The Research Of Mandatory Dividend Legal System Of Listed Company

The mandatory dividend issue of the listed companies has drawn broad attention from academics since 2001 when the China Securities Regulatory Commission implements the guidance for the dividend policy of the listed companies. The main purpose for rolling out mandatory dividend system of the listed company in China is to protect the interests of minority shareholders or external shareholders from being harmed via state intervention when the autonomy of the company fails to address the issue of substantial shareholders impair the interest of minority shareholders by abusing stock share advantage. The purpose is also to cultivate dividend culture of the listed companies, to promote the long term investment concept of the stock market, and to develop stock market to its mature stage in a steady and orderly way. This article analyzes in depth on China’s mandatory dividend system of the listed companies, and offers practical suggestions to improve the system based on the current system.Chapter One introduces the basic concept, background of constitution, detailed rules and implementation of mandatory dividend system in China. Currently, the Chinese government sets the requirement of accumulated dividend in last three years being thirty percent of annual average distributable profit of the listed companies in the same period, as the condition for re-financing of the listed companies. At the time of the introduction of mandatory dividend system, China’s securities market has just come to its tenth year of development. In the market, there are situations such as listed companies not paying dividend to shareholders, minority shareholders speculate in the market due to unsecured dividend, the substantial shareholders embezzle company assets by affiliated transactions, and many listed companies suffer excessive government intervention, which together affect the interests of the minority investors, make it hard to be protected, and cause the serious speculations in the secondary market. Since 2001, the Securities Regulatory Commission has in a row implemented a series of policies in order to strengthen the requirement and administration of the dividend of the listed companies: from policy promotion to set up the rule in 2004 that the listed companies must have done cash dividend in the last three years as a condition of re-financing of the listed companies, to set up the percentage of the mandatory dividend in 2006, to further increase the percentage of mandatory dividend in 2008, to start to request information disclosure with respect to company profit distribution and clarify the responsibility of sponsor and independent director in 2012, and to further clarify the requirement of cash dividend in the listed companies in 2013. After the implementation of mandatory dividend system in China, there has been some improvement in the cash dividend distribution in Chinese listed companies, mainly on the aspects that cash dividend total amount increases every year, the percentage of dividend also increases, and the dividend procedure is more formal in the listed companies. However, due to the imperfection of the system environment, design and associated policies, the single listed company lacks the continuity of the dividend. There is still distance from ideal goal.Chapter Two analyzes the righteousness of implementing mandatory dividend in China from the two economics theories of proxy cost and information passage as well as the positive influence of mandatory dividend on the stock market, and demonstrate the necessity of implementing mandatory dividend in current Chinese stock market. Mandatory dividend of the listed companies can reduce company cash flow which in turn reduce the room for the company management to control the company cash flow, consequently reduce the basis for the company management to take advantage of operation to make profit for themselves. This will in total control the encroachment of company profit by the company management, reduce the room for the company management to manipulate the business to make their own profit, and thus reduce the complexity of business operation, and in turn reduce the difficulty of the supervision by company owners to the company management, and also reduce the proxy cost of the company operation. The regular dividend to investors by the listed company will send a positive message that the company’s business is steady and finance condition is sound and the company is worth investing to the investors in the market, which will increase the investment value of the company. With respect to securities market, the mandatory dividend system can effectively protect the interests of the minority investors, enhance the investment function of the market and suppress the speculation in the market, thus protect the stability of the securities market. But there also should be some boundary on the mandatory dividend system, as it shall not overly intervene with the autonomy of company. After the good result of the mandatory intervention, the mandatory dividend policy shall be adequately loosened, and the dividend shall be ensured by the design of articles of association of the listed company and enhancement of transparency of dividend, and by the establishment of the remedy mechanism of the mandatory dividend.Chapter Three states the issues that affect the positive effect of mandatory dividend system in China, mainly the improperness in the method of mandatory dividend under the system itself, and the issue of double taxation in current bonus tax in China. The unreasonableness of mandatory method shows mainly as below: 1) the current mandatory method is not able to force all of the listed companies in the secondary market to pay dividend, thus does not have general binding force; 2) it does not distinguish stage and industry when doing mandatory dividend. All the listed companies apply the same mandatory standard without taking into consideration that many listed companies which are at expansion stage need huge amount of cash and it is not reasonable to request such company to pay dividend and use it as the condition of re-financing; 3) based on academic study, much more companies pay dividend just right on the mandatory percentage standard after such percentage standard is set. Many companies do so in order to meet the requirement of re-financing, and stop to pay dividend when they no longer need re-financing. This casts doubts to the effectiveness of the mandatory dividend percentage standard. Besides the defects in the mandatory method, there is also some unreasonableness in the bonus tax system that is connected to the dividend system. There is double taxation when bonus tax is imposed on individual investors but not on institution investors after corporate income tax has been paid, which is not fair.Being the most important part of this article, Chapter Four offers the suggestions to improve the mandatory dividend system based on the understanding of the current system, what is missing in such system and reference to foreign equivalent systems. Firstly, change the current mandatory measures that link to re-financing, and to set the requirement of paying dividend as mandatory standard requirement of the listed companies, and also take punitive measures accordingly, such as periodical announcement by China Securities Regulatory Commission of those companies which violates the dividend rules. On the other hand, provide certain incentive to those companies which comply with mandatory dividend requirement, such as shorten its re-financing approval cycle to reduce time cost of re-financing. The mandatory dividend standard shall be specified with such fundamental pre-conditions, and use indicators such as company life cycle, industry specification, financial conditions to specify the policy supervision of the dividend system of the listed companies; secondly, improve associated tax system, reform the unreasonable rules in the bonus tax system, and promote the implementation of mandatory dividend system from tax perspective; thirdly, improve the rights of minority shareholders to the dividend plan based on the mandatory dividend system, such as introducing shareholder vote by different categories, which divides shareholders into different groups and vote by group on the dividend plan of the profit of the listed company. This will protect the interests of all the investors. Also institute investors shall be vigorously developed to enhance the power of minority shareholders; fourthly, establish the litigation system of mandatory dividend as the last remedial protection, and to apply reversed burden of proof when designing such litigation system of mandatory dividend in order to reduce the difficulty by minority shareholders to present evidence. However, the application of the litigation system of mandatory dividend shall be strictly controlled, as to prevent the abuse of such system by minority shareholders to affect the normal operation of the listed companies.