Study On Regulatory Regime Of Unfair Related Party Transaction

A related party transaction (RPT) is a business transaction between two relatedparties to transfer resources, services or obligations regardless of whether a price ischarged, which is, to be brief, transaction between related parties. Therefore, thelegal definition of a related party is the starting point for this study's logic. If a partyis able to control or influence significantly the other party in the financial andbusiness decision, the party then is regarded to be a related party. Due to therelationship of control and great influence and the benefits hidden behind, the RPTbecomes the transaction with the benefit conflict of most intense and such benefitconflict determines the neutral nature of the RPT. When the agreement betweenrelated parties is based on the normal transaction such as a fair negotiation, it is a fairRPT; if the agreement allows one party to be benefited alone and scarifies the benefitsof public investors or minority shareholders, it is an unfair RPT, the typicalcharacteristic of which is that the controlling shareholder, directors or officers reapprofits from it.The representation issue is the conflicts between shareholders and managers, asbriefed by Berle and Means in their works "Modern Companies and Private PropertyRights" studying on the basis of modern U.S. big companies with excessivelydistributed equity. However, the highly centralized ownership structure is verycommon in Asia, especially in the capital market of China, where the listed company's special listed mode of "stripping the main body for listing, reform the originalenterprise as the parent company" created a ambiguous relation between the listedcompany and controlling shareholders. The representation issue between thecontrolling shareholder and small shareholders (public shareholders) thus replaced therepresentation issue between shareholders and managers.The unfair RPT becomes the main means by which Controlling Shareholdersencroach the interests of minority shareholders. In our country, such predatory wayas the unfair RPT of the controlling shareholders, has taken great changes through theequity reform, from the unilateral assets predatory such as the capital possession,violations of guarantee to a certain degree to a multi-channel tunneling degenerationby mainly robbing cash assets with the share price, supplemented by changing assets.In particular, for the past ten years alone, China's M&A market is being very activeand the operations of the connection transaction and M&A are mixed, whichintensifies the concealment and the complexity of the related transactions. As aresult, the harm is complex: form the microscopic perspective, it harms the publicshareholders' interests; on the medium level, it empties the listed company; from themacroscopic perspective, it increases the capital market risk. Therefore, it has a lotto be done for strengthening regulatory on the RPT in listed companies' M&A.This paper argues that, the problem of the regulatory on the unfair RPT in thelisted companies' merger and acquisition lies in: the interest conflicts of the maintrade body, the information asymmetry and fraudulent of both trade parties, the unfairpricing of the fair. For this reason, this paper puts forward the main point of viewwhich must make such RPT similar to the "normal trade" or "arms-length trade".First, according to the interests of the main trade conflict, it is to establish thefiduciary duty of the controlling shareholders, directors and officers and to giveminority shareholders the right claiming for fair trade with a good balance of theinterests of both parties through defining the rights and obligations. Second, for thefraudulence of the unfair RPT, it is to strengthen and refine the mandatory disclosuresystem of the RPT. Third, for the unfair pricing of the transaction, it is proposed toensure the substantive justice with procedural justice. To ensure the integrity of the pricing procedure, the existing legal system has absorbed some advanced experiencefrom foreign legislation, but it turns out not so effective. This paper argues that thecrux is that the existing provisions are too deficient, not thinning and systematizedenough. Therefore, it is suggested to improve based on the existing system of "theboard of directors proposes and shareholders meeting approves": first, set up atemporary and ad hoc independent director committee (SC), representing unrelatedshareholders to participate in the trade negotiation and approval, to block theinfluence of the controlling shareholders to the board of directors; second, adopt the"majority of minority shareholders" approval system (MOM) instead of the existing "two-thirds of the voting rights held by the unrelated shareholders attending themeeting" voting system; third, give full play to the goalkeeper's role of theindependent directors and the auditors, ensuring the fairness of the pricing.For the design of the regulatory regime of the unfair RPT, this paper paysattention to several principles. One of them is that, from the microscopic perspective,the system design shall be fine and scientific; from the macroscopic perspective, itshould make a balance of the efficiency and fairness, and costs and benefits. Nomatter in the acquisition regulation or in the RPT supervision, the balance of interestsshall not only ensure the fairness but also promote the efficiency of mergers andacquisitions. For example, the law can endow those minority shareholders withjudicial relief while promoting efficiency of mergers and acquisitions; differentthreshold also can be set for the information disclosure, etc. Another is that, it issuggested to use a two-channel driver regulatory model of the public law enforcementand private lawsuit. The regulation goes ahead with litigation simultaneously, andthe disciplinary goes with relief. A third one is to pay equal attention to the baselessregulation and typed thinking, to ensure the interaction of the close and the open ofthe supervision system. According to this thought, this paper, besides theintroduction and conclusion, consists of four parts (six chapters) with the logic andcontent as follows:Part1is the definition and status quo of the unfair RPT. layer upon layer the