Research On Legal Institution Of Classified Stocks

Setting up as the cooperative products of legal norms and contract arrangements, classified stocks are stocks with different content rights which created by separating and combining various sub-rights of equities. The essence of interference conducted by legislation of classified stock is how to set the boundary of charter autonomy of classes of stock. This institution has been widely used in the stock structure of foreign company law, while still does not exist in the company law of China. The preferred stock system which requires the establishment of rules beforehand is an icebreaking within the stock structure that used to be dominated by the common stock. In the future, with the application and derivation of classified stocks, the gradually diversified capital structure of corporation is going to reshape the arrangement of control power, which will lead to further complication of interest. As corporations optimize and renovate its management, they are also faced with brand new challenges, which makes their structure and organization even more exquisite.This essay takes the legal institution of classified stocks as the main focus, incorporating methodologies including logic reasoning, systematic analysis, historical analysis, comparison, case study and the economics of law analysis, etc. Through analyzing the fundamental theories of classified stocks, this essay aims to construct a typological system for classified stocks, to design its legislation process, to discuss its application in various forms of corporations, and to establish a management system to deal with the stock interest conflicts, providing a well-rounded thought for constructing our nation's classified stocks law system. On the structure of this essay, apart from the introduction and conclusion section, it can be mainly divided into the following six parts:The first chapter sorts out the foundation for the formation of classified stocks through analyzing the nature and structure of stock equity, as well as proposing the method to construct a typological system for classified stocks. Classified stocks have the nature of dual right. According to the theory of corporate contract and autonomy, classified stock is a contractual right within the frame of contract law. Under the vision of corporate law, the classes of stock are legal rights. Its category division shall not be restricted to the convention, rather to emphasize on providing a typological system for classified stocks. The sub-rights of classes of stocks can be distinguished by two layers of notion: regular case and special case, properties type and control type. The classes of stock can be regarded as a combination of a group of sub-rights. Among the sub-rights that are attached to the classes of stock, other than the contents about the standard common stock that are the same as per stipulated by the corporate law, the rest of special rights are what we regard as rights of classified stocks. Rights of classified stocks can not only possibly bring changes to the arrangement for sub-rights under the conventional common stock equity system, but also bring new rights that are not yet covered to conventional common stock. Taking the common stock as reference, and through the permutation and combination of voting rights and property interest, we can categorize the classes of stock into nine types by primary logical classification. Based on this, together with various combinations with numerous special sub-rights, the modality of classes of stock can be greatly enriched.Chapter two mainly discusses the institutional value of classified stock legislation for contract law and corporate law, and put forward an outline for classified stock legislation in our nation through the clarification of two types of legislation model for classified stock. The institutional value of classified stock legislation lies within two aspects: to properly define the border line for classified stock contract autonomy, and to provide a rational and widely-applicable principle of classified stock for public product. The value of classified stock legislated corporation regulation system can be reflected in two aspects: firstly the reappeared balance shown by the contents of rights of classified stock, and the extension to the conventional equal equity idea of capital-based proportionally-distributed voting rights; secondly starting from the choice of fiduciary duty between preferred shareholder and common shareholder, to extend the conventional sphere of credit to that of classified stocks shareholders. By placing contracted autonomy and national regulation on the foundation of the establishment of classified stocks, we can find correspondences to various legislation systems of classified stocks. Western countries emphasize that the classified stock is a production of contract. Thus in virtue of arbitrary regulations, they take constitutionally autonomous legislation of classified stock, authorizing corporations to freely establish the settings of classified stocks. Nations within the civil law system put the emphasis on the legal attributes of rights for classified stocks. They take statutory way of classified stock legislation. With the help of peremptory norm, the category of classified stock is limited within the legislated range. It can be further branched into classified statute and sub-rights statute. Based on the current condition of our country, it would be better to distinguish the forms of corporation and apply different model for classified stock legislation: classified statute for listed companies, sub-rights statute for non-listed public companies and constitutional autonomy for close companies.The third chapter studies the legal classified stock legislation system of public companies. At this stage in our country, restrictions shall be placed to limit the type of classified stock that can be set by the public companies: specified preferred stock as the general choice for listed companies, board-selected stock and dual-class share structure for technology innovative companies. The settings of classified stock for unlisted public companies can adopt the sub-rights legal path under the civil law system's statute. In the future, public companies can extend their categories through right of control and right of properties. Considering that the right of control inside a company is the focus of shareholders' contention, as well as the core of a company's management, the control-power-reinforcement mechanism will help controlling shareholders to form or reinforce their control to the company management, which is accompanied by both positive and negative effects. Thus in terms of extending the categories of classified stock that aims at reinforcing the rights of control, it shall take canonical models from various law systems, designing a localized canon aiming at the action that public companies use the classified stock to realize its reinforcement of control power.The fourth chapter discusses the autonomous classified stock system in close companies. Close companies' elastic demand for setting the classified stocks will exceed far beyond the provided categories of model classified stocks, presenting a tendency from partial