Legal Analysis On Non-tradable Share Reform

The protection of small shareholders'interests is an eternal subject of modern corporate system. Non-tradable Share Reform is one question about this subject, and at the core meaning, it is not simply in relation to the circulation of state-owned shares. More importantly, it is in relation to the balance of interest between circulating shares and non-circulating shares, and to the protection of circulating shares, who have had a low status for a long time. In recent years, non-tradable share reform is the most important reform in China-security-area. On April 29, 2005, the China Securities Regulatory Commission issued the "companies listed on the reform of the equity division of the notice", which witnessed the beginning of non-tradable share reform. Since the first four pilot companies was appointed, thousands of companies have participate in a comprehensive reform. However, the current non-tradable share reform lacks of support by rules and relief by justice, which is facing much confusion. Wishing to change this situation and to resolve various problems, a scientific and effective system must be established, which includes: Pricing for a reasonable price, participate and vote mechanism, share repurchases system, performance safeguard mechanism, the information disclosure system, strengthen-class-obligations mechanisms and shareholder appeal mechanism which has derivative litigation as the core.The whole text is divided into four parts as follows:The first part is "a legal analysis of Non-tradable Share Reform", which includes its definition, significance, core principles and standards. Non-tradable share reform is to change the status quo of China's securities market, and to achieve non-tradable shares in circulation. Non-tradable share reform is a legal issue: non-tradable share reform needs a sense of fairness on law, which can not bypass regulation. The aim of the reforms includes: making institutional arrangements for the non-traded shares in circulation, looking for equal value for listed companies, and improving the governance structure of listed companies. Its value is to specify the expected policy, to exert the capital market functions and to establish a rational pricing mechanism. Equality of shareholders and strengthen the obligations of controlling shareholders are the core principles of non-tradable share reform.The second part is "necessity of non-tradable share reform and analysis of the status quo ", which discussed the necessity of non-tradable share reform and the status quo: Analysis of non-tradable share reform group, which is the equity division itself, focuses on the necessity of exposition stock. Internal equity division is a listed company in circulation which concludes both shares in circulation and in non- circulation. It stems from the equity classification according to status. Shares own lacks legitimacy, which is contrary to the "principle of freedom of shares" and "share with the same principle." and contrary to principles of classification categories shares; Meanwhile it lacks reasonability, which leads to huge differences on costs and prices between two types of shares. Both revenue and risk-sharing of the two types of Stockholder take on serious asymmetry. Stockholder equity division cuts off the links of the capital gains mechanism between the circulating and non-circulating shares. The conflict between the two types of shareholders rises, and leads to stock market slump. Unreasonable conditions of the equity division demands a reform of the status quo. The reform of the equity division and the main problem facing the current situation is discussed. At the legislative level, legislations are absent: the legitimacy of the guiding document is doubted, and the existing rules are not perfect, which can not protect the interests of shareholders. At the relief level, there lacks arrangements of private relief, and public relief is in a dilemma. supervision of a contractual relationship is seriously absent. Besides, non-tradable share reform still faces many problems: lacking of rational pricing mechanism, widespread psychology of trial and error, bad systems of information-disclosure, and the abuse of power holding by non-circulating shares (the shareholders).The third part is "analysis on justice of non-tradable share reform program", which is to analyze how to achieve the value of equality in the reform. It must ensure that two types of Shareholders can reach a fair and reasonable package under the equal mechanism. This requires a breakthrough in the reform of the equity division from a legal point, and establishment of a scientific, rational and effective system to balance the two types of equity interests of the shareholders. the principle of equal shares must be taken to practice: a reasonable price for the balanced pricing mechanisms must be established to achieve the balance of prices: two types of shareholders mediate to fix the "on-off", and accountants, lawyers and other professionals must be involved. "Price" includes: sending now, paying stock dividends, the form of debt restructuring or reorganization of assets and so on. participation and voting mechanism must be strengthened and improved: circulation stockholder gain the real equality to exert the right to vote using proxy system, Communication system of voting, cumulative voting system and the assembly voting system. A performance bond guarantee mechanism reform must be established: the legal validity of commitment must be specified, the security system should be used, and the power of judicial relief should be involved.The fourth part is "analysis of the value of non-tradable share reform", which proposed measures to protect the interests of small shareholders. The correction of interests-balance-lacking under the equity division is the establishment of a scientific and effective system: systems of Share Repurchases: the reduction of state-owned shares, and optimization of the company's capital structure through share repurchases; regulation of the supply of shares to improve the value of the company; protection of minorities to resolve objections equity; strengthen and improvement of the corporate governance structure of listed companies. Fully information disclosure system should be established to endow shareholders the right to appeal. Related persons'obligation should be enlarged, and the supervision of listed companies to disclose information should be strengthened. Obligations of directors, supervisors and senior management should be strengthened too, with particular emphasis on preventing the circulation class and non-circulating shares stockholders from violating rights of circulating shares stockholder. Shareholder appeal mechanism and a shareholder derivative litigation should be established in order to prevent and correct misconductions of big shareholders and the business sectors, and protect the interests of small shareholders.In the beginning of joint-stock reform, the implementation of the equity division is a non-rational choice, because it runs counter to the basic principles of markets and tenets of law. Now we will once again reform it, and we should make a rational choice. Non-tradable share reform should fully absorb the lessons of the equity division. It must abide by the fundamental principles of market and law, and we should avoid a trial and error psychological-driven reforms. In this paper, the need to establish a scientific and effective system of law is repeatedly stressed, in order to breakthrough non-tradable share reform from the legal perspective and provide a scientific basis for this system, so that the reform can proceed under a rational and standardized guidance to change a blatant inequality between different entities, and achieve equity among different entities. Reform is, in essence, in the economic sphere, but its thinking-way and philosophy must be lawful, and should be promoted by ways and means of law. This is the only way to ensure fairness and justice in the reform.