Research On The Prohibition Of Financial Assistance In Company Law

The company is composed of senior managers,company general employees,equity investors,creditor investors,secured creditors and other economic entities.The roles position of these entities are usually built based on different types of contracts,not just company law.The company is the knot of different types of contracts,and a risk business with autonomy of will.However,due to the existence of transaction costs,the cost of description of all possible future situations ex ante contracting is too high,so the company contract can only be a long-term and incomplete contract in essence.Because of the incompleteness of this kind of contract,the company law is required to play the role of model and loopholes filling in corporate contracts.The important function of the company law is to reduce the transaction costs of different economic entities to carry out commercial activities through the form of company.Its appropriate goal in the normative sense should be to promote the overall welfare of the various entities affected by company activities.As an important governance mechanism in company law,the prohibition on financial assistance was created by the United Kingdom in the 1920 s and continued self-improvement and institutional change during the following 90 years.At the same time,the system was also widely disseminated and transplanted in European countries as well as in Australia,Singapore,Hong Kong,Malaysia,New Zealand and other countries and regions that were deeply affected by British law.Although the earlyprohibition on financial assistance in all countries was based on the British law,but the legal system of the company was not a pure technical rule,because the institutional environments,market structures,political ecology,and cultural traditions vary from country to country,the constraint conditions and implementation paths of any legal system of the company were also different,therefore,in the process of the modernization of company law in various countries,the system has successively undergone self-improvement and reshaping,which made prohibition on financial assistance in contemporary countries has their own characteristics.This article will highlight the functional value of the company law in reducing agency costs within the research framework of incomplete contract theory.It will backtrack the development and evolution and institutional changes of the prohibition on financial assistance,comparatively analyze the specific microstructures of various countries' prohibitions,propose that lowering the transaction cost is the origin of the legitimacy of the system after analyzing and reflecting on the current to tradition theory of legitimacy of the system,and based on the actual soil of the company's agency costs in China,it specifically discusses China's legal framework system for the prohibition on financial assistance,which is trying to construct a management path that combines contract autonomy and legal supervision.In addition to the introduction,the whole thesis is divided into six chapters.The first chapter is an overview of the basic theories of the prohibition on financial assistance.The second chapter is a review of the development process of its historical evolution and institutional changes.The third chapter is the analysis of the main content and overall severity of the prohibition on financial assistance in various counties using the comparative and research method.The fourth chapter is the heckle of the traditional legitimacy explanation and the rational logic in the prohibition on financial assistance.The fifth chapter is the analysis of the legitimacy of the prohibition on financial assistance using the method of analysis of law and economics.The sixth chapter is to reconstruct the prohibition on financial assistance in the company law of our country by combining the current situation of legislation in our country and the reality of corporate agency costs.The main contents are as follows:The first chapter aims to answer the question of “What is the object of study”.It mainly introduces the definition and main forms of financial assistance of the company,examines the connotation and denotation,main types,important features,constituent requirements,and causes of financial aid behaviors,providing the study basis for the subsequent further analysis and interpretation.Financial assistance is not a specific legal term but an ordinary business term.It is necessary to review the specific transaction implementation process in order to properly identify it.It usually has four important characteristics,namely,common commercial language attributes,with “financial” or “funding” attributes,following the commercial essence and authenticity standards,and unilateral spontaneous behavior attributes.The main types of financial assistance include specific types such as: gifts,guarantees,compensation,exemptions or waiver,borrowings,and other forms.When considering various forms,the size of the value is usually not regarded as a judgment criterion,and emphasis “essence is greater than form”,at the same time,various types have different characteristics and judgment standards.The emergence of any commercial phenomenon has its objective necessity and economic needs.The main reason for the financial assistance was triggered by the completion of leveraged buyouts and management buyouts,the break-up fee mechanism in the acquisition market,the promotion of employee stock ownership plans,encouraging creditors to participate in debt restructuring and other incentives.There are reasonable commercial or social motives as well as doubtful motives in these incentives,so the business ethics attributes of financial assistance cannot be generalized.The “finance assistance” in the prohibiting of financial assistance system has five major elements,namely,“acquisition” of company shares,acquisition of “shares” of the company,sponsors are companies and their subsidiaries whose shares are transferred,the grantees belong to a specific scope,the purpose of providing financial assistance is to help obtain shares of the company.Only when these five major elements are met can it be recognized as a “financed assistance” behavior regulated by the prohibition of financial assistance system.At the same time,in order to avoid some transactions thathave the characteristics of financial support in form but are not harmful in substance,the system also establishes unconditional exemption and conditional exemption.The second chapter aims to answer the question of “Where does the research object come from”,it mainly based on the historical evolution