The Consideration On Improvement Of The Legal System Of Proxy Solicitation In China

Proxy solicitation is an important corporate governance legal system.This system has a significant positive impact,and is expected to play a role in protecting small and medium investors.This system originated in the United States,and it makes possibility to meet the quorum of the shareholder meetings.In the United States,the consulting institution usually play an important role in proxy solicitation,which deserve our learning.China Securities Investor Service Center is a neutral institution,and is operable to use the proxy solicitation to protect the small and medium investors.However,there are some maladies in this system such as formalism.It has aggravated the situation of the protection of the investors,hindered the shareholders from voting,and was not conducive to the equalization of rights,obligations and responsibilities in corporate governance.And there is no clear legal provisions about the eligibility of subject,cost allocation and information disclosure regarding proxy solicitation.There is a blank in the legal system.On the one hand,the idea of solving these problems can be found from foreign legal systems.On the other hand,upper-level law and the doctrine can fill the blank,and the law can be interpreted by the courts.There are four chapters in this article.The total words are around 28 thousand,except preface and conclusion.In first chapter,we discuss the legislative status,the practices in China,and impacts of the proxy solicitation.We argue that proxy solicitation has more positive impacts.And we summarize key issues that need to be focused on.Regarding the practices of the proxy solicitation in China,the proxy solicitation of Shengli Gufen is the first practice.The proxy solicitation of Jinan Qingqi put forward new ideas for practicing small and medium investors.They tried to solicit proposal right and voting right,nominate themselves as directors,and then approve this nomination in shareholder meeting.Regarding the legislative status of the proxy solicitation,there are few laws concerning this system in China.The current laws and regulations only provide a principled stipulation on the entrustment of voting right,leaving problems for the operation in judicial practice.Regarding the impacts of the proxy solicitation,some scholars held the "positive impacts theory",and others held the "negative impacts theory." After research,the "negative impacts theory" are debatable.The positive impacts of the proxy solicitation are more significant.First,the system “bundles” the voting rights held by small and medium investors,which enhances their bargaining power.Second,the system can reduce the cost of shareholder's participation in the shareholder meeting,thus strengthening the shareholder's control over the company.Third,improve the corporate governance structure.The essence of the company is a set of arrangements of rights and obligations.This system may change the "shareholders' rational indifference" and enhance the democratization and representativeness of the shareholder meeting.Therefore,the advantages of the system outweigh the disadvantages,and the system should be used more and play its role to protect the investors.After analyzing the existing laws,regulations,practices and viewpoints,this article focuses on three issues of proxy solicitation: 1)eligibility of subject,2)information disclosure and 3)cost allocation.These issues cover before,during and after the process of solicitation.They are key issues that need to be paid attention to.In second chapter,we discuss the rationality and legitimacy of non-shareholders as the eligible subject.We argue that the eligibility of subject should not be limited.If this system can protect the investors,then more people should be encouraged to initiate proxy solicitation,and the restrictions on the eligibility of subject should be relaxed.Regarding the question of whether or not the eligibility of subject of proxy solicitation should be restricted,there are both "affirmative" and "negative" viewpoints.The former believes that the subjects should be restricted to prevent malicious solicitation of vandals.The latter believes that the subject should not be limited to the three categories explicitly mentioned in laws;and according to the existing law,everyone is entitled to solicit proxy.As to the legal rule,the “Guidelines for the Governance of Listed Companies”(2018 Revision)stipulates the board of directors,independent directors and eligible shareholders may solicit voting rights from the company's shareholders.In the United States,the eligibility of subject is the most relaxed.Any individual or institution can solicit proxies.In Taiwan,the eligibility of subject is strictly restricted.Starting from the intention of legislator,the relevant provisions do not prohibit non-shareholder from soliciting proxies.The "Guidelines for Articles of Association of Listed Companies"(2016 Revision)stipulates that "the company shall not set a share ratio on the proxy solicitation",which manifested that