Listed Company's Related Party Transactions Legal System Evolution

As a system introduced during the process of a planned economy switching to the market economy, the Chinese listed companies, not educed from the enterprise development, are grafted onto the Chinese enterprise by the top-down approach. In December 1990 with the opening of the Shanghai Stock Exchange, the Chinese securities market was endowed with the mission of state-owned enterprises reform. Take the companies listed in the Shanghai Stock Exchange for an instance, 70% of these listed companies were re-organized from the state-owned enterprises. Such structure often has lots of connection with the original state-owned enterprises, thus comes the connected transactions.A connected transaction of a listed company refers to the transfer of resources or obligations between the listed companies or its controlled subsidiary and a related party of the listed company. Due to the particular relatedness of the two parties, the connected transactions can save the cost of the information search, the business negotiations and the accomplishment of the deal. Therefore, it can lead to the saving of the transaction cost, the transaction safety and the transaction efficiency, which other transactions may achieve with luck, but not by searching for it. However, by extension, connected transactions are generally not fair. Once the related parties abuse the control power and infuse or transfer interest to each other, it will infringe the right of the listed companies, minority shareholders and the debtees, destroy the fair-play foundation of the market, even disorder the securities market.The legal system of the connected transactions relevant to the listed companies, experiencing the stages of the lack, the germination and the expansion, has worked up, after the development of more than 10 years. Nevertheless, because of the market foundation of the rising and the transition1, the connected transaction becomes more complicated and more concealed, which requires new reforms to the legal system.The article, on the basis of jurisprudence, the comparative laws and the cases analysis, describes the development of the legal system of the connected transactions relevant to the listed companies, analyzes abundance cases, compares the similar laws and regulations abroad, then comes to the conclusion that the connected transaction is representative among the business rules of the securities market. To observe and research the development of the legal system of the connected transactions can help us to get access to the relationship between the inner requirement of the economic subject to the business rules and the transplant of the related laws and regulations. The article, aiming to combine the feature of the state-owned listed companies and the collectivizing trend of the listed company development, on the basis of the economic analysis, the regulating rules and the supervisory laws of the connected transactions, proposes the direction of the reform of legal system of the connected transactions relevant to the listed companies.Subsequently, the article suggests, during the listed companies'development from the shareholding company to the group company, that we must admit and regulate point-blank the connected transactions, so we can find the balance point for regulation among the multilateral interest relevant to the connected transactions and standardize the interest transfer during the connected transactions. On the precondition of the regulation that the related party, meaning the majority shareholder, must fulfill the necessary obligation to the listed companies, we should admit the integrated interest of the group company relevant to the majority shareholder. While exerting the function of the parent-and-subsidiary structural organization, we must realize the maximum of the listed company and protect the interest of the minority shareholders and the debtees. Only in this way that can we achieve the jural equity and justice, can we achieve the positive regulation of the laws to the connected transactions. This article consists of five parts:The first part is about the profiles of the connected transactions relevant to the listed company. The author describes the connected transactions, the related party, the related relationship and other related definitions according to the present laws, administrative regulations issued by the CSRC and other relevant administrative authorities, and other rules. The author describes the general situation of the connected transactions in China's securities market, as well as the background and main features of the connected transactions relevant to listed companies. Under the state-controlled market structure, the connected transactions have their own characteristics.The second part focuses on the development of the legal system of the connected transactions relevant to the listed company. On the basis of theory of agent by agreement, the legal substantial of the connected transactions should be the conflict of interest, which means the conflict between the majority shareholders and other shareholders and the conflict between the owners and the operators of the listed companies. The author introduces the present legal system of the connected transactions, which experienced three phases of the lack, the germination and the expansion. The article believes that there is a complete supervisory regulating systems dealing with the unfair connected transactions during the dynamic games between the supervisory authorities and the listed companies. However, there are lots of conflicts between the present regulations due to the obvious lash-up features of the regulations issued by different authorities, which leads to the awful systematicness of different regulations.The third part is about the empirical research of the connected transactions of China's listed companies. The individual case studies and the demonstration dates. Meanwhile, it notices the two different trends that the listed company deals with the connected transactions, positively countering and passively abusing. China's listed companies, as the main subject of the economic reform, not only passively is supervised by the legal system, but also positively decreases the amount of the connected transactions and increase the standardization of the connected transactions inside the group, interested in the assets securitization and the direct financing.The fourth part is about the comparative study of the overseas legal system of the connected transactions. It does comparative study of other countries'regulating legal system and discusses the advantage of different systems from the aspects of the mature market in the U.S.A. and the emerging market in Asia. After analyzing the differences between that in China and that in the above-mentioned countries, the author researches how to use the advanced legal systems and models for reference in China.The fifth part covers the development trend of the legal system of the connected transactions relevant to China's listed companies. The listed companies, such as those listed in the Shanghai Stock Exchange, are increasingly becoming group companies, and China's group companies, taking the PETROCHINA as an example, feature the character of connected transactions under the enterprise groups. The author proposes that China can adopt the legislatorial protection in Germany and the judicial review system in the U.S.A. to regulating the connected transactions under the model of enterprise groups. We must, on the precondition that the regulation that the majority shareholder must fulfill the necessary obligation to the listed companies make clear the responsibilities the majority shareholders should take and admit the integrated interest of the majority shareholder and the listed company.