of the prohibition of financial assistance laws in the United Kingdom and the European Union.It attempts to use historical analysis methods to uncover changes in the prohibition on financial assistance to tap the economic logic and policy behind the system,through historical evolution process to analyze the inherent source of impetus and the logic of reality that will help to explore the the rules and regulations.Due to special issues in the transfer of equity in the British industrial and commercial circles after the “First World War”,the Greene Committee first proposed a policy suggestion on the prohibition on financial assistance in the company law evaluation report.In the company law of year 1928 and year 1929 in the United Kingdom,the prohibition on financial assistance was firstly introduced with a written law,and provisions were perfected in the company law of year 1947 and year 1948,and a relatively complete system of the prohibition on financial assistance was preliminarily established.In the 1960 s,the prohibition on financial assistance was disseminated and transplanted globally through two completely different approaches:the initiative transplantation in the common law system countries and the passive transplantation in civil law countries.At the same time,in the process of the implementation of the system over the past 30 years after the United Kingdom's 1948 company law,many policy controversies had emerged regarding the financial assistance.The company law assessment report of 1962 Jenkins Committee and the important case of the 1980 s eventually prompted the United Kingdom to make very significant changes to the system in the 1981 amendment to the company law and created a far-reaching “whitewash” mechanism.In the 1990 s,various countries started the modernization process to the company law.In this modernization wave of company law,the prohibition on financial assistance had also received an unprecedented comprehensive and systematic policy assessment,including the United Kingdom,the European Union,and Singapore and other countries,which also madebold proposals for the revision of the system in the company law modernization assessment report,and eventually led to the legislative department's drastic reform of the prohibition on financial assistance,to make it more adaptable to the needs of modern business development.During the ninety years' period when the prohibition on financial assistance from the creation of the prototypes to the completion of modernization,the prohibition on financial assistance was generated,developed,disseminated and evolved in a wavy form,which showed the the characteristic of “Strictly prohibited-restrictive management-deregulation” on the legislative orientation.This characteristic is mainly due to the legal,political and economic factors such as: the continuous promotion of Britain,the entanglement and restriction between the European Union and the United Kingdom,the continuous change of the legal logic behind the prohibition,corporate legislation is shifting to small businesses and the gradual acceptance of leveraged buyouts by the market.The third chapter aims to answer the similarities and differences between various countries' the prohibition on financial assistance,make a holistic assessment of the legal regulation of financial assistance issues in various countries,and making in-depth comparisons of key microcosmic components,and try to analyze the reasons behind this difference.The prohibition on financial assistance originated in the United Kingdom and was subsequently transferred to countries and regions that were deeply influenced by English Law,such as Australia,Singapore,Hong Kong,Malaysia,New Zealand,etc.The European Union company law directive also basically adopted British practice,making various European Union member countries also carried out system transplantation in succession,while the United States and Canada did not establish relevant law.However,specific to the microcosmic structure of the law,the current rules of each country and region are different,which are embodied in five major aspects such as: whether the applicable objects include private companies and holding companies,whether there are any unconditional exemptions and the various specific situations for unconditional exemptions,whether there are any conditionalexemptions and the various specific situations and procedures for conditional exemptions,whether to grant shareholders,creditors and other relevant subjects the right of objection,for application to court for dismissal of resolution of financial assistance from company,whether the legal consequences that the company and the responsible personnel should bear after the occurrence of illegal financial assistance and the transaction providing financial assistance is effective.If taking the major differences in these five aspects as a major category of indicators that measure the overall severity of the prohibition on financial assistance to carrying out quantitative processing,it is not difficult to find that under the existing legislation on the prohibition on financial assistance in various countries,the degree of severeness in different countries has very different levels of relative severity.The reason why the strictness of all countries from the basically consistent beginning(because they are all based on the United Kingdom's prohibition on financial assistance for the full absorption)developed into the current different level of severity,it mainly due to the differences on transplantation method,legal system,economic development mode and other aspects of the system.In general,the severity of countries and regions that have carried out initiative system transplantation and the spontaneous consciousness of the legal system continuously enhanced become lower and lower,while the severity of the countries and regions that have carried out the passive system transplantation and with less spontaneous consciousness of the legal system continue to maintain a high level.The average severity level of civil law countries is much higher than that of the common law countries,so as to build a lower severity level in the countries and regions that take the worldwide financial investment and trade service centers as the economic development goals.The fourth chapter aims to answer the qualitative question of “Regulate or not regulate”,which mainly discusses whether there exists necessity and legitimacy for the law to directly regulate the company's financial assistance problems,and analyzes and reflects on the interpretation reasons for the traditional justification.The Greene Committee took the first step