System Of Related Party Transactions Of The Company Regulations

When modern corporate system develops, related transactions are the inevitable result. Their existence is unavoidable, having certain advantages and positive factors. Regarding to law provisions on related transactions, there is a process from absolute prohibition to gradual opening up in the world. Along with the development of Chinese market economy, the reformation of the corporate governance system and the establishment of a modern corporate system, the issue of related transactions has been prominent. In particular, most of Chinese corporations, especially the listed corporations, were formerly state-owned enterprises. A shareholder may hold a significant share of the corporation, which leads to endless related transactions. If all these related transactions followed the principles of fairness, equality, and honesty, and were carried out with the prerequisite to ensure state properties not being hampered, corporate assets not facing inappropriate loss, hence to protect the legal interests of shareholders, then such transactions would be normal, which could not be avoided under the market economy system. However, in practice due to the lack of necessary law provisions, these related transactions frequently twist the trade terms, and a few controlling shareholders pursue inappropriate interests by infringing on the interests of affiliate companies, other shareholders and creditors. These unfair and unjust related transactions seriously damaged the independence of the corporation as a legal person and the integrity of its assets, and disrupted the normal order of the market economy. Therefore, it is of practical and immediate significance to study on related transactions and to regulate them.There are no provisions on related translations in the 1993 Company Law of China, which is pitiful. In China, related corporations, as a law terminology, was first seen in taxation law. The concept of related transactions was not noticed until 1997 when the Ministry of Finance issued the "Corporate Accounting Rules-the relationship of related corporations and the disclosure of transactions between them".However, there are only departmental regulations which provide rules on related transactions, which is far from adequate in view of the level of law.On 27 October 2005, the Standing Committee of the National People's Congress passed the revised Company Law, which is a landmark. The revised law explicitly stipulates that no controlling shareholder, actual controller, board member, supervisor, and senior manager should undermine corporate interests through related transactions. At the same time, the Law introduced a series of mechanisms to protect the interests of affiliate companies, minority shareholders and creditors, in order to provide rules on related transactions.This thesis consists of four parts. Part One is a general theoretical analysis of related transactions from three aspects, including the concept of related transactions, their characters and the necessity to provide rules on them, which is the basis of this thesis. Part Two elaborates mechanisms for regulating related transactions of other countries , including the protection mechanisms for affiliate companies and minority shareholders in related transactions and how to protect the interest of creditors. The protection mechanisms for affiliate companies and minority shareholders include the aspects of shareholders' fiduciary duties, and pro and post law safeguards for minority shareholders. This part explains in details the roles of approval by shareholder assembly, shareholders' right to query, exclusion of shareholders' right to voting, independent board member, invalidating and recalling of shareholder assembly resolutions, shareholder indirect litigations and disfavoring shareholders' right to requiring shares on regulating related transactions. The mechanisms to protect the interest of creditors in related transactions through two aspects of disregard of corporate personality and deep rock doctrine. Part Three sets forth some questions in related transactions in our country and the reasons, which challenge our country' s company law in regulating related transactions. Part Four emphasizes on the positives and negatives of the mechanisms and rules introduced by the revised Company Law to standardizing related transactions, and puts forward some recommendations for further improvement.