arrive due proportion provided by company law or charter of corporation and so on.

 

  1. The analyzing of this reform

The effect flaw of juristic act is a legal regime which is profound for corporation internal arrangement, because the resolution made by entitled institution is binding for almost people related to the company. The effect of corporation resolution can substantially affect the interest of shareholders, obligees and the employee of company. But the resolution of corporation is made on the foundation of capital majority rule, so the interest of minority shareholders and creditors can be sacrificed in these resolution made by majority shareholders and professional managers representing them. Not to mention the agency cost and morality risk(Easterbrook, Fichel,1998).

The effect flaw regime of corporation resolution is a remedy of this problem, which provide those people in disadvantage in corporation governance to avoid from being infringed by those controller in the method of overthrow the resolution that injuring their interest.

The necessity of introduce regime of unestablished corporation resolution could be concluded as:

(1) The resolution of corporation is a kind of jurisdiction act stipulated in General Provisions of the Civil Law of the People’s Republic of China, which divided statuses of effect flaw into three types, including invalid, revocable and unestablished. In continental legal family, we attach high significance to internal coherency of civil law and business law, taking company law as a specific law of civil law. So the system of effect flaw in company law should also consistent with the framework of civil law on this problem(Liu, 2017).

(2) There are incidents of unestablished juristic act in the real lives. It’s known that the corporation resolution is likely to be used by the majority shareholders and the professional managers controlling the companies operation. Especially in some circumstances that minority shareholders can’ intervene the resolution, the actual controller of corporation will take utility of resolution to infringe the interest of minority shareholders and creditors.

(3) The function of unestablished resolution is different from that of other kinds of effect flaw in corporation resolution. Compared with the revocable resolution, the unestablished resolution didn’t fulfilled the basic requirement of making corporation resolution, with necessary steps of this process absent or violating the rule of charter and law, with no concerning of the content of the resolution itself. In comparison of invalid resolution the unestablished resolution only has flaws in the process of making resolution, but the invalid resolution is defined because of its violating of the provision of company law. So if the process was remedied the resolution can come into force properly again, but for the invalid resolution, the substantial content of that violating the provision of company law, so the resolution with the same content can never have justified binding force even though the process has been make up.

 

  1. The operation of the effect flaw regime.

The operation of effect flaw of corporation resolution is relied on lawsuit proceeding. In the operation of this regime, the entity justified to claim, which mean the proper plaintiff, and the proper defendant. The condition that proper plaintiff should fulfill in this proceeding and the specific steps in these proceeding should be stipulated by company law.

The revocable resolution should be withdraw in the proceeding named with revoking lawsuit, the proper plaintiff of which is the shareholder of the relevant company. The shareholders raising this lawsuit are not necessarily to hold opponent attitude to the resolution, because the shareholders agreeing with the resolution might have no aware of the revocable reason of the resolution at the time committing the resolution. So the shareholder of the corporation regardless of agree the resolution all not, are all capable to trigger this revoking lawsuit.

The conditions of revoking an existing resolution include:

(1) The process of raising a meeting, regardless of board of directories and plenary session of shareholders, violating the stipulation of process in charter or the company law

(2) The substantial content of the resolution is inconsistent with the stipulation of charter of the company.

In addition the shareholder claiming that concerned resolution revocable should provide mortgage in case they abuse the right to intervening ordinary running of business.

In the proceeding of lawsuit, the court can make discretion on whether the flaw in process of making resolution can really substantially impact the legal effect if the court holds that there is only slight problem in process making this resolution, the claim will be turned down.

As for the unestablished resolution, the proper plaintiffs include the shareholder, directory and the supervisor of the relevant company.

The condition to trigger the lawsuit of confirming the resolution as unestablished are listed below:

(1) having not raising relevant meeting at all

(2) having not committed a vote at all

(3) the people attending the meeting or the share of stock that people attending hold did’t reach the primary requirement of company law or the charter.

(4) the ratio of agreement in voting didn’t reach the requirement that given by the company law and the charter.

 

The lawsuit to confirm the resolution as unestablished can only confirm the fact that the resolution given by the corporation is unestablished. If the litigants and other relevant entities are infringed by the unestablished resolution, the legal remedy could be attained only by launching another action of performance.

 

  1. The legal resource from where this reform borrowed.

The resource of this reform is mainly the relevant stipulation of company law from Germany and Japan. As mentioned above, the corporation resolution made by directory board or the shareholder’s meeting decided some profound internal or external issues in running business, but the agent cost because of separation of corporation’s ownership and management and infringement from controlling shareholder caused by capital majority rule making the minority shareholders and the other relevant entities in a disadvantage position (Singh, 2003). So these entities in disadvantage should be specifically protected. The effect flaw regime substantially acts as a remedy for them to avoid being infringed under the controlled corporation.

The company law of German didn’t specifically stipulated the regime of unestablished corporation resolution, but this regime is founded with the judicial cases, to make sure that the extreme violation of law in process making resolution can be corrected timely. The Federal Supreme Court of German held that only the established resolution can be revoked, and the evaluation of effect of a resolution must on the basement of an established juristic act. So the plaintiff cannot trigger a confirming lawsuit to declare the resolution as invalid or a lawsuit to revoke the resolution. Substantially unestablished resolution should be stipulated separately from the regime of invalid and revocable resolution.

In addition, the regime framework of effect flaw in corporation resolution of Japan can be also described as “trichotomy”. Originally, Japan didn’t have independent company code, instead, it has a general business code covering all the realms of business law. In that period, the unestablished resolution of corporation is also structured by judicial cases, only when 2005, Japan had witnessed a reform in the field of the whole business law, separating corporation law from the business code, and a modification of corporation law was exerted. The unestablished resolution was introduced in the “Company Law” of 2005.

In addition, Korea is the third state that explicitly stipulates the unestablished corporation resolution regime. The conditions to define a corporation resolution as unestablished on Korea Law are a bit wider than those in Chinese Company Law, and the justified entities to trigger the lawsuit is little wider than those of Chinese law.

 

  1. Conclusion

The effect flaw of corporation resolution in continental legal family plays an important role in the internal management of a corporation. Originally, the corporation law of all the states only stipulated the effect flaw of revocable and invalid. But with the business operation and development of business law, people found that only these two types of resolution cannot cover all the effect flaws, not to speak of providing sufficient remedy for entities in disadvantage in corporation arrangement. Subsequently, the countries in continental legal family gradually structured a new branch of effect flaw in corporation resolution, the unestablished resolution. The method of making this change is usually by judicial precedent, but some countries chosen to modify the code to formulate this regime as formal written rule, but others choose to remain it as precedent with instructive force.

China adapted to the ordinary stipulation of the continental legal family, borrow legal regimes from German, Japan and Korea, with the purpose to cover all the effect flaw, to provide comprehensive protection to entities in weak.

 

 

Reference:

  1. Ronald H Coase,(1937),“the Nature of Firm”, Economica, 16,(4), 386-405
  2. Oliver E Williams,(1985), the Economic Institution of Capitalism, Macmillan : The Free Press.
  3. Easterbrook, Fichel,(1998), The Economic Structure of Corporate Law, Cambridge: Harvard University Press.
  4. Liu Junhai,(2017), the Balance between Corporation Autonomy and Legal Intervening: the innovation and defection of “the forth interpretation of Company Law”, Journal of Legal,7,36-50.
  5. M Singh, W Iii,(2003), Agency costs, ownership structure and corporate governance mechanisms, Journal of Banking & Finance , 2003 , 27 (5) :793-816.

 

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