in providing a theoretical basis for the prohibition on financial assistance.It tried to explain under the capital maintenancerule that “a company cannot buy its own shares” that the prohibition on financial assistance could limit the company's ability to purchase its own shares.It was intended to prevent companies from improperly returning capital to shareholders.However,the scope of the prohibition had far exceeded the scope that the capital maintenance principle had attempted to regulate.For some transactions that did not cause any impairment of the company's assets at all,such as the provision of loans,the principle of capital maintenance couldn't provide a strong explanation.Later,this interpretation was seriously questioned.The law of financial assistance was discussed in the context of protecting creditors and minority shareholders against the abuse of company assets.The prohibition was considered as a mechanism to protect the interests of creditors and minority shareholders from harms of high debt buyers.The buyers borrowed money to finance for his purchase,obtained control right of the target company and used the resources of the target company to repay their loans.This kind of behavior leaded to abnormally high financial agency costs,existing the misuse of the target company's resources and then its wealth was diverted from the target company,as a result,the creditors and minority shareholders of the target company were facing the risk of potential harm.However,this interpretation had a relatively large amount of insufficient explanatory power problems in terms of protection of creditors or the protection of small and medium-sized shareholders,and the current academic community believes that the company law has shifted from preferential protection of the company's counterparty to promotion of commercial activities to enhance the economic growth.The most core of a leveraged buyout is that the target company ultimately bears the cost of the acquisition and its cash flow is used to make the final payment for the acquisition of debt.The potential for financial assistance to promote this unethical business practice may be obvious and morally annoying,leading to it being considered as “very inappropriate”.Therefore,the prohibition on financial assistance seems to be the natural enemy of leveraged buyouts and is a natural obstacle to the core arrangement of leveraged buyouts-using the assets of the target company as the ultimate source of repayment.However,the prohibition on financial assistance isaimed at the behaviors that “obtain” the company's shares by others,not just behaviors that “acquisition” of the company's shares or obtaining the corporate control right by others,which greatly weakened the curbing leveraged buyouts as a justification explanation for the prohibition on financial assistance.In addition,the traditional view that leveraged buyout is a harmful business practice to the market is increasingly being proven not to be absolute.The regulations of the prohibition on financial assistance will hinder those potentially economically valuable leveraged buyout,and creditors can prevent the risks of leverage buyout through event risk clauses,so curbing leveraged buyout is currently unable to provide a justification basis for the system.There is also the view that the prohibition on financial assistance can indeed prevent market manipulation,but at present national securities laws already have a special legal system to guard against market manipulation risks,so it is a wrong reverse logic to prove the rationality of the prohibition from preventing market manipulation.The fifth chapter mainly uses the research methods of law and economics to interpret the commercial property of financial assistance behavior itself and the potential conflicts of interest,and reduces the agency cost as the necessity and legitimacy legal principle basis for the law to directly rule and regulate the financial assistance.The establishment and interpretation of the “essence” of the company is the starting point for the logical analysis of the specific micro-legal system of the company's financial assistance system and regulation.The exploration and debate on the nature of the company began in the field of law in the late 15 th century and derived into three schools of doctrine of the nature of traditional companies: legal fiction theory,legal reality theory and legal negative theory.They have their own interpretation tensions in different areas of the company's system,but trapped in the historical limitations of their time and research paradigm,they all inevitably have interpretation power limitations.After the 1930 s,the economics discussion about the“black box” of the “enterprises” by the economists has opened the discussion stage ofmodernism on the nature of the company.Coase regarded the enterprise as a contract structure,a special contract that was different from the market,and from which has created a modern enterprise contract theory;Not only that,the modern contract theory also argues that the completeness of the contract is a kind of good wishes.In the actual society,it makes the actual contract necessarily an incomplete contract due to the reasons such as: unobservability and unverifiable caused by people's bounded rationality,ex ante information asymmetry and ex post information asymmetry,language's limitations in description power,the transaction side is heterogeneous and there are different types of preference cooperation.The company is a combination of contractual relationships among the suppliers of various production factors.This internal contractual relationship is also a kind of agency relationship.In the course of the operation after the conclusion of the contract,there will inevitably be three kinds of agency costs problems,and the function and value of the company law is to reduce this agency cost to further increase the overall economic effect.Specific to the process of financial aid transaction,there may be three types of agency costs-the conflict of interests between the company owner and the business people employed by the owner,the conflict of interests between the shareholders with an absolute majority or controlling interest and the shareholders with smaller or non-controlling interest in the company,the conflict of interests between company itself or its shareholders and its contracting partners(mainly creditors,etc.),the choice of legitimacy and regulation method of the company's financial assistance for the company's laws lies in the existence and severity of these three types of agency costs.From the perspective of reducing agency costs,which can effectively