U.s. Company Law Regulation, Self-dealing

Self-dealing transactions are referred to as transactions between a director, officer or controlling shareholder (hereafter referred to as "interested parties") and the corporation, which involves a conflict of interest. Self-dealing transactions are governed by duty of loyalty for it requires directors, officers or controlling shareholders be faithful and loyal to the corporation, which prohibits the personal interest of interested parties conflicting with the interest of corporation. Proper controlling rules are applied to regulate self-dealing transactions and assure the fairness of the transactions in most countries. The legal institution on controlling self-dealing transactions developed well in U.S. The corporate law of U.S. on controlling self-dealing transactions has experienced from prohibition to conditional permission under controlling rules. Current controlling rules of self-dealing in U.S.are procedural fairness rule and substantial fairness rule. Procedural fairness rule which excludes the influence of interested parties from participating in voting requires the approval of majority of disinterested parties following full disclosure on conflict of interest by interested parties. Procedural fairness rule makes it unnecessary to bring the transactions before the courts for objective evaluation. However, substantial fairness rule permits interested parties to participate in voting of self-dealing transaction but provides the courts examine the substantial fairness of the transaction following dissenting shareholders claimed before the courts the transaction is unfair. This does not mean that all the transaction where a conflict of interest arises will entail litigation. The substantial fairness rule is applied in most of states in U.S. including Delaware. The author analyzes the two different rules further from the point of view on fairness and efficiency which are two value aim of commercial law. Concerning fairness, substantial fairness rule and procedural fairness rule are almost equal. From efficient point of view, the factors influencing the efficiency of controlling rules include information costs, negotiation costs, adjudication costs and market mechanisms. Negotiation costs, adjudication costs and market mechanisms are the crucial factors in influencing the efficiency of controlling rules. The preferable rule depends on the specific economic, judicial and social circumstances of a given jurisdiction. The author analyzes specific economic, judicial and social circumstances in China and finds that procedural fairness rule is a preferable controlling rule which suits current circumstances of China. Finally, some legislative advices are provided regarding improving the current stipulations in corporate law and regulations.