Legality Issues Of Corporate Establishment

The purpose of this article is to study the issues with respect of legality of corporate establishment. Effects of a corporation can not be put into full play, unless it is duly established. However, challenges about legality of corporate establishment are always raised in practice, as a result of statutory loopholes and deficient implementation in practice. Therefore, for the purpose to discuss real underlying legislative intents, resolve statutory defects and promote the development and improvement of corporate establishment mechanism in China, it is necessary to analyze and study legality issues of corporate establishment from the perspective of government control.This article includes six chapters as follows:Chapter One. Studies of Corporate Establishment TheoriesThe author believes that, along with the development of market economy, many countries adopt the principle of efficiency as the underlying theory with respect to corporate establishment mechanism and encourage establishment of corporations. Protection of trade safety is mainly realized by rigorous scheme of liabilities as a result of defective establishment of corporations. To judge legality of corporate establishment, the principle of efficiency supplemented by the principle of trade safety shall be followed. As to companies with establishment defects, whether the establishment is absolute invalid of comparatively invalid shall be judged basing on the ponderance of such defect. However, remediation of defects shall be applied to either absolute invalidity or comparative invalidity, and absolute invalidity shall be restricted, in order to avoid the concussion to the society by disregard of company personality。Chapter Two. Studies of Legality of Promoters of CorporationsThis chapter indicates that to make use of and facilitate increase of the fortune of society to the extent as full as possible, a promotive and open attitude shall be adopted in study and analysis of theoretical and practical issues in respect of legality of promoters. This article studies the qualifications as promoters required for couples, persons lack of adequate capacity to undertake civil liabilities, non-profitable institutions and partnerships. This article also points out that rather than sweeping disqualification as promoters, it would be more advisable to set forth appropriate restrictions upon certain group of natural persons or entities on a case by case basis, taking into consideration of third-party'interests and benefits as well as nature of such group of natural person or entities, in order to maintain good economy order.Chapter Three. Studies of Legality of Capital ContributionBesides confirmation of the reform of capital contribution mechanism in the new Company Law, this chapter identifies a number of defects of the current statute, including the mandatory requirement for minimum proportion of capital contribution in cash, limited forms of capital contribution permitted by law and mandatory requirement for assessment of capital contribution, and believes that such defects may increase the costs associated with investment and have negative impacts on abilities to make full use of social resources. This article suggests further reform of the capital contribution mechanism. It is advisable for the administration authority for industry and commerce to abandon the obsolete legal capital doctrine and relieve the restrictions on the forms of capital contribution.Chapter Four. Studies of Legality of Articles of AssociationThis chapter emphasizes the possibility of right abuse of the company establishers caused by the poor control of articles of association by the laws widely existing in Chinese companies and the overfull autonomous rights of the company establishers. This problem shall be resolved by presumption of applicable provisions and enaction of model articles of association. In respect of judgment of legality of provisions contained in articles of association, this chapter argues that, considering the nature of articles of association as long-term agreement, voluntary rules shall not be completely eliminated from the articles of association. Based on such argument, it believes that more strict principle shall be applied to articles of association of non-listed companies, while innovations in articles of association of listed companies shall be encouraged to the extent permitted by laws and good social customs.Chapter Five. Studies of Legality of Establishment Procedures of Corporations This chapter examines certain issues related to promoters'meeting and corporate registration. It suggests a number of improvements in administration of corporate registration by administration authority for industry and commerce. This chapter especially argues that substantive examination during corporate registration procedures shall be abandoned, so that burden and responsibilities of corporate registration authority can be released and rent-seeking activities can be eliminated.Chapter Six. Studies of Remedies Available to Defectively Established CorporationsThe first part of this chapter examines the theories regarding rectification of defects related to corporate establishment, which are adopted by common law system and condimental law system. Secondly, it studies the improvement measures to eliminate the disadvantages and loopholes under the current legislation of China, including (i) the studies of legality and disadvantage of administrative corporation revocation mechanism and (ii) the proposal to formulate a mechanism to facilitate suit for invalidity of corporation and rectification of defectively established corporations, in which the causes of action shall be strictly limited to avoid reckless denial of corporate personality. Furthermore, this chapter studies the liabilities resulted from defective establishment of corporations and puts forward detailed proposal to improve the current mechanism.