the legislator does not intend to restrict.All is permissible unless prohibited,therefore non-shareholder should have the right to solicit proxies.In order to protect the interests of small and medium investors,it is more reasonable to make extensive interpretation on the subject of proxy solicitation.In practice,the solicitors should be allowed to seek “private benefits” as long as they will not harm the interest of other shareholders.And it is not meaningful to ban non-shareholders from solicitation only.Besides,In the United States,professional consulting institutions have deeply involved in the proxy solicitation.These institutions solicited proxies under the entrustment.In China,the consulting institution is underdeveloped.It is necessary to encourage non-profit organizations to participate in,in order to protect investors.Considering “private charity is not sustainable”,encouraging the participation of profitable consulting institutions may be an alternative solution.Institutions should be given proper incentives.Meanwhile,issues such as conflicts of interest and inadequate performance of fiduciary duties should also be prevented.In third chapter,we discuss the disclosure of proxy solicitation under dilemmas and laws.At present,there are two dilemmas.First,the legal system may be insufficient;second,there are defects in the solicitation materials.Although many theorists argue that the legislation is insufficient,we argue that there are rules to provide enough guidance for information disclosure of this system.After studying the rules and practices of the United States proxy solicitation,it was found that the disclosure in the United States was too complicated and difficult to understand.Therefore,the disclosure should be easy to understand.It is easy to be understood by the public for the purpose of effective communication.Besides,the court plays a role in information disclosure.The court can decide the relevant disputes.Materiality or significance can be applied on relevant issue.In fourth chapter,we discuss the cost allocation of proxy solicitation,and introduces the Froessel Rule,and proposes to optimize the rules applicable to China's practice.Related researches are mostly based on rules in United States.The rule for the cost allocation is that the incumbent directors basically can get reimbursement,but the insurgent(dissenting shareholder)usually bear the cost by themselves.The rule is relatively reasonable,but still has some problems.The problems are: 1)it is unfair to the dissident shareholders;2)it does not meet the legal value of corporate democracy.The Froessel Rule is that: the incumbent directors can always get reimbursement,if they defend corporate policies rather than personal interests;insurgents(dissident shareholders)can only get reimbursement when they win the proxy contest.The rule was born in the 1955,from the case Rosenfeld v.Fairchild Engine and Airplane Co.which was given by Judge Froessel.This rule was confirmed in subsequent judgments.But the rule has flaws and it is too "friendly" to the incumbent.We use law and economics method to discuss this rule.The dissident shareholders bear the cost themselves,preventing them from soliciting or looting the company.Reimbursing dissident shareholders when they win the proxy contest,makes the rules conducive to the active role of the system,which is conducive to small and medium investors to solicit proxies and fight for their interests.From the perspective of the participating subjects,the rule balances efficiency and fairness.The efficiency is reflected in that: solicitors bearing the cost prevents excessive solicitation.Fairness is reflected in that: dissident shareholders get reimbursement if they win the support of the majority shareholder;and bear the cost when they do not get the support.However,from the perspective of reimbursement of the incumbent directors,the rule has problems.As long as meeting business judgment rule,case law supports the company reimburse the incumbent directors,which result in defending shareholders by using company resources.The Conclusion,the Suggestions on Improvement of the Legal System of Proxy Solicitation in China,we put forward the suggestions for perfecting the proxy solicitation system,and finally realizes the fundamental goal,protecting the interests of small and medium investors.First,considering that the more advantages of proxy solicitation,it is recommended that there is no restriction on the subject of soliciting.Encourage consulting institution participate in,enhance the value of the company,and boost the stock price,for a win-win situation.Second,it is recommended to emphasize that information disclosure should be easy to understand.Perform information disclosure duties in accordance with existing regulations.The court should explain and apply the law in disputes.Third,it is recommended to clarify the cost allocation rules and provide guidelines for all parties.Strictly limit the conditions for the board of directors to obtain reimbursement,and prevent them from using company resources against shareholders.