Legal Regulation On China’s Corporation Division

Since France’s establishment of the system of corporation division in company law in1966, the European Union, China’s mainland and Taiwan, Korea, Japan and other countriesand regions have also followed suit by adopting and formulating such system to replace theoriginal “twisted” means of establishing subsidiaries before business transfer so as to achievethe effect of corporation division, which has greatly improved commercial efficiency. Today,corporation division, as a reverse operation for merger, has together with such operations asmerger, asset transfer constituted major forms of company reorganization. This paper, basedon the thinking of corporation division and relevant systems in Chinese company law fromlegal philosophical and economical perspectives, and through comparative study of thespecific rules relating to such system, systematically teases out legal regulations forcorporation division and offers corresponding suggestions for improvement.This paper unfolds itself in six chapters apart from Introduction.Chapter One Theoretical Deconstruction of Corporation Division. One task of law is toaccurately define academic concepts, making the law more comprehensible and offeringcausal explanation to norms. Under the thinking paradigm of Jhering’s so-called “ThroughRoman Law Beyond Roman Law”, this Chapter firstly teases out extra-territorial conceptsand connotations of corporation division at legislative level before concluding that foreignlegislation, from the perspective of the company/companies after division, generally dividesby the modes of operation the concepts of corporation division into division by acquisitionand division by the formation of new companies, based on which some other countries andareas such as Japan, Korea, and Taiwan Province in China further provide for real division.Under the circumstances of real division the total assets of the company remains unchanged,and what has changed is the assets’ forms of manifestation and ownership of its propertyrights. Thus, the semantic meaning and concept of corporation division in the present studyshall under the part of “morphological deconstruction of corporation division” still beunderstood broadly, i.e. including the concept of real division, and shall in the rest of thepaper, unless otherwise specifically required, be interpreted narrowly, i.e. not including realdivision, but covering such circumstances of derivative division, division by the formation ofnew companies, division and merger. Based on the concept of corporation division already defined and upon the comparison of the nature of corporation division from the perspective ofcorporate personality separation on the subject dimension and business separation on theobject dimension, it is held by the author that the nature of corporation division shall beunderstood as a whole, i.e. starting from the perspective of organic unity between both thesubject and object dimensions, the nature of corporation division shall include simultaneoussplitting of personality element and property element, which implies that corporation divisionincorporates at the same time the change of legal personality at personality level and thechange of property at the level of property right transfer. Only by doing so can we explain in areasonable manner why the companies after division need to assume joint and severalliabilities for the debts of the company before division, and, in the case of pure division (i.e.division by the formation of new companies and division by acquisition), why the businessafter division can immediately be transferred to a newly-established company withindependent legal personality. After deconstructing corporation division from the perspectivesof concept, connotation and nature, all specific forms of manifestation for corporationdivision is further deconstructed from several aspects so as to facilitate thoroughunderstanding of such system in judicial practice and corporate practice with regard to itsdemarcation and operation.Chapter Two Judicial Interpretation for the Determination of Corporation Division. ThisChapter is an extension of marginal form deconstruction mentioned in the first chapter. Whatdiffers is that the section of “deconstruction of the forms of corporation division” emphasizesthe manifestation patterns of different forms within the corporation division, while thisChapter takes corporation division per se as a form to be distinguished from and identifiedwith other similar systems in the corporation law. Through judicial reading of the casesconcerning Citibank division and merger, Nanjing Chemical Company, and Hangzhou Yuhangequity acquisition, it is proposed that corporation division is a means by which theprofit-making function of the company is separated and by which the company operates, andthat the act of specific property contribution by one company to another cannot simply beidentified as corporation division, but to distinguish corporation division from similar systemssuch as business transfer, reinvestment, and establishment of subsidiaries, from suchdimensions as the object of transfer, the form and ownership of the consideration received,and whether the liability assets of the investing company is diminished or not. To be specific,the object of transfer in corporation division is general lump-sum transfer of the ownership, claims and debts involved in the business assets, while what is transfer in business division,reinvestment and the establishment of subsidiaries is commonly the assets per se, excludingdebts related thereto. The consideration obtained from transfer of business after corporationdivision is more often than not the equity in the newly established or existing company, andsuch equity is owned by the shareholders of the divided company, thus reducing the liabilityassets of the divided company accordingly. Business transfer is the exchange of thetransferred business for other economic interests other than equity, while reinvestment is theexchange of