Legal Regulation Of Related Party Transactions In Limited Liability Companies

Related party transaction is a very common phenomenon in the company's operation process.It has the advantages of reducing transaction costs and accelerating the efficiency of business operations.But the company's related party transactions will also become a means for them to obtain benefits through abnormal channels under the control of some "insiders".At present,the laws of our country have quite complete regulations on the related party transactions in listed companies,but the related party transactions also commonly exist in limited liability companies,with no sufficient regulations governing them.In cases involving disputes over related party transactions,the proportion of limited liability companies is extremely high,so it is necessary for the law to regulate them specifically.In the Company Law of the People's Republic of China(2018 Amendment),article 21 prohibits five types of parties in a company from using connection relationship to harm the company's interests,and the scope of the connection relationship is defined in article 216.But the relationship that may lead to the transfer of any interest of the company is not that clear.This expression superficially covers all situations of related parties.However,it is difficult to give a definitive answer in the actual identification process of related parties.According to article 1 of The Provisions(V)of the Supreme People's Court on Several Issues concerning the Application of the Company Law of the People's Republic of China,if a defendant makes a defense merely on the basis that the transaction has gone through procedures prescribed by laws,administrative regulations or the company's bylaws such as information disclosure and approval by the shareholders' meeting or general assembly of shareholders,the people's court shall not support the defendant.The procedures are not mentioned in company law.Although the Shanghai Stock Exchange's Stock Listing Rules provide for information disclosure procedures,the provisions are not laws or administrative regulations,neither do they apply to limited liability companies.On the legislative perspective,the law has not paid sufficient attention to the related party transactions in limited liability companies.Because of the lack of legal regulations,the related party transactions in limited liability companies are highly arbitrary.In the process of deciding and implementing related party transactions,there was a lack of the system of information disclosure and the system of voting right exclusion.At the same time,it did not specify the shareholders' inquiry rights when related party transactions occurred.The lack of legal provisions has led to the lack of effective restrictions and relief measures for non-related party shareholders in the process of related party transactions.There is great risk to the interests of shareholders and the company.On the judicial perspective,two key issues in such cases remain unclear.The first is the lack of recognition standards for fair related party transactions.A legitimate related party transaction should meet the requirements of substantial fairness in addition to the due procedures.Company Law does not specify how substantial fairness should be determined.Secondly,the extent of completion of the procedure affects the distribution of the burden of proof.Due to the lack of procedural rules,the burden of proof in the litigation is attributed to the plaintiff,which increases the burden on the plaintiff.With the increasing number of lawsuits,the disadvantages of the existing law have become more apparent.This article starts from an examination of judicial cases,and find out the problems existing in the related party transactions in legal practice through the statistics and analysis of these cases.The settlement procedure can reflect that there are generally lots of controversies in case judgments.the main disputes between the two parties can be reflected in the various focuses of the dispute.the distribution of the burden of proof can reflect that different courts have different ways to distribute the burden of proof.The determination of whether the price is fair can reflect that there are different ways of determining the fair price of related party transactions by local courts.This article does not just rely on theoretical analysis,but summarizes existing research,draws on relevant foreign legislation and research results,and combines China's judicial practice to obtain feasible measures to improve the legal regulation of related party transactions in limited liability companies.This article will put forward feasible ways to improve the related party transactions in limited liability companies at two levels,the ex ante regulation and the improvement of litigation procedures.Firstly,the law needs to identify the meaning of related party transaction,and specify the scope of related parties and the manifestation of related transactions.Secondly,the law needs to establish safeguard measures for related party transactions.This involves establishing information disclosure procedures and voting procedures in the process of related party transactions,clarifying shareholders' inquiry rights,and allowing shareholders to vote on related party transactions.With regard to the improvement of litigation procedures,first,the standards for determining fair prices shall be improved.The general market price should be compared,and if necessary,the opinions of independent professional third parties should be consulted.At the same time,judges should examine the motivation,purpose and economic environment of the related party transaction.If the price of this transaction is obviously low,but it is for the consideration of the company's overall interests,then the court should not deny the transaction.Second,the distribution of the burden of proof should be clear.In cases where the complete disclosure and voting procedures have been fulfilled,the plaintiff should bear the burden of proof,and in cases where the relevant procedures have not been fulfilled,the defendant should provide evidence.