A Research On Legal Issues Of Affiliated Corporation

In this treatise we will anatomy the principles of affiliated corporations, in the perspective of the comparative law and the economic analysis, as well as the three legal issues associative to affiliated corporations: the protection of the minority shareholders in subordinate companies, creditors of subordinate companies and restrictions on cross-ownership and attempt to give legislative proposals to affiliated corporations on the base of summarizing the advantages and disadvantages of different regulatory models in developed countries, combine with the development of our affiliate status. This treatise first described the concept of the affiliated corporations, revealed the motives associated with affiliated corporation legislation, and analyze benefits and drawbacks associated with the affiliated corporations in the perspective of the comparative law and economics, and pointed out that the main legal issues of affiliated corporations is the agency problem between controlling and subordinate companies, controlling companies and minority shareholders in subordinate companies, controlling company and creditors. Then we discussed around the three problems and pointed out that the core of the legal issues associated with affiliated corporations is control and guidance the controlling power of the controlling companies. The controlling and guidance foundation of the corporate law needs a series of benefit balancing regulation to act.Finally, combining with the legislative situation of affiliated corporations in China, as well as the legislations and practical experience in developed countries, we are trying to indicate that to improve legislation of affiliated corporations in China should we should first clear the concept of affiliate corporations, and then strengthen the fiduciary obligations of controlling companies, and improve the creditors protection system.This treatise is divided into five parts, besides the introduction and epilogue. The first chapter discusses the basic principles associated with the affiliated corporations; the second chapter discusses one of the three major agency problems associated with affiliated corporations– keep the balance of interests between controlled companies and subordinate companies; the third chapter discusses another agency problem of affiliated corporations - the protection of creditors of subordinate companies; the fourth chapter discusses the limitations and rules of cross ownership; Chapter V summarizes the development of status of affiliated corporations in our country, and comment on the current legislation and make meaningful recommendations."Introduction" reveals three issues, the important position of affiliated corporations in today's market in the background of economies of scale, differences of the regulation in developed countries and the trend of integration of regulations in these countries, and the subject and main thread of this treatise. This chapter tries to reveal the reality: affiliated corporations is essential to contemporary market, irregular transactions and the unequal distribution rules which caused the imbalance of rights and interests among related parties is not only inevitable, but also a necessarily and voluntary choice for managers and investors in the process of pursuing corporate interests and value-added transactions. To protect the balance of interests between controlling companies and subordinate companies, some developed countries established an interest balancing strategy which covers from control companies, subordinated companies, and external creditors.The first chapter, "The Basic Principle Associated With Affiliated Corporation": This chapter aims to provide a principled analysis of legal issues associated with the affiliated corporation, and try to answer three questions. First, what is affiliated corporation? What is the initial motivation of affiliated corporation legislation? Second, what are the advantages associated with affiliated corporation? What are its disadvantages? Third, what is the core problem affiliated corporation regulation? Around three issues, this chapter first defines the concept and scope of affiliated companies, affiliated corporation is a multi-level corporate join composed of several independent legal companies by the unit of Stock control and special contractual arrangements for the purpose of obtaining economic benefits. The performances of affiliated corporations include equity-control and contract-controlled affiliated corporations. Then, analyze the benefits and disadvantages associated with affiliated corporations in the perspective of comparative law and economics. Finally, on the basis of summary and analysis, we point out that the core legal issues associated with affiliated corporations is to resolve agency problem between controlling and subordinated corporations.Chapter II, "The First Legal Issue Associated With Affiliated Corporation: Keep the Balance of Interests Between Controlling and Subordinated Corporations": This chapter tried to express such a view, the relationship between controlling and subordinated companies is actually a "principal - agent" relation, the key to pursuit the balance of interests between affiliated companies, and their minority shareholders is to strengthen the fiduciary obligations of controlling corporations and managers, and reduce agency costs of controlling the companies. In this chapter, we try to establish a structure including "Access", "Trust", "Exit" strategies, to check and balance the controlling power of controlling companies, protect the balance of "control - dependent " relationship. Among these strategies, "access" strategy is the foundation, "trust" strategy is the core, "exit" strategy serves as the "Guarantee Clause" in the protection of minority shareholders.Chapter III, "The Second Legal Issue Associated With Affiliated Corporation: the Protection of the Interests of Creditors of the Subordinate Corporation": This chapter first analyzes the special problems of creditor protection under the environment of affiliated companies, the principle of company personal independence and the limited liability of shareholders deserves a breakthrough facing to affiliated corporations, and authority creditors to lift the veil of subordinate corporations. This chapter proposes three strategies to solve this problem: first, lifting the veil of subordinate corporations; second, set limitation to the right of set-off of controlling company; third, Deep-Rock principle. Piercing the veil of controlling companies serves as the foundation and centre of these three strategies.Chapter IV, "The Third Legal Problems of Affiliated Corporation: Regulation of Cross-Ownership": This chapter first described the concept and scope of cross-shareholdings, analyzed advantages and disadvantages of cross-shareholdings; then inspected the regulations of cross-shareholding in the British, the United States, Germany, Japan, France and other countries, and summarized three kinds of regulation mode including "laissez-faire style," "strict constraints" and "compromise style"; finally comments of the existing cross-ownership regulations in our country, and proposed Legislation proposal. This chapter tried to express such a view: the attitude towards cross-ownership in a country depends on the mold in which corporate develops and the degree of liquidity of equity. In the U.S., legislators take a tolerance attitude to cross-shareholdings, limited only the member right of the shares between parent and subsidiary; higher levels of ownership concentration in France, the legislator held restricted manner to cross-shareholdings, cross-shareholdings between companies are not allowed to exceed 10%; Germany, Japan, Britain and other countries adopted a compromise-type regulation pattern, only restrict cross-ownership among affiliated corporations.Chapter V" Legislation and Perfection of Affiliated Corporation in China ": This chapter first reviews the development of corporate and affiliated companies in China, summarizes the legislative status of affiliated companies in our country; and then comments legislation of affiliated corporation; finally summary China's development of legislation, and put forward a meaningful proposal. This chapter tries to reveal the reality: With the development of market economy, affiliated companies have become an indispensable element, legislation of affiliated corporation also have made meaningful process, but compare with developed countries, legislation of affiliated companies in China are still unclear. To improve legislation of affiliated companies in China, China should follow the example of the extraterritorial experience, built up a set of equitable mechanism which includes stringent disclosure obligation, clear fiduciary obligations, limited decision-making power in related transactions, derivative action, and other secondary strategies. The law should not be blindly refused or condone affiliated corporation, but to seeking a relatively fair meeting point of interests between the control and subordinate companies.