Research On The Legal Issues About Corporate Structural Changes

This paper aims at the study of general issues in corporate structural changes and its major four types. Corporate reorganization has been one of the hot areas in corporate practice in recent years. It is one of the hot buttons in corporate law theory researches and it is a realistic issue that corporate laws and regulations have to face in a great variety of corporate behaviors in operation. Given the fact that there has been no law governing corporate structural changes in form or in sense in our country, this paper discusses and deliberates major issues and basic procedures about the systems for corporate structural changes by means of comparative methods from the perspective of legal functional analysis. The paper structure is that of total– substructure in five chapters.Chapter One seeks to identify general issues in corporate structural changes. The paper starts from the concept of structural changes and searches for the real meaning of structural changes from varied expressions and definitions of different countries. Observing the set-aside decision-making power in some areas in terms of corporate law, we find that corporate behaviors constitute corporate structural changes only when they meet such substantial elements as "scale", "decision-making" and "risk", so they become particular concerns of the law. Based on our country's practical needs and legal frameworks, in line with all the abovementioned essential requirements, corporate structural changes are merger and consolidation, division, important assets transfer and transformation of corporate forms. The legitimacy for the corporate law to adjust these important corporate behaviors stems from equity and efficiency in a competitive balance. The legal systems for structural changes of high-quality companies are subject to the selection of this balance point. Only adjustments without ignoring the pursuit of economic efficiency, without abandoning the interests of stakeholders can take care of the benefits and avoid defects. When the company law attempts to influence corporate behaviors, it will naturally accept part of the behaviors while limiting part of the behaviors. For the majority of the company's business practices, the company law does not expressly provide procedural requirements, so the company is free to decide. However, as far as corporate structural changes are concerned, it is easy to break through equity and efficiency, and damage the interests of the company and third parties, so it is necessary to provide some restrictive norms, whose rationality and legitimacy are equally important. The company law's theories on stakeholders originate from the "shareholder-based" reflections, which stresses that the company is not only to pursue interest maximization for shareholders as the objective, but also to be concerned about the interests of other stakeholders. The basis for legal protection of stakeholders lies in that they have invested in the company specific assets, and therefore, they are subject to the impacts of the corporate structural change behaviors, the processes and the legal consequences, which may affect the company's main structural changes, including shareholders, creditors and employees. When the coordinated relations among the company's shareholders, creditors and employees are undermined, they themselves cannot eliminate the damages or restore them to the original status, so they need compulsory codes of conduct to restore or create order, which is the"legal needs"for the protection of stakeholders.The general contents and principles of corporate structural changes are implemented and embodies in the four specific forms of structural changes, but different changes experience different objectives and adjustment methods, each with clear features. The paper is comprised of four chapters, which discuss and substantiate general principles of corporate structural changes and how they play their roles in merger, separation, asset transfer and forms major transformations respectively, with considerations of particularity in each of the systems.Chapter Two examines the 1st form of corporate organizational structural changes: company merger. Essentially, the merger eliminates all the company's shareholders, who invest their shares in the remaining or follow-up company, or in the new company. It is the most basic form in corporate structural changes, and it is the most frequently adopted structural means in practice. However, the connotations and extensions of mergers and acquisitions are often crosscutting. In acquisitions, mergers are absorbing mergers, but the connotations of mergers do not cover acquisitions, and the meanings of acquisitions do not cover newly-created merges in mergers. Corporate merger processes should to ensure the smooth progress of the merger while protecting the interests of the company itself, operators, shareholders, creditors and employees, namely, considering fairness and efficiency in the legal regulations for corporate structural changes. First, for merger contract preparations and terms, the company law should provide for the necessary records of matters, and the company can have free choice of other issues besides. As for measures against injustice of contract contents, shareholders'rights of repurchase of shares and rights of assessment are importance measures to protect the interests of minority shareholders. Second, the merger is an issue in need of resolutions by the shareholders meeting. Various countries have various voting requirements. The author holds that the double-proportion requirement should be adopted. That is, the resolutions can be passed only when the total shareholders equity ratio of the participating shareholders and the shareholder representative equity ratio in favor reach the statutory minimum standards respectively. Third, from the perspective of corporate interests, in order to ensure that the company's decision-making efficiency, the merger should be streamlined and simplified. The law can provide for lower applicable standards for mergers with no significant impacts on shareholders and creditors and introduce simple systems for mergers. Fourth, as for registration of the changes, the company law should be clear about registration items and time, because it is the registration that eventually determines the final time for the merger to come into effective in the end. Fifth, the "information access rights" and the "the right to dissent" are indispensable rights of the creditors in corporate structural changes. In order to overcome the drawbacks of the majority capital decision, shareholders against the merger should be given the right of share repurchase. At the same time, given the fact that corporate mergers usually give rise to the transfer of labor contracts, working conditions, etc., appropriate protective measures should be available at the procedural level in addition to protection of employees'interests at the substantive level.Chapter Three continues to explore another form of corporate organizational structural changes: corporate division. Division and merger and consolidation have similar structure, contrariness, or exterior-interior nature. In order to maintain the equitable nature designed by the legal system, references can be made to the normative model of mergers to explicitly stipulate statutory produces and legal effects for corporate separations. In principle, all separations should have separation documents that are subject to resolutions at shareholders meetings. In addition, minority shareholders'right of share repurchase request must be given. After implementing protective procedures for the creditors, the separation should be registered. In the meantime, given the fact that corporate separations and corporate mergers will not necessarily produce the same impacts on the interests of shareholders and creditors, there are still discrepancies in the systematic designs for corporate separations and corporate mergers. In order to make good use of corporate separation systems, first, we must be clear about the nature of the separation of the company. Comparatively speaking, this paper tends to the theory on split personality. In terms of corporate separation