Research On Defensible Terms For Provisions Of Entrenchment

The company's articles of association are indispensable basic documents defining everything from the establishment,operation,management to the dissolution of the company.However,in practice,the articles of association often contradict their original purpose as put forth by corporation law and subsequently result in legal dispute.At the outset,the cause for dispute appears to be the conflict between applicable choices from the articles and from regulations.In fact,it is due to the discrepancies within the methods for balancing the interests of shareholders.Although protection of shareholders' interests is included in China's "Corporation Law" and it is theoretically indisputable,it mostly focuses on the "peripheral" system of shareholder protection,and rarely goes directly into the "core" of the company.Despite the fact that regulations take into account the "balance of shareholders' interests",the corresponding provisions are relatively general and fragmented,and dispute often arises about how to apply them in practice.More precise terms and mechanisms are required to promote the realization of "balance of shareholders' interests".These mechanisms should take into account the positioning of controlling shareholders and non-controlling shareholders,the company's operating efficiency and business autonomy,the moral hazard and interests of non-controlling shareholders,and more importantly,the balance between legal intervention and autonomy of will.It is important to set up enforceable terms for provisions of entrenchment as well as define their adjustment conditions.To achieve this,they must be integrated into the clauses of the corporation law.This article is divided into four chapters to study the defensible terms for provisions of entrenchment.The first chapter discusses the theoretical basis of the defensible terms for provisions of entrenchment.Provisions of entrenchment belong to a brand-new system concept in China,therefore the initial concepts,fundamental basis,and basic functionality must be explicitly defined.It also requires a categorization method to clarify its system structure.Firstly,the provisions of entrenchment and their adjustment conditions should be distinguished;the latter shall be referred to hereafter as the defensible terms for the provisions of entrenchment.The defensible terms for provisions of entrenchment are the articles that make it more difficult to modify or revoke certain provisions,the purpose being to maintain the autonomy of the company.The defensible terms must provide for special resolutions,the strictness of adjustment,the complexity of the content,and the protection of particular shareholder interests.Secondly,the fundamental basis for the defensible terms should be identified.On one hand,this research determines that the contractual nature of the company's articles of association and the enabling rules of the corporation law are justified;on the other hand,the legal scope of the company's self-created articles of association and the legitimacy of adjustments to the company's articles are questioned.Thirdly,the basic functions are explained,including the functions of restricting the abuse of capital majority,strengthening the autonomy of the articles of association,balancing the main interests,and reducing agency costs.Fourthly there are two main categories of defensible terms for provisions of entrenchment: corporate resolution entity rights matters and corporate resolution procedural matters.The boundaries and sub-categories of each category are further clarified,and provide a framework for future discussion.The second chapter refers to the defensible terms for provisions of entrenchment of corporate resolution entity rights.These provisions refer to the question of presence,absence and the extent of shareholder rights with respect to resolving substantive matters at the shareholders meeting.This chapter focuses on the three main subcategories of entity resolution provisions,namely,the defensible terms for convening rights,proposal rights and voting rights.Study in theoretical background,comparative law review,judicial practice and market analysis of normative use,lead to the following conclusions.Defensible terms of convening rights are further divided into three subcategories: those pertaining to first shareholders' meeting,the annual shareholders' meeting and any extraordinary shareholders' meeting.As far as the first shareholders' meeting should be concerned,the defensible terms should allow for the adjustment of the convening right of an individual or part of the sponsors;meanwhile,other shareholders should be given the right to convene the first shareholders' meeting.With regard to annual shareholders' meeting,the defensible terms should not completely deprive the convening right of shareholders,but should adjust the shareholding ratio and duration requirements for exercising the convening right.Finally,there should be specific limitations regarding setting a pre-procedure depending on the situation.For extraordinary shareholders' meeting the convening right should not be revocable by the defensible terms,however,the shareholding ratio,duration of shareholding and the requirements of the pre-procedure to exercise the convening right should be adjustable.The second category of defensible terms for provisions of entrenchment is with respect to proposal rights.It is determined that the design of the terms should not be used to change the nature of shareholders' proposal rights from minority to individual.The articles should be allowed to make autonomous provisions on the qualifications of the subject of the proposal right and also allowed to set up proposal exclusion rules and proposal exercise procedures.The third category of defensible terms is with respect to voting rights.From the perspective of hermeneutics,this section analyses China's current law,and divides them into four parts: the attribution of voting rights,the exclusion of voting rights,the allocation of voting rights and the secondary allocation of voting rights.Firstly,the defensible terms should not be allowed to attribute voting rights to the company's internal members or external members.Secondly,shareholders cannot be deprived of voting rights through defensible terms in the absence of legitimate reasons.Shareholders should be able to waive