Legal Regulations For Company’s Profit Distribution

Seeing from the agency cost theory, profit allocation can affect a company’s operationand then lead to the decreasing of profit, which is a fact that all relevant subjects are unwillingto accept. What follows is upgraded internal contradictions in the company. There are somuch speculation in China’s market lie in that the shareholders cannot receive much dividendsand the material share bonuses are just symbolic, besides, some companies do not even havethem, and thus shareholders can only place their hope on stock speculation for return ofinvestment. Policies on profit distribution are decided by the company on its own. Managers’avoiding of high risks and abuse of capital democracy together with creditors’ strictlyguarding against the profit distribution and shareholders’ concession to the company’slong-term interest have led the company to adopt little or even drop policies of profitdistribution, which finally will infringe upon the interest of many medium and smallshareholders. While the judicial process is not readily to intervene when there is not adequatediscipline and legal system to rely on. However, in case that profit policies may have a seriousimpact on the legitimate interests of some relevant parties, the law should offer institutionalregulation and prevention, and the judicial proceedings also should make an exception toprovide relief to impaired shareholders.Going beyond the limitations of the Company Law, this paper gives a comprehensiveanalysis and discussion to the above issues by combining with the Securities Law, relatedlegal documents and economic theories. This paper is divided into four parts, which probeinto the subject by first stating problems, then to analyze and give solutions and finally tobuild the regulatory mechanisms.The first part is based on the general theories of profit distribution requirements for thecompany, and then demonstrate the current problems in today’s capital market in China andthen to analyze the pros and cons of the existing legal regulation mechanisms. To show that asto those problems with profit distribution, it is hard to solve or effectively solve thoseproblems by only rely on the share repurchase system and the mandatory and incentivemeasures.The second part is to analyze the deep internal causes that have forced those problems onprofit distribution. In this section, the author proposes that it is the abuse of the company’s autonomy, the shock of equality between shareholders and stock rights, and the alienation ofthe decision-making mechanism that together result in those problems in profit distribution.Resulting in the emergence of conflicts and contradictions among shareholders, creditors andmanagers, and then lead to other problems.The third part is to investigate the necessity of solving problems on profit distribution.First, it proposes the disadvantages to shareholders, companies and creditors if profitdistribution problems are not solved; then, on that end, the company’s goal of seeking profitand the value of stock rights of shareholders can be realized, moreover, it will facilitate theoperation of the company; at last, to see it globally, many other countries are having aneffective mechanism of solving problems of profit distribution. By observing the inadequacyof China’s regulatory mechanism, it concludes the urgency of solving those problems on profitdistribution.The fourth part is to discuss the establishment of a remedy mechanism on the base of theexisting system. With a comprehensive measurement of all relevant interests and the situationboth before and after innovation, this section proposes an effective mechanism as the remedyto problems on profit distribution. To avoid conflicting with other systems, which may resultin overlap protection, unprofitable protection or improper protection, making it a newmechanism with Chinese characteristics that works as the remedy for profit distributionproblems.