On The Validity Of Share Buyback In Limitted Liability Company Agreement

With the further opening up of legal restrictions on company registered capital in our country, the market share and the company status become increasingly prominent in the market economy. Share buyback clauses in the articles of association limited liability company refers to that when certain conditions(usually the shareholder is dismissed due to his own fault and the shareholder leaves office willfully and so on) are realized, shareholders will lose the qualification, and the shares will also be repurchased by the company. By making out such terms, the limited liability company aims to eliminate other disharmonious factors that will destroy the characters based on shareholders, and to prevent the mutual trust among shareholders from the effect of new shareholders, thus to ensure the company operate continuously.Although there exists a controversy about the theory basis of share buyback clauses in the articles of association of limited liability company, the validity of this provisions is affirmed in most cases in nearly half a century. However, the regulation of Chinese company law to this item is still in a state of vacancy. How to perfect and complete our legal provisions ?Obviously, the articles of association is the best choice for it strongly reveals the shareholder autonomy will. In particular, the case validity should be judged on the premise of analyzing the main party in share buyback clauses in the articles of association limited liability company and the provision itself. The above judgment will provide a suggestion for the judge on which aspects to consider when a similar case occurs in the future, which is the starting point of this paper. The author intends that these research products could be available to the settlement of this problem, also to the resolve of disputes about the validity of buy-back clause in the articles of association. The whole paper consists of six parts:The first part gives a brief introduction of three relevant cases, and the outcome of court judgment. After a comprehensive analysis of these three cases, I list the similarities and differences to conduct further explanation and summarization on the focal point of disputes.Continuing from the problems arose in the proceeding part, the second part elaborates how the court deliver its verdict on the validity of the share buyback clauses in the articles of association of the limited liability company of these cases through the application of related provisions of Chinese Corporation Law and make a conclusion on the applicability of these legal provisions to judge the validity of Articles involved under the condition of legal vacancy when encountering the dispute of share buyback validity in judicial practice.The third part expounds the legal principles of stock buyback postulated in the articles of association of the limited liability company, including possibility and necessity. This section primarily demonstrates the positive functions of stock buyback in company development and shareholder guarantee from the freedom of contract principle, interest balance theory, characters based on shareholders of limited liability company, and the autonomy of the articles of association of limited liability company.The fourth part is about the value of share buyback stipulated in the articles of associations of limited liability company. I give a specific analysis on the theoretical and practical value of such terms on the basis of such aspects as follows: the manifestation of the ruin of "capital maintenance"; the benefit to improve company operation efficiency and to optimize resource allocation; and the advantage for the limited liability company to get rid of the plight of "easy to knock in, difficult to knock out".The fifth part is the core part mainly discussing the force of share buyback clause in the articles of association of a limited liability company. From the perspectives of applicable party and the content of articles of association. I make a clear illustration on the following issues: what kind of shareholders are to be bound by the Articles and what are not; which agreements are valid and which are not, even the agreements which are imperfect and the validity still to be determined.The sixth part is a conclusion of the whole paper. Based on the theories presented above as well as the discussion on the force of share repurchase clause listed in the articles of association of a limited liability company, I carried out an empirical analysis on the three cases to settle the case disputes.