Study On Regulation Of Unfair Related Party Transactions In Limited Liability Company

This paper discusses the regulation of unfair related party transactions in the limited liability company. It can be divided into three parts: introduction, body and conclusion. In introduction part, we review the origin, background, research purpose and present research situation of the selected topic, and also talk about the main research methods used in this paper. Besides, we briefly introduce the structural arrangements of this paper. There are five chapters in the body section.Chapter I focuses on the definition of related party relationship. In recent years, related party transactions have become more covert. For the purpose of making right judgments, judicial practice should be based on "substance over form principle" criteria. Besides, the chapter clarifies the nature of the conflict of interest associated with unfair related party transactions and the other relationship behind transaction parties which may cause the company’s interests metastasis. By combing and comparing the current status of legal regulation, we find that the current legislation and regulation of related party transactions are mainly focused on the areas of listed companies. However, we must admit that the vast majority of China’s market players are limited liability companies at present. Due to special governance structures and weak external supervision, unfair related party transactions are more prone in the limited liability company. However, regulation for related party transactions in the limited liability company is still in a blank state, and the existing principles, rules are lack of relevance and operability. Thus, we point out the problem for the purpose of following analysis and problem solving.Chapter II analyzes the recognized standards of fairness in related party transactions in the perspective of comparative law. One is the procedural fairness, and the other is substantive fairness. Requirements of procedural fairness are prior to the content fairness. Not by a fair, just, open and reasonable process does not recognize the legitimate and reasonable conduct of the transaction. Fair procedure will help to achieve fair contents of a trade. In particular, the principles of procedural fairness are mainly reflected in the following three aspects: significant related party transactions shareholders’ approval system, the vote avoidance system and disclosure of interests involved. Substantive fairness refers to that related party transactions should meet fair trade practices and trading conditions in the market and the parties’ rights and obligations should be allocated fairly and reasonably.Chapter III re-examines procedural and substantive fairness, and elaborates complete modern connotation of "fair standard" which should include "procedural fairness + substantive fairness + disclosure of information." However, the law for the regulation of related party transactions falls far short with the above "fair standard". There is much to be desired. At the same time, based on the legislative and judicial practice, this chapter discusses the introduction of independent directors and judicial review in limited liability companies.Chapter IV puts forward controlling measures for the unfair related transactions in three aspects. The first is to draw lessons from rules of fiduciary duty of controlling shareholders established in common law to constrain and control abuse of control power. The second is to mandatorily disclose related party information and transactions behavior among shareholders. The third is to strengthen supervision by independent third parties to regulate related party transactions, for example establishing mandatory special auditing system of related party transactions.Chapter V discusses the relief mechanism of unfair related party transactions in the limited liability company, including the recognized standards of loses under unfair related party transactions, and further discusses the compensation mechanism from three main stakeholders’ aspects: the company, minority shareholders and creditors for protecting their interests.Finally, we summarize the whole paper in the conclusion part and point out that the legal system of our country is in a process of continuous improvement. At the same time, regulation of unfair related party transactions in the limited liability company also needs to go through a process of continuous exploration and research. In order to promote related party transactions in the limited liability company developing healthily and orderly and to achieve the unity of efficiency and fairness, relevant legislation and regulatory authorities should develop effective regulatory measures in the core of company law regulation system, and by comparison and learning from the regulation of listed companies as well as foreign countries’ experience. At last, the author points out some drawbacks to be improved in future studies.