Triggers For Appraisal Right In Limited Liability Company

Since the establishment of the rule of capital majority rule, minority shareholders are often not taken seriously, and limited liability company is based on mutual trust between shareholders and closely-held, and therefore cause the shareholders difficult to withdraw from the company. In order to protect the shareholders from investing in a completely different company, appraisal right system came into being, which provides minority an effective channel to withdraw, and create a substantial ex ante incentive for management to avoid uncompensated alterations in beta in circumstances where market constraints on managerial misconduct may not function. The2005amendment to China’s Company Law established appraisal right system for limited liability company and initiatively provides for non-distribution of dividends for a long period and amendment to the articles to make the company continue to exist as the triggers for appraisal right, which raises academic controversy. Also, appraisal right system has a limited application in judicial practice, which mainly lies in the imperfect provision on triggers for appraisal right.In addition to the introduction and conclusion, this paper is divided into four parts:The first part discusses the origin, institutional purposes, and legal basis of the appraisal right system, to lay a solid theoretical foundation for the following discussion.As non-distribution of dividends for a long period and amendment to the articles to make the company continue to exist are included as triggers for appraisal right, the second part performs a comparative study on regulation on these two circumstances altogether with fundamental corporate changes. Taking into account the nature of continuing legal relationship which can be terminated early if a substantial basis is present and the function of appraisal right system to perform as an exit and provide managers with ex ante incentives to avoid misconduct, this paper concludes that these two circumstances are compatible with appraisal right system.The third part analyzes the practical problems of triggers for appraisal right in China’s Company Law. As either the triggers are too strict to achieve, or provisions are so vague that local courts around the country conform to different standards in judicial practice, appraisal right system fails to play its role which it should have.Therefore, this paper in its last part presents the corresponding proposal to perfect the provisions. This section seeks to address the aforementioned issues by liberal explanation in order to expand the scope of radiation of the system.