tangible or intangible assets owned by the company for equity of an existingcompany. The establishment of new companies is in essence a type of reinvestment, with theonly difference being that the object of reinvestment is existing company while the former isnewly-established companies. The consideration for the latter three all belongs to theinvestment company itself, without decreasing the liability assets of the company despiteasset transfer, but only a change of asset form. Therefore, all companies after corporationdivision shall assume joint and several liability for company debts before division, whilebusiness transfer, reinvestment and the establishment of subsidiaries exclude the applicationof joint and several liability.Chapter Three Procedural Rules for Corporation Division. In modern rule-of-law society,procedural justice compared with substantive justice is being placed on a more predominantposition, where private law can give better expression of justice through procedures. Whatpolicy can solve is procedural rules, not the results, and what a policy can drive is the process,from which results follow. During the change of times from shareholder’s-meeting-orientedstructure to board-of-directors-oriented structure, the company has shifted from shareholders’shadow to real presence with legal personality, and accordingly the board of directors isassigned with the heavy mission of formulating plans for corporation division, through whichthe intent of corporation division is tentatively taking shape. During such process, the agentcost incurred by directors due to moral risks and adverse selection in formulating divisionplans shall be controlled and reduced through directors’ fiduciary duties, duty of care standard,time and dedication standard, as well as dependence standard. Meanwhile, to settleinformation asymmetry caused by principal-agent relationship between shareholders anddirectors, full disclosure of information is a endogenous request for safeguardingshareholders’ right to know. Thus, after division plans being formulated by the board ofdirectors, prior full publicity to the shareholders of the company to ensure the reasonableness of the final resolution and its compliance with the true intent of decision-makers is both alogical starting point and a logical end for the guarantee of shareholders’ right to know. Thedecision-making power by shareholders’ meeting as the ultimate organ for decision-making ofcorporation division shall not only be exercised in the form of “meetings”, but also be endedup with a “resolution” reached under the rule of assets majority voting, to the maximumextent isolating personal will from independent will of the company and forming independentpersonality of the company. In order to ensure that interested parties could at the first momentbe informed of company’s resolution with regard to corporation division and exercise relevantrights as appropriate, the company shall adopt such means of afterwards publicity as notice orpublic announcement towards creditors, and leaving documents about relevant issuesconcerning corporation division at the company for consultation and reference by interestedparties. Finally, by taking advantage of the commercial registration of “the attribute of publicgoods”, the market economy participants in a stranger society are provided with behavioralexpectation and guarantee of public credibility. The transition from acquaintance trust insimple commodity economy to institutional trust in industrial society and information societyhas transformed the process of searching for information and establishing mutual trust by andamong parties to a transaction into provision of information dependent on the institution itself,realizing the dual-purpose of maintaining transaction security and increasing commercialefficiency through commercial registration system.Chapter Four Evaluation of the Legal Effects of Corporation Division. The legal effectsas mentioned in this Chapter refers to affirmative or negative evaluation of the act ofcorporation division after being subsumed to legal norms, and the favorable or unfavorableresults thus enjoyed or assumed by relevant participants. The predictability of law in modernsociety lies in that the legal consequences of all sorts of behaviors have been explicitlydeclared by law, and each actor can clearly foresee the consequences of their behavior.Therefore, all participants in corporation division can, after making the resolution ofcorporation division and completing corresponding acts, obtain affirmative or negativeevaluation by law in accordance with the legal norms subsumed. The former is called eligibledivision, producing positive legal effects, while the latter is named defective division,resulting in negative legal effects. In the case of eligible division, the claims, debts, propertyrights, intellectual property rights of the divided company covered by independently operatedbusiness are transferred to newly established company or existing company. The problem that follows is that, for all the companies subsequent to corporation division, is there anynon-competing duty with regard to relevant business transferred. This Chapter suggests thatlegislation shall deliberately remain “silent” and give place to “the wisdom of businessmen”,allowing all relevant parties thereto to agree by themselves in corporation division plan orcorporation division agreement. If commercial participants have not expressly agreed to suchan issue due to their neglect and no agreement has reached thereafter, then judiciary authorityshall be resorted to as the last safeguard for right relief when the judges make overalljudgment through analysis of the reasons for corporation division and the purpose behind thebehavior of all participants. In the case of defective division, which may result in a lawsuit forinvalidity or revocation of resolution for division or invalidity of the act of division, theprinciple of validity in defect relief system for corporation division shall be applied, i.e. thecourt, when trying cases involving defective corporation division, must take as the principlethe maintenance of the stability of legal relations after division, endeavor to remedy anydefective act in division, and handle properly the coherent and collaborative relations amongsuch three types of lawsuit.Chapter Five Balance of Interests in Corporation Division.