Legal Issues Relevant To The Restriction On Number Of Shareholders

The Corporate Law of the People’s Republic China stipulates that owners of private limitedcompanies should be less than50, while the limitation for shareholders of public limited companiesshould be less than200. As the accumulation of private capital advances, people have more of a desireto invest and wish for more channels for financing, while the current limitation on the number ofshareholders is too strict and is not good for corporation’s financing. So, based on my research, Iconclude that the section of the Corporate Law of China which requires private limited companies tohave less than50shareholders, should be interpreted as a “arbitrary law”, and investors who break thislaw should still be recognized as shareholders; while the law should enforce the limitation onshareholders of public limited companies more strictly and rule the investment invalid for people whobreak this rule, up to imposing criminal punishment. However, the number of limitation on shareholdersof non-public corporate limited by shares is advised in this thesis to be raised to400from200, and onlycorporations which have400shareholders should be required to apply for a public offering. Moreover,to improve the implementation of the law, the law should define the types of legal arrangements whichare used to try to avoid the regulation of the law，such as beneficial shareholders, employee shares,trusts and private placements, and rule them to be in contravention of the law.Japan has combined the two types of companies, public and private limited companies, into one,namely, public limited companies, with more restrictions on share transfer. This is an active attempt,after Japan had implemented the two types of corporate systems for67years, in order to make it easierfor companies to transparently and efficiently raise money, and to some degree this represents thedevelopment trend of our country. This thesis tries to clarify relevant laws, administrative regulations,and the regulations of competent authorities on the limitation of the number of shareholders, and thenanalyze from a legal perspective whether the rule on shareholder numbers is flexible or practicallyenforceable. In order to assess the law’s enforceability the paper will analyze the common methods usedto avoid the limitation on shareholder numbers, and look at legally remedies for more clearly enforcingthe law, based on its intent. To analyze the value of the law, based on its value form a public policyperspective, this thesis will analyze in depth three cases on this topic: two domestic cases dealing withshareholder limits of non-public companies and their subsequent judicial opinions; and one foreign case, Goldman Sach’s attempt to avoid America’s relevant regulations on shareholder numbers.Compared with reforming the initial public offering system, which would require far-reachingchanges in order to have a significant effect, this paper suggests primarily quantitative rather thanqualitative changes to the law. These changes would make it easier to control and supervise privatecompanies and would help with the financing of small and medium sized enterprise. Moreover, thisreform could be a start for broader reformation of the financing system.