their voting rights,but defensible terms may restrict their waiver.The defensible terms should provide for modifying voting exclusion criteria,but should align with the overall interests of the company and protect against the undue reduction of shareholders' personal interests.If it is necessary to reduce the interests of shareholders,it should also meet the standards required by justice.Thirdly,limits on the allocation of differential voting rights structures should be removed in some industry fields.Thus,the defensible terms should be allowed to adjust the proportion of special shares and restrictions on transfers,and to limit the scope of application of special voting rights.In addition,the applicable time for the voting right allocation structure should be before the IPO.Fourthly,defensible terms should be allowed to adjust the qualifications of authorized entities,the duration of authorization and the form of voting rights exercised under the secondary allocation.The third chapter covers the defensible terms for provisions of entrenchment of procedural matters,that is,the articles are adjusted for the procedural rules relating to the formation of the company's resolution.The procedural rules can be categorized into defensible terms for adjusting the required proportion for passing resolutions,voting mechanism and proceedings of shareholders' meeting.The defensible terms for adjusting the required proportion for passing resolutions can be further divided into two aspects: the passing ratio increase terms and the quorum requirement terms.As for the former,defensible terms should be allowed to increase the percentage of votes required for passing resolutions,and expand the scope of application of special resolutions.For the latter,the defensible terms should provide for setting the quorum.Before setting,the base number should also be clearly calculated as based on voting rights held by presenting shareholders in the company's total voting rights.Consideration should be given to the fairness and efficiency of the resolution,and determination of the quorum should be fixed at the beginning of the meeting.The defensible terms for provisions of entrenchment with regard to voting mechanism can be divided into three sub-categories: split-ticket voting type,multiple-class voting type,and specific shareholder consent type.With regard to split-ticket voting type,the defensible terms should allow for adjustment,but the application of the split-ticket voting should be limited to the purpose of satisfying "convenience" requirements,and meet the procedural requirements such as the corresponding setting period or notification form.With respect to the multiple-class voting type,the articles should be allowed to set up corresponding class voting terms in accordance with the procedural requirements of ordinary shareholders' meetings.In addition,the specific terms for the adoption of resolutions and the matters for resolutions should also be written.With regard to the specific shareholder's consent type,although intended to be effective,the scope of the subjects and the exercise period should be strictly limited.The defensible terms for provisions of entrenchment with regards to proceedings of shareholders' meeting includes the adjustment provisions for the notice of shareholders' meetings and the form of discussion of shareholders' meeting.The former should be allowed to adjust the method of call notice and the period of call notice.There should be several restrictions on the latter,including that the applicable subject is only a non-public company.The articles of incorporation regarding written resolution rules should not break through the unanimous agreement rules,and should clearly list the major resolutions of the company that adopted a consensus.The last chapter examines the theoretical practice of the discussed defensible terms and the recommended response to the consequences of their adoption.The setting of defensible terms starts from adjusting the balance of interests between shareholders until it affects the overall interests of the company.Therefore,this chapter subdivides the defensible terms into two perspectives,and examines the micro and macro stances to ensure underlying problems can be solved,whether new problems will arise,and how new problems can be overcome.From the perspective of the company,the defensible terms can alleviate the problem of alienation from the corporate system,the high agency costs and the issue of templated corporate governance.However,the institutional alienation from the corporate system can be solved only to a limited extent,substitute agency costs problem may emerge and the templated corporate governance issue still needs review.From the perspective of shareholders,these defensible terms can coordinate the conflict between the company's decision-making logic and the protection of shareholders' interests in the corporation system,enhance the awareness of shareholders' rights,and defend those rights.However,the dangers of over-correction of shareholders' interest protection and the potential negligence of these rights are still issues.In terms of application,defensible terms can improve the protection of shareholders and increase the cost of infringement of shareholders' rights and interests,but there is a lack of corresponding general regulations and supporting rules.Finally,in terms of market practice,it conforms to the rising reality of shareholder activism and shareholder democracy in the Internet age,bridging the gap between the grafting of foreign shareholder activism and the inheritance of local protection systems of shareholders' interests.However,there are obstacles to adopting the defensible terms for provisions of entrenchment.For example,the current Chinese corporation law provisions are not detailed enough for shareholders to participate in corporate governance,and in some cases lack clear legal authority and specific rules for corporate governance.In the end,there are two responses to the issues mentioned above.The first is to build a shareholder fiduciary duty system,provide a theoretical basis,practical support,and institutional content.The second is to propose corresponding rules,including the mode of expression of defensible terms,the general rules of the defensible terms,and the modification of specific clauses of the company law corresponding to the defensible terms.