Capital Majority Rule: Dissimilation And Return

Since Adolf A. Berle and Gardiner C. Means put forward the proposition of"Separate the ownership from the operational control of the corporation"in their classical book- based upon the empirical studies of isolated holdings, the Corporate Governance theory in modern countries has experienced a shift from"shareholder-oriented"to"director-oriented", correspondingly, corporation laws show much attention to board members. However, the documentations upon the studies of the structure of stock ownerships since 1980s, have shown different viewpoints if compare to Berle and Means's. In most nations, not only there are large shareholders in big corporations, but also these large shareholders play an active role in company's operations and managements. Consequently, the logical origin of the modern corporation's management has changed from the deputy problem between the shareholders and managers into the deputy problem between the minority shareholders to the controlling shareholders, which has a great signification in the situations of the largely centralized shareholdings in our country.There are many academic studies on the topic of the protection of minor shareholders and the governing of controlling stockholders, but most of them based upon the theories such as"prevention of the abuse of the authority","public order principle","principle of good faith"and"trust obligation", rarely covering the theme of the capital majority decision rule, which is the system root of separating controlling stockholders from medium-scale and minor shareholders. Capital majority decision is a majority decision rule by way of judging the amount the shares representing the decision right as their calculating standard. It borrows ideas from the democratic decision mechanism, on basis of the characteristics of corporate capital, converts the basis from the"capita"majority to"capital"majority. The cases that controlling shareholders invading minority shareholders'and corporation's interest in practice, are mostly be carried out under the"legitimate appearance"of capital majority by controlling shareholders. So then, we can not help thinking deeply that whether corporations must implement this voting mechanism since majority decision rule can be easily utilized by controlling shareholders to invade minor stockholder and corporation's interests? If only the capital majority decision rule is the most appropriate solution, what are its merits? Whether depending on the decision rule itself can realize the goals it pursues? That is to say whether we need to do any correction upon the capital majority rule? If indeed need any correction and amending, the way to succeed it and the relevant guarantee system? This article exactly put my thinking upon these questions and unfolds my discussions following this logic thread.This text is composed of 3 main sections and 6 chapters. Theoretical part is the first section that is composed of 2 chapters. Firstly, we argue the validity of the capital majority decision through the angle of democratic view; reach the conclusion that the capital majority rule is at most a kind of"incomplete procedural justice"after analyzing its historical originals and intrinsic values. The capital majority decision rule stems from the principle of nominal equality of shareholders and can be utilized by controlling shareholders to invade the minority shareholders'and corporation's interests if without the assistance of other guarantee institutions, deviating from the principle of the'shareholders'equality in substance', which is an important goal of modern corporate laws, thus dissimilation occurs. The dissimilation is the topic in second section which also be consisted of 2 chapters. Combined with the practices of the corporations in our country, adopting the empirical analysis method, we analyze the reasons and origins of dissimilation; sum up the different kinds of the dissimilation and demonstrate the effects the dissimilation of the capital majority brought to us. The last main heading in my article is about return; aiming at the causes of dissimilation, by imposing good faith liabilities on controlling shareholders, try to find a feasible way to bring the capital majority decision rule back to the goal of justice in substance; reflect and prospect the institutions of the law about how to ensure and govern the good faith obligations be performed by the controlling shareholders.The first chapter reasons the validity of capital majority decision rule. From democratic angle, this chapter aim to verify the necessity and feasibility of the capital majority decision rule step by step through 3 questions, why corporations need to be democratic? The reason why majority decision rule be adopted by corporations? Why corporations accepted the capital majority decision rule? Firstly, why corporations need to be democratized? Because corporations are well qualified the promises ("there is a wide and far, self-conscious and united society") to implement the democracy similar to small democratic countries, have much in common if compare to democratic counties in term of the corporation's management and democratic countries'governing. Secondly, by the comparison of"consensus","majority decision"and other democratic decision rules, it is clear that every rule has its merits and demerits, among all the choices open to us, only the simple majority rule has its particular advantages: not only can prevent minor take actions as a whole, but also guard against minority to hinder the whole from taking actions. Lastly, with the characteristic of the aggregation of capital, capital majority decision rule represent the positive relationships among investment, profit and risk, be favorable to the calculation of the voting right, and it is necessary and feasible to convert the voting basis from the"capita"majority to"capital"majority when majority rule is applied to corporations.The second chapter is about the origin and the intrinsic value of the capital majority decision rule. This chapter consists two parts: the historical origin and value analysis of the capital majority. At first, the corporation's decision rules e underwent a history process from"consensus","majority", from"capita"to"capital"majority, from"absolute"to"limited"capital majority. Secondly, by analyzing the values of capital majority, according to John Rawls's justice theory, we find that the capital majority rule is at most a kind of"incomplete procedural justice", its meaning is limited to a rational decision mechanism, in no case should this rule can be the authoritative foundation to justify the decisions. Although the opinion by majority still hold all the aces, in the least