Research On The Veto Right On Board Of Directors

In the traditional voting system of board of directors, the voting system of “oneperson one vote” is usually adopted. However, during the current wave of privateequity investment, the voting system of board tends to dissimilate, in which case theprivate equity fund requires the investee company to grant veto right to the nameddirector appointed by the fund in order to avoid information asymmetry. In the courseof private equity fund operation, granting veto right to the named director greatlystrikes the traditional voting system of the board, which also results in therestructuring of the powers among the board. In this setting, starting with the nature ofthe provisions of the company law, this article comprehensively delves into thephenomena of veto right on board during the operation of private equity fund andsummarizes the legal strategies to perfect the veto right on the board. This article hasin total29,000around words and can be divided into6parts:Part I firstly describes the particularities of the veto right on board, based onwhich further analyzes the corporate law nature thereof, pointing out the difference ofveto right adopted by Limited Liability Company and Joint Stock Company.Furthermore, this part sums up the domestic and foreign researches in this regard,especially the reasons why veto right on board develops and its legality.Part II firstly categorizes the veto right on board at home and abroad, which canbe roughly classified into three kinds, namely Class Director’s Voting Right,Supermajority Voting Right and Nominated Director’s Consent Right. On this basis,this part analyzes the difference of veto right on board adopted in the article ofassociation and shareholders’ agreement. In the meantime, this part analyzes theapplication of veto right on board in accordance with the PRC law.Part III discusses the powers of the board of director and the scope of powers ofthe veto right on board, opining that veto right must be exercised within the scope ofpowers of the board of directors and further claiming to restrict the powers of vetoright on board extending to the matters reserved to shareholders.Part IV focuses on the exercise rules of veto right on board based on the analyses of the forgoing parts and argued that the named director shall exercise the veto right inaccordance with the rule of maximization of interest of all shareholders, the rule ofreciprocity of rights and obligations and the rule of proactive exercise. Based on theserule, this part further delves into the liability limitation on the veto right on board,especially the decision-making liability.Part V stresses and puts forward several legal strategies to perfect the veto right’ssystem. Firstly, this part proposes to expressly define the boundary of legality of theveto right on board; secondly, on the assumption of the boundary of legality thereof,this part advises to further restrict the application of veto right on board. Lastly, inorder to regulate the exercise of veto right and in light of the exercise rules asproposed in Part Four, this part argues to impose stricter fiduciary duty upon theprivate equity fund and its named director(s), and simultaneously sets up remedymechanism for the abuse of veto right on board.Part VI is the conclusion of this article, which, based on the reasons of the otherparts, argues that while recognizing the application of veto right on board in limitedareas, the boundary of legality, categories, obligation of the named director andremedies mechanism shall be explicitly defined and established.