reference to categorical innovation. The interest conflict among shareholders inside close companies is more severe. Further than absorbing the experience dealing with the interest conflicts between common stock shareholders and classified stock shareholders, we shall also analyze the possible unfair damage to vulnerable classified stock shareholders and provide a general thought: first to ensure the higher mutual fiduciary duty among shareholders; second to require the board to balance the interest among classified stock shareholders; third to analyze the equity rights of classified stocks. There are mainly three explanations: strictly according to literal meanings; honesty, credibility and fairness principle; fiduciary duty. If the classified stock's contract can be regarded as a complete contract, the only method that can be applied is to explain strictly according to the literal meanings. If it is an incomplete contract, taking the classified stock equity as a whole, we can prefer the strict literal explanation method, supplementing honesty and credibility rule when it comes to blur or ambiguous contract clauses. Fiduciary duty explanation is also replenished for the identical part between the classified stock equity rights and common stocks. When adopting above-mentioned differentiated explanations, it shall also adopt the following rules: the fiduciary duty afforded by the board to common stock shareholders shall not exceed the classified rights clearly regulated by the special stock's contract, but shall be prior or equal to the fiduciary duty afforded by the board to special stock shareholders.The fifth chapter focuses on the legal protection system for classified stock shareholders. The pre-caution management for interest conflict among classified stock shareholders usually happens in two situations. The first type is when there is actual influence to classified rights and the classified voting system is activated according to the corporate law. There are conclusive, enumerative and general yet not completely enumerative three types of legislation system. In the current stage, our nation shall inject enumerated legislation into both the arbitrary regulations inside close companies and peremptory regulations in public companies, at the same time combining the corporate constitution to frame the range of classified voting items. The second type is the contractual management relying on the classified stock contractual explanation or the classified stock contract clause design, in order to protect the classified stock shareholders' interest. Classified stock after-event protection mechanism includes two types: the voting rights resurgence mechanism, and the dissent shareholders trade-in request system which needs a reasonable confirmation on its applicable targets, exercise procedure, activation event and fair evaluation. The third type is the extension of fiduciary duty in corporate law, which includes two aspects. The first aspect is the fiduciary duty undertaken by board to classified stock shareholders. If the involved conflict has been clearly stipulated by the classified stock contents in the model contract, unless the company's overall interest is damaged, there shall not be arbitrary adjustment to the board's fiduciary duty under the model of corporate law. If the involved conflict has not been clearly regulated by the classified content, the board shall generally consider the nature of the equity and the treaty-conclusion ability of classified stock shareholders, distinguishing and differentiating the fiduciary duty of each type of classified stock shareholders, balancing the interest of classified stock shareholders in a fairly-distributed but not equally-distributed way. The second aspect is the extension of fiduciary duty among classified stock shareholders. Control type classified stock shareholders, and in some conditions few classified stock shareholders can all become the duty-bearer of fiduciary duty among classified stock shareholders.The sixth chapter provides suggestions to gradually construction of legal institutions of classified stocks in China from the whole. First of all, the design of legal institutions of classified stocks, should bear in mind the concept of equality of stock rights and balance of Interests. The former one requires the content of classified stocks representing the overall balance of different types of sub-rights of equities in principle, which manifests the equality of stock rights. Even in rear conditions where sub-rights of equities loss overall balance in content, it still hold the principle of “equality of stock rights” thanks to the permission from other classes of stock shareholders in company. The later one requires providing appropriate protection to vulnerable classes of shareholders based on the general view of optimize corporate governance and operating. Secondly, the design process of legal institutions of classified stocks, reflects the co-constructing of Contract Law and Corporation Law. The first step is count the probability of classified stocks. The second step selects the resource of classified stocks from the view of legislation, thus defines the scope of contracted autonomy. The third step selects the exact type of classified stocks from the types permitted by legislation, so as to complete the property setting of specific classified stocks. Besides, the legal rules of classified stocks should be mandatory rules in general at the beginning, while consider the factors of “generality and personality” and “public corporation and closed corporation” within the content of classified stocks, as to decide the exact distribution of mandatory rules and permissive rules. Next, discuss the progress of legal institution of classified stocks which is about to happen. Firstly, analyze the types of classified stocks by following the standard of differentiate company form and the properties of classified stock. Besides common stocks, at the beginning of construction classified stocks, the property classes of stock in company should keep the current preferred stock range or expand a little bit; for control type classes of stock, it is likely to introduce in dual-class share structure, vetoing stock and the directors selected stock. In order to set the classified stocks of closed corporation, it is necessary to select prescribed sub-rights. When the classified stocks comes into maturation period, the types will be expand continually. Secondly, sum up the applicable subject of classified stocks, which can be divided into two groups: publishing company and shareholder of classified stocks. At the setting up period of legal institution of classified stocks, at least one type of applicable subject of classified stocks of public corporation has constrains, while closed corporation doesn't have such constrains. In general, the applicable subject of classified stocks presents an expansion in general. Thirdly, provide case studies of classified stocks applied in mixed ownership transformation of state-owned enterprises, in order to clearly identify that not single type classified stocks, but combined application of classified stocks, can optimize the stock structure of the corporation, and to respond to the need of transformation in China.