“Law as a means to an end”,such end does not necessarily means only the interests of single individuals, but also those ofthe society, for constant examination by social practice of Adam Smith’s theoreticalassumption that "individual’s act of pursuing the maximization of profit ultimately promotesthe maximization of social welfare", ended up with the founding that endless pursuit forindividual benefit but will stifle individual interests, bringing society into disorder. In thesame vein, multiple conflicts of interests may also show their presence in corporation division,so, during the process of corporation division, interests of all relevant parties demand morebalance and protection. Only when the interests of interested parties are protected in divisionbased on the aim of company operation of maximizing the overall welfare ofcommunitarianism, can a sound ruminant mechanism and benefit balance mechanism for allinterested parties in corporation division be formed. In the case of protecting minorityshareholders, private law has been proved powerless in enhancing the capability of thesubjects of private law, but can confirm and protect their freedom, one example of such beingshare repurchase claim, which, as a corrective mechanism for capital majority rule undercorporate personality, realizes its normal freedom under private law by providing withdrawalmechanism to protect minority shareholders from undue control of major shareholders. In the case of creditor protection, laws provide creditors with procedural protection and substantiveprotection by establishing such systems as notification and announcement, right of dissent andjoint and several liability. When worker protection is concerned, due to the personal attributeof labor contracts, the current principle of general succession could only answer the questionthat workers’ labor contracts can not be terminated due to company division, but could notanswer who shall succeed the workers’ labor contracts in the case of corporation division, andonly by adopting the doctrine of most significant relationship, differentiating the relevance ofthe workers to the business to be separated from the divided company, and conditionallyvesting the workers with the right of choice and right of dissent based on showing respect tothe intentions of all parties involved, can we not only respect the autonomy of will of theparties of labor and capital, but also protect the legitimate interests of the workers from beingdamaged by corporation division, in order to achieve win-win situation.Chapter Six Probing into the Improvements of the Mechanisms Relevant to CorporationDivision in China under Efficiency and Fairness Value System. This chapter also serves as the"acting conclusion" of the paper. It is natural for business law, as law generating from marketeconomy and directly serving the market economy, to reflect efficiency and fairness thatshould be inherent in market economy. Therefore, this chapter, in addition to reviewing andcriticizing the inadequate legal regulation in contemporary China’s corporation division andtaking efficiency and fairness as the guiding ideology, proposes the following suggestions forimprovements. First, the division and merger system common in foreign legislation shall beexplicitly established in Chinese legislation, for such system is not simply adding the systemsof corporation division and corporation merger, but a “small system” under the “big system”of corporation division, the establishment of which helps to improve the efficiency of thesystem of corporation division and the integrity of classification. Second, for simple andminor organizational changes or corporation division by which no substantial interests of allshareholders are affected, more convenient procedural rules shall be provided for byestablishing summary division system, i.e. replacing shareholders resolution with boardresolution for those acts of corporation division in satisfaction of the requirements as providedby law. Third, the system of independent expert shall be introduced as a means of externalguarantee for the fairness of division plan. Under such system, participation of independentexperts and provision of professional advice makes the shareholders’ meeting more informedof the issues concerning corporation division and more sagacious in making decision. Moreover, having taken into account the differences between closely-held company andopen-end company in corporation division, the law shall stipulate that, in the case of companylimited by shares, external opinions must be issued by independent experts, while in the caseof limited liability company, whether external opinions shall be issued by independent expertsmay be decided by the articles of association or the shareholders’ meeting, thus reaching arelatively reasonable balance beween rigidity and flexibility. Then, with regard to thosecompanies issuing several classes of shares, it is recommended that, as a corrective measurefor capital majority rule, the class shareholders’ meeting shall be introduced and triggermechanism be established in the voting session of corporation division, so as to better balanceefficiency and fairness. Finally, the current system of creditor’s right shall be discarded andregress to classification of multi-party creditor’s right under traditional civil law, and, bydifferentiating the expression of intent between creditors and debtors and among creditors aswell as the divisibility of payment, overall determination shall be made of the specificcreditor’s right after corporation division, being single creditor’s right, divisible creditor’sright, un-divisible creditor’s right or joint creditor’s right.