explain the most typical different types of company differential management,the legislative model of “in principle prohibition & conditional exemption” and “conditional” exemption model that emerged in the transition of the prohibition of financial assistance.Which,to a certain extent,corroborates the agency cost analysis has a strong theoretical explanation power.At present,the second type of agency problem in the operation of listed companies in China occupies a dominant position in the first and second types ofagency problems,that is,compared with the self-interested behavior of the company's senior staff infringing shareholders' interests caused by the separation of ownership and control,the “hollowing out effect” of large shareholders with the advantage of control plundering the interests of small and medium shareholders is more prominent and serious.In addition,the total debt leverage of listed companies and the company's investment behavior are negatively correlated.The governance effect of debt financing on the first type of agency costs is more significant than the third type of agency problems arising from debt financing,indicating that debt financing in the corporate governance of investment behavior has a benign effect of curbing excessive investment.Financial liabilities and new added investment expenditures are positively correlated.Operating liabilities or commercial credits and new added investment expenditures are negatively correlated.Currently,the operating liabilities level of listed companies is higher than financial liabilities.The sixth chapter aims to answer the question of “how to perfect our country's legal system”.This section will set up a more detailed and multi-dimensional local financial assistance legal framework system for the company's financial assistance behavior under the current background of corporate agency costs in China.The earliest emergence of the concept of “financial assistance” in the company laws and regulations of our country was on “Notice of Issuing the Essential Articles of Association of Hong Kong Listed Companies”,which was published and implemented on June 10,1993.According to Article 2.2 of the “Essential Articles of Association of Hong Kong Listed Companies”,the articles of association of listed companies in Hong Kong must make a provision for company financing to purchase their own shares and specify the contents what must be included.On December 29,1993,the Standing Committee of the National People's Congress reviewed and approved China's current “Company Law”.It does not directly stipulate whether the company can provide financial assistance for others to obtain company shares.In the following related laws and regulations of “Notice on Issuing the Guidelines for the Articles of Association of Listed Companies”,“Securities Issuance and Underwriting Management Measures”,“Listed Company Acquisition Management Methods”,“Unlisted Public Company Acquisition Management Measures”,“Listed Company Equity Incentive Management Measures”,the regulations concerning the prohibition on financial assistance system are gradually involved in a scattered method.However,in general,there are many deficiencies in the existing legislation prohibiting financial assistance:(1)Fragmentation of rules,lack of uniformity and independence;(2)Thin and rigidity of rules,lack of systematization and flexibility;(3)Financial assistance clauses fail to reflect the core requirements and it is easy to expand the scope of prohibition;(4)The lower level of the legislation and the lower cost of violations and others.In this chapter,combining the characteristics of corporate agency costs in China,it focuses on discussion on the principle and rules of financial assistance for different applicable objects,financial aid issues in the company's employees' shareholdings,financial assistance issues in management buyouts,conditional immunity model selection problems and other important propositions of the prohibition of financial assistance.Based on the analysis of the status of agency costs in China and the important propositions in the financial support system,the author proposes to reconstruct the prohibition on financial assistance in China,the specific legislative proposals including: First,strengthen the unity,independence and the systematization of the prohibition on financial assistance legislation,unify provision of principle provisions,unconditional immunity,conditional immunity,right of opposition,legitimacy of transaction,interpretation,etc.,making it a complete system of the company law independently;Second,stipulate deal behaviors that are with the characteristics of financial assistance on the forms but have been regulated by targeted legislative or judicial actions,and the legitimate obligations development transactions of special financial companies and the behaviors to pursue higher-level goals on the prohibition on financial assistance as the unconditional exemptions so as to avoid conflicts when the rules or laws are applied;Third,adopt a more loose and free “insubstantial damage” model for the limited liability companies and the non-listed and non-public companies in China,that is,the company may provide the financial assistance withthe conditions: the assistance will not substantially damage the interests of the company and its shareholders and the solvency of the creditors,and the board of directors passes a resolution that the company should provide the assistance,the terms of the assistance are fair and reasonable to the company;For listed companies and non-listed public companies,from the four dimensions of company type,control power,transaction motive and leverage level,the differentiated exemption approval mode is comprehensively considered,under the premise that when the providing financial assistance shall not reduce the net assets of the company or reduce the net capital,the assistance funds are provided from the company's distributable profits,and assistance is in good faith and meet the best interests of the company.Fourth,clarify the legal consequences of illegal financial assistance and increase post-punishment.When related agreements of financial assistance involve third parties in good faith,the agreement will not be invalid simply because of a violation of the prohibition on financial assistance,and it clearly stipulates the invalidity of the behavior of financial assistance will not affect the legality of the acquisition of equity.At the same time,director who is at fault in illegal financial assistance will be liable for repayment of any losses may have occurred in the transaction due to his breach of a fiduciary obligation.