Studies On The Legal System Of Controlling Shareholders’ Faith Obligations In Connected Transactions

The principle of equality of shareholders is also a principle of the corporate lawand an important goal of the corporate laws in most nations. In the modern corporate,the stock rights is becoming more and more concentrated so the shareholders aredivided into two parts which are named the controlling shareholders and theminority shareholders. The extent of the controlling shareholders’ power in thecorporate expands rapidly. In the controlling shareholders utilize the power in orderto chase private interest while they will seriously hurt the interests of minorityshareholders and the company. As a consequence, the corporate laws in most nationsconcentrate on the issue of conferring on the controlling shareholders’ the fiduciaryduties towards the company and the minority shareholders as well.The research topic of this paper is the problem of controlling shareholders faithobligations. There are five parts about the controlling shareholders faith obligationresearch in connected transaction in this paper: the fundamental conception, thenaissance reason, the main parts, the institution safeguards and the legal system of thecontrolling shareholders in connected transaction.In the first part of the article, the author unscrambles the fundamental conception.First of all, the “connected transaction” mainly concerns the estimation and theessence of the connected transaction. Secondly, the criterion of the controllingshareholders can be roughly summed up as “pro forma standard”,“assumptionstandard” and “essential standard”. The pro forma standard is the amounts of holdingshares while the assumption standard and essential standard concern about the realcontrol of the shareholders. In commercial practice, the single pro forma standardcannot cover all the situations in reality so the assumption standard and essentialstandards and principles should be applied together.The author analyzes the causes of fiduciary duty of controlling shareholders inthe related party transactions in the second part of the article. The connectedtransaction is very special. The particularity can help dealers reduce transactions costsbut it will also lead to substantial unfair outcome. We need to establish theappropriate legal rules in order to regulate the related party transactions. Fiduciary duty of controlling shareholders also has its own rationale. In the modern company,alienation of majority voting control in the hands of controlling shareholders hurts thecompany and minority shareholders which is contrary to the equality of shareholdersand the basic thesis of company law. Fiduciary duty is imposed on the protection ofthe interests of minority shareholders and the preventability of the controlling powerin hands of controlling shareholder. This fiduciary duty is transformation of civil lawprinciple of honesty and credit in the company law.The third part is about the basic content of the fiduciary duty of controllingshareholders. Fiduciary duties of the controlling shareholders include the duty of careand duty of loyalty. The author considers that the new part mainly includesobligations in good faith, compliance and disclosure obligations according todevelopment of corporate practice. This section focuses on the content of theobligation and discusses the constituent elements.The content of part four is the controlling shareholders’ fiduciary duty inconnected transactions. Any system needs institution safeguards as the operationguarantee. The chronological sequence of analysis and architecture is ex ante control,mid-event supervision and ex-post accountability. These institution safeguardsinclude stockholders’ classified voting system, independent directors, supervisors andshareholder lawsuit system.The fifth part is about the legal system of the controlling shareholders inconnected transaction. The author selects the United States and Germany which arerepresentative state in their own legal system, anglicizing the development andinstitutional features of controlling shareholders’ fiduciary duty. Then the analysis isabout the legislative practice in China, which examines the relevant provisions of thecompany law and the securities law. Finally, this paper makes recommendations onlegal rules of controlling shareholders’ fiduciary duty in China under theextraterritorial legal experience.