Related Party Transactions Legal Regulation

Connected transaction is a peculiar practice of market economy. It has come into existence and developed together with the origination and development of enterprise groups to be an instrument for profit due to its characteristics in low trading costs, massive scale, income adjustment and access to monopoly. Connected transaction is in wide use in many countries and is acknowledged in their laws. Since the two parties involved are unequal in economic status, there is conflict in the dealings, thus inevitably resulting inequality to hurt other bodies of interest such as middle to small investors, creditors and the state as well as the health development of the securities market which deviates from the basic principals of the market economy. Therefore the start and stand of legislation on connected transaction is to prevent improper occurrences by imposing rules on the connected transaction by first acknowledging its existence as reasonable.In the process of China' s market reformation various kinds of connected transaction have formed and due to the incompleteness of state-owned business reforming, there have been faultiness in both structural control and law regulations plus faultiness in supervision of the companies all of which leave space for the companies to improperly trade inside to avoid taxation or to manipulate on profits. This is specially the case with the listed companies who have caused severe economic losses to numerous investors and creditors and have severely-fouled the growth of China' s capital market. In order to protect the middle to small investors and develop the capital market there must be legislation on connected transaction .China' s regulations on connected transaction started by tax legislation and accounting legislation. From 1997 the body supervisinglegislation on connected transaction .China' s ,regulations on connected transaction started by tax legislation and,acppunting legislation. From 1997 the body supervising in the securities market has strengthened supervision on the listed companies regarding,connected transaction. As the result of their efforts, (a series rules were established. But since there was lack of emphasis by the government on connected transaction in the beginning there had been no applicable laws and punishing system, rather there had been too much interference from government bodies, resulting even more problems. One of the problems is the lagging behind of legislation on connected transaction : The Company Law had only statements in principle regarding connected transaction and is faulty;The Securities Law stipulates on listed companies regarding connected transaction , but is low in rank of enforcement and is limited in binding. The other problem is the softness in execution of the laws, not enough strength in control and weakness in supervision. There is no effective protection of the benefits of middle and small shareholders. Furthermore There is no effective external supervision on the running of agents.Discussed in this paper are the contents and necessity of ruling on connected transaction with the analysis the problems and their causes in China' s regulations on connected transaction . Seven suggestions are made to perfect them by referring to the experiences of developed countries in connection to China' s practical situation: (I) Introduction of the system of disregard of the corporate fiction, establishment of honesty-obligation of the biggest shareholder, completion of oting system , establishment of shareholder derivative law suit system, completion of structural control of legal person and its strict censorship before listing, perfection of legislation onconnected transaction in the Securities Act. (2) standardization of the company before listing , perfection of the. system of promoters and adoption of the way of their capital operations to block the source improper connected transaction . (3) Suggestion to enhance level of legislation and more force in execution, further implementing the system of outside director and perfecting the system of information disclosure. (.4) Joining of self-discipline and supervision, intensification of the state and the obligation and the responsibility of the supervision agency, perfection of the measures of supervision and punishiment. (5) Perfection of legal compensation. (6) Expedition of management system for agents. (7) Enhancing the training of investors and staff of the listed companies regarding the laws, regulations and disclosing of information.