definition and concepts such as the related parties, related partytransaction, unfair related party transaction, M&A, the unfair related party transactionin the listed companies' acquisition, the connotation and denotation of the researchobject is defined, among which the definition of the RPT is the logical starting pointby defining the connotation and extension of the RPT. Its essence is "control" and"significant influence" and the recognition standard of benefit as the core isestablished accordingly. It is clearly defined that the unfair related party transaction isa transaction that the listed company's controlling shareholder or any other relatedparty may reach and benefit therefore alone by utilizing the control and effects at theexpense of the benefits of the public investors or the interests of minority shareholders.This part also defines the analysis framework of this paper, which is the connotationand extension of listed companies' merger and acquisition.Through a lot of empirical data and macro inspection into the RPT in the listedcompanies' merger and acquisition, and selecting typical cases in the three M&Amodes such as the acquisition through agreement, merger by absorption anddirectional increase for analysis, it is finally analyzes the five factors of the unfairrelated party transaction, including special generating mechanism of listed companies,the highly centralized ownership structure, imperfect corporate governance structure,controlling shareholders' opportunism and incomplete information; it analyzes theharm of the unfair related party transaction to minority shareholders, listed companiesand capital market from the microscopic, medium level and macroscopic perspectiveand thus find out the crux of the problem for the purpose of providing regulatory goalsfor the construction of the regulatory system from the perspective of economics.Part2is the theoretical analysis of the unfair related party transactionsupervision.This part consists of Chapter2, which is divided into two small parts. The firstsmall part is about tackling the legitimacy issue of the unfair related party transactionsupervision in the listed companies' merger and acquisition. The second is aboutprobing into the legal dilemma, e.g., the three big problems of the unfair related party text.The first thing is to analyze the legitimacy of the unfair related party transactionsupervision. It combs the contractual theories, communitarian theories, concessionarytheories briefly, and puts forward the absorption of the essence of the communitariantheories and the concessionary theories, revision of the "de-supervision" in traditionalcontractual theory, adhering to the supervision theory of high efficiency and low costin the contractual theory of supervision theory, to realize the interaction of the pathdependence and the theory fusion.The send, third and fourth section of this chapter discusses the three legaldilemma of the unfair RPT. This part is the core of this paper's theory, throughdigging out the three core problems of the unfair RPT, continuing the first parts aboutcurrent situation and cause analysis and connecting the following fourth,fifth andsixth parts about the supervision system construction. Through deeply digging outthe three legal problems of the unfair RPT, i.e., conflicts of interest, fraud and fairness,it is describe the basic mode of conflicts of interest of the unfair RPT in theacquisition, probing into plan for balance of interest and finding out the harm of thefraud and unfairness in the unfair RPT and the reason for its regulatory.Part3is the analysis of the existing supervision and regulations on the unfairRPT.This part has combed the existing supervision regulation and is the linkconnecting the preceding part and later part of the paper in the logical structure.This part tries to set up a system of the supervision regulation on the unfair RPTthrough principle supervision, typed supervision and judicial relief with a legalmethod of "forming of system" from Carl. This idea will be discussed in thefollowing three parts.Part4is about setting up of a system of the supervision regulation on the unfairRPT.Chapter4is the principle regulation on the unfair RPT. It analyzes the defectsof our existing fiduciary duty system and relevant ancillary mechanism and discussesthe alteration of the duplication supervision of disclosure plus approval in detail through altering and comparing the fiduciary duty of the controlling shareholders,directors and officers and commenting on our relevant legislation. Furthermore, itprobes into the general principle supervision on the unfair RPT through comparativelycommenting on the A Practical Guide of Supervision on Abusing Related PartyTransaction in Asia issued by OECD and our existing Implementation Guidelines forListed Companies' Related Party Transaction.Chapter5is about the typed regulation on the unfair RPT. It probes into thechange from "the type of truthful regulation" to "the type of law's construction"through the typed thinking about current situation and characteristics in the key fieldsand the three M&A modes (the acquisition through agreement, merger by absorptionand directional increase) of listed companies' merger and acquisition.Countermeasure suggestions are put forward according to the RPT in different M&Amodes with a view to forming the typed supervision regulation on the RPT in listedcompanies' merger and acquisition and absorbing it into the laws and regulations onthe unfair RPT when it matures.Chapter6is about the judicial supervision after the unfair RPT. The judicialrelief afterwards is always regarded as the deterrent behind the administrativesupervision, and has strong supervision function and illegitimate deterrence function.Therefore, the supervision on the unfair RPT in listed companies' merger andacquisition includes the construction of specific relief system such as the fiduciaryduty and the minority shareholders' appraisal relief and the improvement andreference of the shareholder derivative action and class action from the angle ofjudicial relief. Only through the preventive regulation before the RPT and therestoration and deterrence of the judicial relief afterwards can the balance of interestof all parties to the listed companies' M&A be realized.