A Study On The Legal Restraint Mechanism Of Equity Rights Of Privatized Bank’s Controlling Shareholders

It is said that 2018 was the first year of an era of "strengthening governance" of the banking industry.Corporate governance has been included in the annual regulatory focus of the banking regulatory department,especially for the small and medium-sized banks.There is a significant deficiency in corporate governance.The event that Baoshang Bank was took over by competent authority is believed to be of great relevance to the controlling shareholder’s abusing rights and illegal use of bank funds,which resulted in “serious credit risk”.It has received great attention and became a hot topic in all walks of life.Some think that private capital participation in commercial banks will bring huge risks,so such bank industry’s reform shall be postponed,while others have proposed to limit the proportion of private capital in bank industry.This article argues that private shareholders do not have a natural "inferiority".Limiting the shareholding ratio is not advisable.From the perspective of improving legal regulations,a legal restraint mechanism of equity rights of privatized bank’s controlling shareholders a privatized bank’s control of shareholders’ rights should be established.This prevents moral hazard for bank shareholders.The basic logic of this paper is that based on the regulatory takeover event of Baoshang Bank,to analyze the underlying reasons of moral hazards of bank shareholders,and combine recent years’ s market practice of China’s banking industry privatization reform,and finally draw a conculsion that the current market access regulation,which featured as “indifference of behavior but access” patern of banking supervision,is ineffecient in solving the inherent moral hazards of bank shareholders,and further proposes that private law and public law should be both utilized to improve China’s current legal mechanism regarding the control of shareholders’ rights of privatized banks.Based upon the "equal rights and responsibilities principle",it is imortant to assigned certain obligations or responsibilities to controlling shareholders,including the principle of good faith obligations,the restriction of voting rights and the special responsibilities of bank controlling shareholders.The latter two are the specificization of the principle of good faith obligations.From this perspective,this article believes that China’s bank equity governance should strengthen "penetration supervision" to alleviate the information asymmetry between the regulators and the shareholders of privatized banks,thereby ensuring the implementation of the aforementioned legal rules.In addition to the introduction and conclusion,this paper is divided into four parts.The first part of this article analyzes the Baoshang Bank incident in detail and extracts that its core problem lies in "controlling shareholders’ abuse of equity rights",and establishes the theme for the follow-up discussion of this article,namely,the privatized bank’s controlling shareholder rights restraint mechanism.The second part of this article defines several basic issues of the shareholder rights restriction mechanism of privatized banks.Firstly,this article sets out the definition of controlling shareholders and how to understand “abuse of controlling power”.Secondly,the analysis of moral hazards as the underlying reason for bank control shareholders’ abuse of control rights.In addition to the theory of economic man utilitarianism,this article considers that there are also information asymmetry problems within banks,and the company’s limited liability system,deposit insurance system,and "too big to fall" are external institutional reasons that cause control shareholders’ moral hazard.Thirdly,through theoretical and empirical research results,it is emphasized that there is no necessary relationship between the nature of equity,the proportion of equity,the nature of industry from where the contribution to bank comes and the abuse of rights by bank’s controlling shareholders.Then this article introduces the current“indifference of behavior but access” banking supervision mechanism.The conclusion is that banking supervision mechanism is inefficient in solving the inherent moral hazards of bank shareholders,which is the main argument of this article.It is not sufficient to restrain bank shareholders’ incentive to abuse controlling power only by external regulatory supervision.It is advised to integrate private and public law.Based on the theory of "equal rights and responsibilities",the statutory "good faith obligation" principle shall be incorporated into the legislations,and the voting rights of the controlling shareholders of the bank should be appropriately restricted in special circumstances.Futhermore,once a shareholder’s holding reaches the controlling standards,such shareholder should be continuous be supervised and bear special responsibilities to curb his short-sighted behavior,which is also for the purpose of maintaining the stable operation of the bank.The third part of this article will mainly discuss the current law on the restrictive mechanism of bank controlling shareholder rights,and also take an insight into the special historical background of the bank industry’s privatization reform in China.First of all,it comes the discussion on the current laws and regulations applicable to the controlling shareholders of privatized banks in China,including general principles for execising shareholders’ rights,restricting rules on voting rights,bank shareholders’ legal responsibilities,and supporting measures for bank equity governance.After that,relevant legislative gaps were analyzed.Secondly,in view of the aforementioned major deficiencies,this article then took an insight of the legislative practice of European,American countries and China’s Taiwan region.It is found that on one hand a principle for exercising shareholders’ rights and voting rights in private law,and on the other hand the special liability of bank shareholders in public law and penetrating supervision,both are common in the legal system of these contries(region).The latter two are the main trends of the current international bank’s equity governance.The fourth part proposes specific legislative suggestions based on the experience of other countries(or regions).Firstly,it is necessary to establish the faithful obligations of controlling shareholders as a general legal principle to regulate potential abuse of control rights by banks’ controlling shareholders,and also provide a top-level legal basis for the restriction system of voting rights and the special responsibilities of controlling shareholders of banks.The purpose of the system is to maintain a balance between the controlling shareholder and the other shareholders inside of the privatized bank,by way of restricting the voting rights of the bank’s controlling shareholders conditionally,especially in the case of overdue and excessive pledges of shareholder loans.Last but not the least,it comes to the specific suggestions on measures for "penetrating supervision" of bank equity.