Research On Establishment Of Classified Stocksystem In China

Classified stock system helps to classify the shares into diversified types based on the different stock rights attached to the certain stock shares and offer the classified stock shareholder some specific protections. Compared to common stock, classified stock shareholders enjoy a preferred or restricted right in a variety of fields such as profit distribution, distribution of residual property, voting, conversion and redemption of stock, appointing board directors. It should be noted that different stock right is the key factor when considering the classification, so the common stock type in China, such as classe A,B and H shares of stock do not belong to the system this paper will discuss here.Due to the flexibility of the classified stock system, it plays an important role in helping directors to have more voting rights and thus a dominant control over the company, expanding the financial channels for company, defending against the hostile takeovers. To be more specific, the system can realize the purpose of raising more capital without equity being diluted through building a multiple-class structure. Besides, the diversified investment demands in the market can be met through the adoption of the classified stocks. For example, the preferred stock kind is a better choice for the investors who hold an attitude of risk aversion and thus seek for a safer investment return. Lastly, restructured voting rights and shareholder rights plans, which are also the application of classified stocks, are two commonly adopted methods to defend against hostile takeovers.In addition to its values to corporate governance and capital market, this paper also gives an analysis on the rationality of the classified stock system from the jurisprudence perspective. Firstly, it does not contradict with the principle that the equal rights should be enjoyed among the same kind of stocks. With a growing number of institutional investors stepping into the capital market, an obvious tendency just shows up that the control over the company is gradually seized by only a small number of shareholders. As the result, the interest of minor shareholders who have limited voting rights can be easily overlooked and infringed. While in the classified stock system, there is a good balance among different kinds of shareholders with reference to stock rights and duties, which is a realize of substantive equality. Secondly, the principle of autonomy of will which is one of the golden rules in private law field, can be put into good practice through establishing the classified stock system. It provides companies with more choices of stock types apart from common stocks which can help to achieve different goals. And the degree of autonomy is even higher in in Anglo-American legal system for that articles of associations or even board of directors of a company can have a decision on the issuance of a newly classified stock type there.China has not yet systematically built the legal system of classified stocks so far. But some relevant legislative practice in a lower level has been taken since the 1990 s. This paper gives a review on China’s legislation evolution in this field and summarizes the problems showed up in the whole process. The past legislative practice mainly focused on the preferred stock which is only one of the classified stock types. The latest regulation on preferred stock was made in 2014 and it was thought to be thorough and comprehensive. Law makers in China once also attempted to introduce the concept of classified stocks and classified stockholders’ voting system, but it was a fail because the law makers did not thoroughly grasp the essence of classified stocks. The biggest problem of all is that China has not had any legislative practice concerning classified stock system at the Company Law level, which resulted in the slow development in this field. Some basic problems remain to be unsolved such as the establishment of the standards for classification of stocks and the scope of matters which can be voted by the classified stockholders alone. What’s more, the protection for the classified shareholders is weak for a package of protection methods has not been well designed and adopted.The classified stock system is widely adopted in the countries with sophisticated corporate related legislation, such as America, Great Britain and Japan. This paper compares the relevant legislative practice including statute laws and cases of major countries from the perspective of comparative law. Based on the analysis on the merits and demerits learned from other countries’ experience and current legislation condition of China(such as economic development, corporate governance ability, legal system etc.), this paper intends to give suggestions on establishment of classified stock system in China. To briefly conclude, the types of classified stocks should be specifically pointed out in legislation to avoid vagueness and uncertainty in judicial and business practice. To give the classified stock holders a better protection against right infringement, the classified shareholders’ voting mechanism should be well set up. The scope of issues which can be separately voted by classified stockholders alone and regulation on the meeting procedure should be more detailed.