functions, they can be used as measures to address the abuse of monopoly power of the enterprise, and they can also be abused to evade taxation or infringe creditors'claims. Thus it is a focus in the legal system design to reduce infringement of creditors by means of abusing corporate separations. Next, the regarding corporate separation types, if the law has no substantive reason against such a separation, and the separation can lead to the objectives of flexible corporate organization and reduction of the cost for organizational changes, then its existence should be recognized. In the event the separation violates important legal principles, we should further consider whether recognizing its conditional existence without violating the principle. Third, our country's legal procedures on corporate separation tend to the proceedings of the enactment of legislation of the EU and Japan. However, the EU and Japan have separate provisions on the legal procedures due to the difference between absorbing separation and new separation, while our country has not made such a distinction and apply the same procedures in principle. Technically speaking, there is no conclusion which legislation is better or worse. Since China applies the same procedures in principle on absorbing separation and new separation, we should distinguish the differences between the two in clause norms and in terminology coupled with appropriate interpretations. Finally, unlike the EU, Germany and Japan, our country does not have explicit acknowledgment of the effectiveness of local general acceptance. Since our country's corporate merger system will lead to general acceptance effect, the corporate separation system should also be interpreted in the same way, only with limitations to the unit's general acceptance effect on the transferred business or property.Chapter Four studies major changes of corporate assets of major changes– major asset transfer. In recent years, our country has experienced surging transfers of major assets in the business circle, so it is of great significance to construct a more complete system for corporate asset transfers. On the one hand, we must raise corporate operational efficiency to promote healthy growth of companies; on the other hand, we should safeguard the interests of corporate shareholders and trading partners to reach a win-win goal. Transfer of significant assets means that the company transfers its main part of business operation or property. As for the standards for the main part of business operation or property, they are determined by analysis of USA law that determines whether the transferred business operation or property constitutes all the substantive assets. This paper argues that it is reasonable and of referential significance to adopt the "quality" and "quantity" analysis. According to these standards, except that the transferee company is transferred all the business operation of assets of others, which has important impacts on the company's operation, the transfer should not need special resolutions by the board of directors meeting to put forward motions for the shareholders meeting to approve by means of special resolutions. During the assets transfer between a transferring company and a transferee company, generally they will enter into a written contract. As far as the general procedures for major corporate assets are concerned, the corporate merger procedures are basically applicable. For the transferring company, besides motions raised through special resolutions by the board of directors, the issue must be approved by the shareholders meeting through special resolutions. In addition, the shareholders with objections can exercise their right of share repurchase in accordance with the provisions of the company law. Assets can be transferred to the price of shares. The purpose of the corporate legislations for setting up the share exchange system is to provide companies with new ways for easier organizational restructuring to enhance mobility and flexibility in corporate operations and to enhance corporate competitiveness. Based on the real needs our country for more legal avenues for corporate restructuring and cooperation, this paper aims at enabling Chinese companies to use structural changes with flexibility to achieve their business strategic objectives.Chapter Five probes into changes of corporate legal forms– the conversion of forms. Corporate form conversion is defined as changes of such conditions as corporate responsibility, equity position, capital contribution, governance structure, etc. without interrupting the corporate legal person status, so as to make it consistent with the statutory corporate form of another legal company with compositions of essential elements. It has some legal characteristics such as compound contents, legal personality "identity", type and procedures. The company stipulates explicitly that its original intention in the form of various companies is to help investors choose correct the company's media activities, thereby reducing the transaction costs of business activities. However, the company's external environment and internal conditions are complex and volatile, and naturally, investors continue to seek maximum benefits, which creates the requirements for the company to change the form. Generation and the retention or abolition of the company are the results of continuous exploration and trade-offs in the economic life. In order to encourage and facilitate investment, and to meet a variety of different investment needs, the company laws of various countries, while adhering to the statutory corporate form in legal principles, also provide corporate form change systems as exceptions. This system is an important system of the company law. Corporate form change in the Western countries with sound market economy and in-depth studies of corporate theories and practices have rather complete systems and provision. In comparison, our country's corporate form and type are relatively simple and restricted, and they are only limited liability company and incorporated co., ltd. The law allows the form conversion between the two kinds of companies. The corporate form conversion is the company's unilateral act. However, because the corporate form changes result in significant changes in terms of the company's shareholder responsibilities, organizational structures, external legal relations, etc., the form conversion will have significant impacts on the interests of shareholders and creditors, and therefore, before deciding independently by the shareholders to convert the corporate form, shareholders must have real and comprehensive understandings of the contents of the form transfer through the form change agreement. According to the law, the form conversion must go through the procedures of resolutions by the shareholders meeting, and procedures for shareholders with objections to exercise their right of share repurchase, etc. The contents can basically refer to relevant provisions on merger, separation and major assets transfer. After the examination/approval and registration processes, the company with the form conversion, on condition that the corporate legal personality is not discontinued, will have the changed form of the company according to the law. The rights and obligations of the former company before the form conversion will be passed to the company after the form conversion without rights and obligations of general acceptance. The shareholder compositions will change a slightly, depending on the differences between the former and the latter companies, and their shareholding will be subject to the provisions of the form change resolutions. The rights they enjoy and the obligations they bear have continuity, and the 3rd party rights will continue to exist in the new shares. Corporate form changes involve not only the interests of all the shareholders and creditors of the company, but also the survival and transaction security of the company. The company law has strict provisions on essential organizational elements and procedures for corporate form conversions. When there are procedural flaws of the conversion, there should be uniform restrictive regulations on the claim advocating that the form conversion is invalid.