Directors Of The Legal Regulation Of Self-dealing System

Self-dealing transaction by corporate directors is a double-edged sword.On one hand, self-dealing transaction is reasonable in the economy, becauseit can save transaction costs; on the other hand, the conflict of interests inself-dealing transaction can result in abuse of it, which will become aninstrument to loot the company and shareholders. Hence, how to controlunfair self-dealing transactions is of great importance in practice. Theessential point is how to strike a balance between efficiency and fairness.This article examines the legal regulation of self-dealing transactions,mainly focusing on corporate law. The author first defines what areself-dealing transactions by directors, then examines the two forces that cancontrol self-dealing transactions——legal force and market force. After that,a comparative overview of legal regulation in the United States, the UnitedKingdom, France and Germany is conducted. On the basis of the overview,legal tools such as mandatory disclosure, approval or ratification bydisinterested directors or shareholders are examined. Finally, somesuggestions to improve the existing legislations in China are put forward.Specifically, this article consists of seven parts.PartⅠis the definition of self-dealing transactions by directors. Theauthor holds that the essential characters of self-dealing transactions bydirectors are non-arm's length and conflict of interests. Self-dealingtransactions can be divided into direct and indirect self-dealing transactionsand the latter should be our main focus.PartⅡexamines the two forces that can control self-dealingtransactions——legal force and market force. The author first surveys theevolution of legal regulation of self-dealing transactions in Anglo-Americanlegal systems, and then introduces the two debates: mandatory rules Vsenabling rules and legal force Vs market force. After that, corporategovernance structure, corporate control markets, capital markets andinstitutional investors are examined. The author concludes that neither lawnor market is perfect, but the former is still the dominant constraints. PartⅢconducts an overview of existing legal rules concerningself-dealing transactions in the United States, the United Kingdom, Franceand Germany, which lay solid foundation for the following analysis.PartⅣexamines mandatory disclosure mechanisms in controllingself-dealing transactions. Mandatory disclosure mechanisms have two forms.One is disclosure per se, which can be called general disclosure; the other isdisclosure as a procedural requirement, which can be called specificdisclosure. These two kinds of disclosures have different legal effects: theformer does not affect the validity and the interested director's civil liability,whereas the latter does.PartⅤexamines approval or ratification by disinterested directors. Allthe legal systems discussed in the article require that self-dealingtransactions by directors shall be approved or ratified by disinteresteddirectors, but they have different effects: some are validity requirement ofself-dealing transactions, others are liability requirement of interesteddirectors.PartⅥexamines approval or ratification by disinterested shareholders.Although approval or ratification by disinterested shareholders has somedisadvantages, it is the last resort within the corporation to prevent unfairself-dealing transactions, because shareholders are the best protectors,especially in the context of emerging institutional investors.PartⅦexamines the existing rules conceming self-dealingtransactions by directors in Chinese Corporate Act and put forward somesuggestions to improve them.