The Choice Of Regulatory Approach For Directors’ Self-Interested Transactions In Limited Liability Companies

Corporate governance of limited liability companies is one of the core topics in the new round of amendments to the Company Law of China,the business management functions of the companies are mainly undertaken by the directors,so it seems necessary to refine the rules of duty of loyalty and diligence showing the interaction between the companies and the directors.The rules of self-interested transactions by the directors of limited liability companies embody the requirements of duty of loyalty of directors.Item 4,Paragraph 1 of Article 148 of the Company Law of China briefly sets up the rules of self-interested transactions by directors.However,in the face of the complicated judicial practice and the reform goal of improving corporate governance of limited liability companies,the existing rules are unable to provide adequate system supply.This article reviews the development of the rules of self-interested transactions by directors in China,and briefly sorts out and comments on the Company Law of1993 and Company Law of 2005.The existing Company Law of the People’s Republic of China fully retains the rules of self-interested transactions by directors in the Company Law of 2005,and the existing rules do not specify the relationship between the procedural requirements for self-interested transactions by directors and the substantive fairness,resulting in contrary judgments in logic conflicts in practice.Moreover,the unclear scope of regulation also results in the relevant rules being selectively applied to similar cases.The existing rules have omissions in the aspects of regulation logic and scope,and there is a need for further improvement.To seek the possibility of the scheme for regulation of self-interested transactions by directors,this article takes extraterritorial legislation as a mirror,focuses on the requirements for resolutions of self-interested transactions by directors and many optional paths of judicial review,and sorts out in detail the space for flexible setting in terms of information disclosure rules,voting rules,identification of interested parties and selection of resolution organs,as well as the possible relationship between the approval of resolutions and judicial review.Extraterritorial practices provide the possibility that directors’ conflicts of interest in the pursuance of self-interested transactions should be disclosed to the competent authorities,that directors having an interest should not participate in the approval or voting of the transaction,and that the interested shareholders should abstain from the approval of the transaction.Directors self-interested transactions by whom has not been approved by the competent authorities are subject to judicial review.The criterion for judicial review is whether the transaction is fair,it is proved by the interested director that the transaction is fair,and the validity of self-interested transactions by directors with the approval of the competent authorities may be subject to judicial review alternative.Based on the possibility of the above regulatory schemes,this article analyzes the scope,disclosure rules,approval authority,validity,judicial review and judicial remedy of directors of limited liability companies,on the basis of the current state of corporate governance of limited liability companies and by reference to existing judicial practices,and attempts to arrive at a suitable path for self-interested transactions by directors of limited liability companies.This article puts forward that the path for regulating self-interested transactions by directors of limited liability companies in China should be: direct trading and indirect trading should be subject to equal regulations.After the directors have fully disclosed all important information relating to the transaction,the shareholders’ meeting should decide whether the transaction should be carried out,and interested shareholders are not required to withdraw from the transaction.Transactions approved by the shareholders’ meeting should still be subject to judicial review,and the standard for review should be whether the transaction is fair or not.Directors should bear the burden of proof for transactions not approved by the resolution should bear the burden of proof for transactions not approved by the resolution,and opponents should bear the burden of proof for transactions not approved by the resolution.With respect to the revision of the rules on self-interested transactions by directors of limited liability companies in China,the following points should be considered: clarifying the connotation and denotation of affiliated relationships;establishing an information disclosure mechanism for limited liability companies;insisting that shareholders’ meetings be the approval authority for transactions;insisting that courts have the final review power for transactions;and achieving the balance between resolution procedure and substantive fairness through the burden of proof system.