On The Restriction Of Shareholders' Rights In The Equity Incentive Of Limited Liability Companies

As the only legal norm for the “equity incentive” system after departmental regulations including the Administrative Measures on Equity Incentive of Listed Companies,Article 142 of the Company Law of the People's Republic of China stipulates that a joint stock limited company shall be entitled to buy back its own shares in case it “applies the shares to employee stock ownership plans or equity incentives”.Nevertheless,since these normative documents are only applicable to joint stock limited companies rather than limited liability companies,the latter assumes greater autonomy in the realization of equity differentiation such as dividend,voting and equity transfer,as evidenced by the tendency of shareholders to carry out arbitrary expansion,restriction and even deprivation of specific shareholders' rights through the articles of association or shareholder agreement.The implementation of equity incentive is frequently involved in such issues.As an additional condition to allow incentive objects to hold shares in most cases,the restriction of shareholder rights leads to the deterioration of the original shareholder repression in limited liability companies and thus causes legal disputes,highlighting the necessity to attach concern to and regulate the issue from the legislative and judicial perspectives.As implied by the precedents,there are considerable legal disputes over the agreed terms on the restriction of shareholders' rights among companies,controlling shareholders and objects of equity incentive.Because of the highly disordered restrictions on shareholders' rights,the equity incentive objects as minority shareholders tend to lose their expected shareholding benefits due to impaired rights,followed by frustration of the companies' incentive purposes as a result of frequent disputes.This paper holds that the limitation of shareholders' rights through shareholder autonomy should by no means simply refer to the division of inherent rights and non-inherent rights in traditional theories.Based on the validity of the rights limitation clauses and the different situations,scopes and modes,the different autonomy boundaries of shareholders' rights should be identified through separate demonstration and definition.Among limitations on the shareholders' self-benefit rights of incentive objects,restrictions on the dividend right and transfer right are the most typical ones,neither of which are fundamental and instrumental shareholders' rights.Exerting an impact only on the property value of the contracting shareholders,limitations on the dividend right of shareholders attach no other obligations of shareholders or third parties and are based on the judgment of rational natural persons.Restrictions may therefore be imposed at the discretion of shareholders,given that the impairment scope of interests is predictable and unlikely to cause a potentially serious injustice.The same is true of shareholders' rights such as property distribution,preemption and privileged subscription.Restrictions on the transfer right of shareholders is frequently agreed on as “shares are retained despite the shareholder's departure”.In the event that a shareholder leaves the company,the forced turnover for shares and the restricted transfer price imply an unforeseeable equity impairment of the incentive object.In this case,restrictions on the transfer of equity concluded at the will of the company shall be deemed invalid.The most typical restriction on the shareholders' right of common interest is the limitation of the right to vote and the right to know.As both fundamental and instrumental shareholders' rights,they are the prerequisites for the realization of other shareholders' rights.Given the efficiency and fairness principles of the law,this is expected to promote a balance of interests among shareholders by acknowledging the rationality of restricting incentives for shareholders to vote while avoiding fostering shareholder repression.In this regard,conflicts of legal values can be resolved by appealing to the principle of “proportionality” in administrative law and by applying the criteria of fair priority and “prohibition of excess”.That is,a company may impose restrictions on the incentive objects' voting rights at its will only on the premise of ensuring stable asset returns of them.The same is true of the derivative right to vote,including the right to attend shareholder meetings and the right to propose.With a more specific and appropriate way and degree of restriction,the judgment standard of “material deprivation” in the current law might be applied to the limitation of shareholders' right to know.While analyzing the legality of agreements on the restriction on incentives of shareholders' rights,such agreements shall be based on the validity principles of subject suitability and procedural appropriateness.On the one hand,as the implementation of equity incentive is usually a complex legal act involving multiple legal relationship subjects,the equity incentive agreement signed by unauthorized agents violates the subject suitability,and may lead to the incentive objects' inability to claim the rights of relevant equity due to the confusion between controlling shareholders and corporate legal persons.On the other hand,amendments to articles of association adopted by the company based on the majority principle,and shareholder agreements signed by some shareholders,are unable to serve as effective contracting carriers for shareholders' rights limitation because of the reduction of shareholders' rights against the will of incentive objects or the possible influence on other shareholders' legal rights.To avoid malicious behavior of controlling shareholders and reduce contracting disputes,incentive agreements should be explicitly agreed on the restriction of shareholders' rights of incentive objects.Specific types of rights should as well be taken into account to formulate differentiated preconditions for the resolution to take effect.Based on the above analysis,three suggestions on the improvement of the Company Law are put forward,namely(1)reviewing the governance status of limited liability companies to improve the concept of legal inherent rights that cannot be deprived in accordance with articles of association or shareholder agreement,(2)referring to and introducing the category voting system to achieve the “consistency of control and responsibility” in the equity distribution of limited liability companies,and(3)formulating incentive share repurchase rules for equity incentive and employee stock ownership to reduce legal disputes and promote pre-regulation.