should people give up their attempt to amend the opinion. As to the correcting standard, it should be a common principle that is acceptable by everyone, a series social justice idea we share in common. Capital majority is the logic result of the nominal equality of shareholders; it embodies procedural justice, speedup operational efficiency and coalesces to form a coherent opinion among shareholders, but beyond its ability to realize the equality of shareholders in substance. The abuse of the capital majority is possible if we execute this rule strictly and absolutely, minor shareholders'and corporation's legitimate interests may be invaded by controlling shareholders, this in fact cause dissimilation. Therefore, on the promise of maintaining the capital majority decision rule, it is necessary to correct it and to protect minor shareholders, try to bring it back to the goal of the equality of shareholders in substance.The contents in the third chapter are about the reasons and forms of the dissimilation of the capital majority decision. This chapter is begin with the definition of dissimilation; after analyzing the causes behind it and the judging standards, then move forward to the empirical and legal analysis upon the behaviors resulted from dissimilation in practice. Capital majority decision rule is stem from principle of the equality of shareholders, but can easily be abused by major shareholders because of its internal defects, thus militate against the realization of the equality of shareholders in substance, which I call it as"the dissimilation of the capital majority decision rule."Based upon the capital majority rule, major shareholders master the controlling operational rights which include self-interest and derivative interests, and that self-interest can also be separated into two parts: common and private interests. Controlling shareholders and minor shareholders differ from the interest features in the area of private interest. Major shareholders abuse their controlling rights in pursuit of their own private interests, even at the cost of scarifying minor shareholders'and corporation's interests, which result in the dissimilation of capital majority decision rule. By analyzing advantages and disadvantages of the standards including"commercial decision rule","dishonesty","legitimate procedure"and"interest suffering"standards, I take my stand on the"interest suffering"standard as our criterion to judge and prevent the abuse of the capital majority. Based upon the above theoretical analysis, I sum up 7 typical behaviors of the abuse of the capital majority in the practice in our country.The origin and effect of the dissimilation is the main topic in the fourth chapter. As a kind of democratic decision mechanism, majority decision has its irreplaceable vantage and become the first choice in democratic decision mechanism. But democracy also cannot avoid its own drawback: a kind of new arbitrariness will be produced if democratize absolutely. Generally speaking, democracy has following 4 defects: majority tyranny problem, majority correctness problem, rational indifference problem and unsolvable problem. These are the defects of democratic system itself, when apply to corporations, these defects not only will still exist in the same way, but also bring new problems such as the equality of interest between minor and major, varying major problem, etc. I hold that the defects of the democracy are the source of the capital majority's dissimilation. We treat the capital majority decision's dissimilation as illegitimate corporation action, because from the angle of the dissimulation's causing origins, though the decision procedure comply with the requirement set by majority decision rule, it is a flawed (injustice contents) resolution made by controlling shareholders whom abuse their voting rights.The theme in the fifth chapter claim is about the choice of the way to get the capital majority return. The return of the capital majority is to get the dissimilated capital decision rule back to its original value, treat and recognize it in the right way. It is hard to achieve any effect if only depend on one way to fight against the abuse of the capital majority decision as the abuse always appear concealed and with multifarious means, we should correspondingly take different legal steps upon different behaviors in different phases. You can always find a loophole no matter how effort lawmaker tried to be prudence and careful, it is impossible for legal system to cover every juristic act. Therefore, I advise to prevent the numerous and complicated abusing behaviors through a general provision by imposing good faith obligations upon the controlling shareholders, to bring the capital majority decision rule back to its original goals. As to the theoretical basis to impose the good faith burden on controlling shareholders, it is a hot academic subject and scholars each have a different view. I believe that the theoretical basis to impose the good faith burden on controlling shareholders should be the defect of the capital majority decision rule's voting mechanism. It is the capital majority decision rule that distinguish the controlling shareholders from the minor shareholders (the relationship between them originally is equally), make the minor shareholder become non-shareholder and enable controlling shareholder obtain operational premium beyond their actual shares; it evolves the original equal voting right into two different rights: expressing and forming rights. Just because of the different status and voting rights among shareholders that originated from the capital decision rule, that's why controlling shareholders whom stay in advantageous status should bear good faith obligation for the minor shareholders whom are a disadvantageous group.The sixth chapter discusses the guarantee system for the return of the capital majority decision rule. Imposing good faith liabilities on controlling shareholders, is only a general and principled provision, in order to bring the capital decision rule back to the goals it pursuits, we need through a series of legal system to protect minor shareholders and to prevent the abuse of the operational rights by controlling shareholders. These legal systems include but not be limited to: limiting the voting rights of controlling shareholders, vesting legal rights to minor shareholders, strengthening the obligations of the controlling shareholders and completing the compensation institutions for minor shareholders. After carry out the research about the above-mentioned institutions under the method of comparative jurisprudence, we evaluate all the relevant current legal system in practice and table to proposal for completion.