Research On Internal Governance Of Close Corporations

The core objectives of corporate law are to resolve the conflicts among shareholders,contain opportunistic behaviors that would reduce the value of corporate,promote the growth of corporation and protect the interests of investors.Global competitions are not only economic competition,but also system competition,whether the legal system can attract investors is also a very important aspect of institutional competition.It makes all of the countries to pay attention to and adjust their basic principles and systems of corporate law in order to maintain the competitive economic advantages of their own corporate governance systems and models.Unlike the public corporations,close corporations' characteristics(fewer shareholders,without separation between capital and administration,no open market)make they have their own problems.So many issues(including increasing shareholders' disputes,shareholders been caught in long-term litigation predicament,shareholders abusing rights,shareholder oppression and so on)are difficult to be resolved in the current corporate governance.The shareholders disputes are the most central and unique problem in the internal governance of close corporations.The settlement mechanism of the conflicts of shareholders' interests will become the main system fulcrum of the internal governance of close corporations and has both theory and reality at the macro and micro level significance.This dissertation will take the internal governance of the close corporations as the research object,trying to comprehensively and systematically elaborate the relevant issues concerning conflicts of shareholders by using comparative research,economic analysis of law and empirical research.On this basis,the paper put forward three pillars of the internal governance of the close corporations and conclude the defects of the existing system and judicial obstacles in China.At meantime,combined with the existing experience of other countries to improve the close corporations' shareholders conflicts resolution mechanism.Apart from the introduction and conclusion,the thesis consists of six major parts:The first chapter is the basic theory,which aims to highlight the basic characteristics and difficulties of the internal governance of the close corporations,in order to lay the foundation for the following discussion.Compared with public corporations,close corporations have different structural characteristics and governance issues,which require different governance models and systems.The main dilemma of close corporations' governance lies in the issue of agency among shareholders,that is conflicts of interests among shareholders.Based on different perspectives,a series of theories related to the internal governance strategy of close corporations have emerged,and each has its own advantages and disadvantages in analyzing shareholders disputes.Due to the predicament of close corporations' unique agency problems,the lack of effective contractual arrangements among shareholders and the limits of judicial intervention,the resolutions of shareholders'conflicts require the simultaneous establishment of ex ante regulatory mechanisms and ex post judicial remedies.To be more specific,it must rely on corporate law,articles of association and judicial invention.The second chapter focuses on the types of shareholders' disputes.The shareholders' conflicts stem from the motives of self-interests of shareholders and they are more likely to aggravate and alienate in the context of close corporations.Specifically,the types of shareholder conflicts of interest are subdivided into three categories:First,the controlling shareholders invade and abuse company's assets,including unfair transactions,occupation of company property,and encroachment on the company's business opportunities.This kind of actions violate shareholders'loyalty obligations.Second,the concealable oppression behaviors,such as deprived information rights,squeeze-out,discriminatory equity repurchase,distributions,dilution and so on.Such behaviors are associated with company's business decisions which makes it is difficult to distinguish and evaluate whether it constitutes oppression of other shareholders.Third,the corporate deadlock.The third chapter focuses on the function of corporate law on the disputes of shareholders in the close corporations.Corporate law,as one of the three pillars of internal governance of close corporations,takes on dual functions of regulation and guidance.Corporate law can be divided into mandatory rules,default rules and enabling rules.The provision of model contract by corporate law is mainly based on the consideration of the fairness and the cost.The function of the model contract mainly relies on default rules and enabling rules to provide clear rules.The function of the corporate law to protect shareholders' interests is prominently reflected in fiduciary duties which are adjusted by the mandatory rules.Features such as adhesiveness of rules enable legislator could nudge shareholders do the best choices.The fourth chapter focuses on how the articles of association as the core of the system of shareholder autonomy can play the role of handling shareholder disputes in close corporations.The articles of association are the contract between shareholders,are the basic principle for shareholders to participate in internal governance of companies,and are important ex ante regulatory mechanisms to resolve the conflicts of shareholders.The possibility and effectiveness of investors taking ex ante regulatory mechanisms are premised on courts support.Therefore,the validity of the articles of association is particularly important.Generally,the validity of articles association follows the procedural judgment rules and the substantive judgment rules.And there are also some special rules for articles association which cause a lot of disputes in judicial practices.For special terms of close corporations' management,courts tend to support the private arrangements of the shareholders.For special terms of shares transfer,courts generally support validity of mandatory transfer clauses,but prohibition of transfer clauses are necessarily need to considering various factors.When the shareholder agreements conflicts with articles of association,courts generally do not directly veto the validity of shareholder agreements,but interprets as relationships that is replaced in parallel.The fifth chapter focuses on the ex post judicial remedies to shareholders disputes in close corporations.Due to the inherent limitations of shareholder autonomy,judicial relief to shareholders' disputes is an indispensable pillar.This chapter based on the classification of shareholders' conflicts in second chapter to explain the judicial response.Meanwhile,put forward the defects of China's judicial practices through empirical analysis.Actually,the judicial intervention is a kind of"drafting" or "disclaiming" what is not covered but "implied" by the shareholders'contracts.Although there are various remedies for minority shareholders when controlling shareholders invade and abuse company asstes,shareholders are more willing to use derivative litigation.Fiduciary duties,reasonable expectations and unfair prejudice are the main institutional bases for judicial intervention in the concealable oppression behaviors.Judicial dissolution and equity repurchase as the ultimate judicial remedies to protect minority shareholders.As for the deadlock,in fact judicial dissolution and equity repurchase are also the relief mechanism,giving minority shareholders a reasonable exit from the corporation.The sixth chapter integrates and expands on the aforementioned research results and explores and looks into possible paths for future reforms in the context of analyzing China's specific circumstances.The Chinese corporate governance strategies have the same strain as the development of the socialist market economic system.The Changing and developing of market economy demands that the legislative concept of Corporate Law should also be changed from "deregulation" to"promotion of autonomy." Second,add fiduciary duties and reasonable expectations on the basis of the existing provisions of the Corporate Law,to enhance the protection of shareholders in close corporations,so as to provide more substantive guidance to judicial adjudication.Third,propose the path of optimizing design of arbitrary rules and nudge shareholders action through menu.Fourth,to reform the shareholder derivative litigation.When the plaintiffs are shareholder of close corporation,the lawsuit could be allowed to be taken in more flexible litigation procedures and the award of compensation could be directly to the individual plaintiff.Fifth,expanding the scope of the shareholders' appraisal right,adding shareholder oppression,judicial dissolution and other reasons as the reasons for shareholders' appraisal right.Sixth,expanding the reasons of judicial dissolution.Put the shareholder oppression as one of the statutory grounds for judicial dissolution which may ensure shareholders's reasonable exit rights.