A Study On Legal Issues Of Introducing Dual-Class Share Structure In China

The dual-class share structure was formed at the end of the 19 th century under the circumstances of capital markets in The United States.It is not based on the principle of “shares of same class have same rights and benefits” but obey with the rule called “shareholders shall have different rights and benefits according to their identity”,which endow some shareholders with privilege on making a company resolution.The dual-class share structure was created according to demands of family business owners,aiming to ensure that they would not lose control over companies after their companies went public.In other words,corporate control will not be diluted by the increasing market-based financing.The structure was once controversial in the United States,because protectors thought the controllers would elude necessary supervision from markets,leading to problems such as misusing rights of control power and infringing minority shareholders' rights.It had been initially negatively evaluated for more than sixty years before widely adopted in capital markets in the United States.But it is still a kind of valuable equity structure as it have been advanced throughout years.There are several advantages of the dual-class share structure,such as keeping control over companies,nurturing corporate culture and avoiding the hostile takeover.It also plays an important role in improving the order of the market economy,which is crucial to the reform of economic system.However,in China,the mainland paid little attention to the practice of dual-class share structure and it was only simply applied in Hong Kong.It draw attention of Chinese people after Alibaba failed in going public on Hong Kong Stock Exchange and succeeded on New York Stock Exchange.But most of them shed spotlight on how to restrict rights of majority shareholders,so as to protect the rights and interests of minority ones.That is because they think that the division of managers and investors should be clear,and the benefits of latter is the highest.We can't deny the rationality of this idea,but if we only focus on protecting minority shareholders as much as possible,we might not meet demands of knowledge economy times and study the structure from a comprehensive way.Therefore,this article is guided by the concept of freedom of contract,appropriate restrictions,and the substantial balance of shareholders' interests.It thoroughly discusses the practical problems faced by judicial practice in China if dual-class share structure is introduced and proposes some targeted solutions.The article first explains the dual-class share structure from the aspects of concept,theoretical basis,and developing history,answering questions like what is the dual-class structure and reveals the experience from the historical dimension in the process of the development.This will lay the foundation for further discussion on the issue of localization of dual-class structure.Secondly,based on the reality of our country,the paper explores the function and significance of the dual-class shareholding structure,starting with the reforms of state-owned enterprises,resisting “barbaric” mergers and acquisitions,stimulating innovation and necessity of this structure.Since it is necessary,we would think what obstacles companies in China will encounter after it is introduced.Therefore,the paper then sorts out the problems might be faced by companies,which includes accessing to market,withdrawing from market,borders of corporate autonomy,unequal information between minority and majority shareholders,adverse selection of dominant shareholders,and the channel for minority shareholder to defend their rights.The purpose is to make a comprehensive analysis about the impact of dual-class structure,so that it could improve our country's corresponding system.Thirdly,from the perspectives of transforming concept of china corporate law,preferential stocks trial,and the reform of the commercial registration system,paper analyses the feasibility of introducing the structure in China.Its purpose is to pave the way for the establishment of the system.At the end of the article,suggestions are put forward.Introducing the double-level equity structure in China requires not only the establishment and improvement of related systems,but also changing concept of corporate governance,abandoning the traditional concept of capital supremacy.By abiding by substantive balance between shareholders,freedom of contract and reasonable restrictions,companies could be compatible with the development of the times.Specifically,this section discusses the change in corporate governance philosophy,and then responds to the legal issues faced by listed companies in China who applies dual-class structure,which includes clearing the boundary of qualification of applying the structure,and advancing the mechanism of protecting minority shareholders' rights.The basic logic lies behind is that under the guidance of the new concept,whole system could be constructed and improved.