Company Law Regulation On The Connected Transaction

With the development of corporation and corporate structure, theconnected transaction emerged. The connected transaction of listed companiesof our country increased quickly year by year. It likes a double-blade sword,on one side, it can cut down the transaction cost and raise the wholecompetition ability of enterprises;on the other side, the unjust connectedtransaction have caused a great deal of troubles. It supports many chances ofcontrolling profits and transferring revenues by controlling shareholderswhich finally impairs the interest of minority shareholders and creditors.This article, with the purpose to prevent unjust connected transaction andprotect the interest of minority shareholders, discusses the general theoryabout legal regulation on the connected transactions and construct theregulation system based on Company Law of PRC which took effect inJanuary 1st, 2006.The article consists of four parts.Part â… is the theoretical analysis of connected transaction . It reviews thedefinitions of connected transaction and affiliate party, the scope of affiliateparty and the features of connected transaction in law. In fact, there is nostandard legal concept of connected transaction. It can be taken as a broaderterm. Connected transaction is the transaction happens between a listedcompany and its affiliate party. So, how to definite the affiliate party and itsscope accurately becomes the premise to judge and regulate connectedtransaction. Although there are a few differences in legal regulations, all thecountries use "control" or "significant influence" as the main basis ofjudgment. Meanwhile, all countries emphasize that substance ranks higherthan form in judgment of connected transaction. As a special kind ofcommercial behaviors, connected transaction gets its own legal features,includes: (1) the subject is inequitable;(2) the performance is hidden andvarious;(3) the benefits are conflict;(4) the transaction is apt to be unjust.According to the analysis of this part, a clear understand of connectedtransaction can be gotten, which could be the theoretical premise of theresearch and legal regulation of connected transaction.Part â…¡is the realistic analysis of connected transaction in Chinese listedcompany. It deeply analyzes the motives, behaviors and reasons of connectedtransaction of our country. In case of just connected transaction, listedcompany intends to cut down transaction cost and raise competition ability;and in opposite case, it intends to control profits and reduce revenues.Connected transactions of listed company in China happen mainly in thecourse of business operation and capital recombination. Connectedtransactions in business operation include connected purchase and sale, costtransfer, assets loan, fund intercourse and credit guarantee. Connectedtransactions include going pubic through a shell and repurchase. All theseconnected transactions origin from the corporate institution and the reality ofChinese listed company. According to the analysis of this part, a directimpression of connected transaction in our country can be gotten, which couldbe the real foundation of the research and legal regulation of connectedtransaction.Part â…¢ is the comparative analysis of the regulation of connectedtransaction. This part starts with two aspects, connected transactions practicedby directors and controlling shareholders. Then compares and analyses thedifferent regulation modes of connected transaction in the USA, Great Britain,Germany, Japan and so on. By the review of above countries' legal regulationof connected transaction, the value trends of the legal regulation are deduced,that is to recognize just connected transactions for the respect of efficiencyand to confine unjust connected transactions for seeking equity. According tothe analysis of this part, the regulation modes of connected transaction andtheir value orientations in foreign countries can be gotten, which could offersome reference for the constitution of regulation system in our country.Part IV is to analyze the regulations of Company Law on the connectedtransactions of our country. This part analyzed the status of legislation and thesystem of regulations. There is a great improvement in the regulations of ournew Company Law of our country on the connected transactions, whichidentified a set of rules and institutions to prevent the unjust connectedtransactions and to protect the interests of the minority shareholders. Therelevant provisions of the system regulate three aspects comprehensively inprevention in advance, protection in process and post-relief on the connectedtransactions. The mechanisms of prevention in advance includes the votingmechanism of the shareholders' meeting, the institution of shareholders'voting agreement, and the avoidance system resolved by the board of theconnected directors. The mechanisms of protection in process are to enhancethe authorities of the board of supervisors and to introduce the institutions ofindependent directors. And the mechanisms of post-relief are to enhance theobligations and duties of the directors, including senior managers, in unjustconnected transactions, and to identify the civil liabilities of the controllingshareholders in unjust connected transactions and the institutions of thederivative actions of shareholders. The analysis of this part is to systematizeand modulate the legal system of the regulations of Company Law on theconnected transactions, to achieve the maximum of the regulations' functions,and to improve them on and on.