A Study On The Legal Issues Of The Financial Constraints In Share Repurchase

From invalidity to validity of the contractual repurchase,many scholars have discussed the capital maintenance principle,the confrontation between contract law and organization law,and the lack of protection measures for creditors.Although there is no consensus on how to regulate share repurchase in China,there is a consensus that share repurchase needs the rule of financial constraints.The purpose of this paper is to explore the way to construct the rule of financial constraints of share repurchase in China,which can solve the existing problems of share repurchase and will become an organic part of China’s corporate capital system.The key point of constructing the rule of financial constraints is to balance the interests between creditors and shareholders.Therefore,from the perspective of capital regulation,this paper takes the protection of corporate creditors,the protection of shareholders and the balance between them as its logic mainline,and delves into the rule of financial constraints of share repurchase in line with Chinese reality,through the research methods of literature analysis,case analysis and comparative analysis.The main contents are as follows:Part One: The legislative status of financial constraints of share repurchase in China.First of all,it is defined that the related concepts of the financial constraints of share repurchase semantically,in order to clarify the scope of the subject of this paper.Secondly,this paper combs through the legislative evolution of China’s share repurchase,from the legal level and non-legal level,and summarizes the current legislative status: it is unnecessary to be subject to financial constraints if the reason constraints are satisfied,but it is difficult to implement the share repurchase even if the capital is not used.Finally,from the present situation of legislation,the main issues to be addressed in this paper are led out: whether the reason constraints can replace the financial constraints,the necessity of adopting financial constraints and how to construct the rule of financial constraints.Part Two: The choice of the financial constraints and the reason constraints.First of all,by analyzing the various reasons for the reason constraints on share repurchase,the paper argues that the reason constraints lack the basis of legitimacy.Then,this paper summarizes the development trend of the reason constraints.Lastly,this paper demonstrates the necessity of establishing the rule of the financial constraints from three aspects: the existence of performance obstacles,the existence of abuse space and the need to protect shareholders’ interests.In turn,it is concluded that the reason constraints can not replace the financial constraints,the former shall be abandoned and the latter shall be constructed.Part Three: The exploration of the pattern of financial constraints.First,the specific meanings of the capital maintenance model and the solvency model are clarified and illustrated with examples.Second,the advantages and disadvantages of the two models are analyzed respectively based on their development history.Then this paper demonstrates the necessity of adhering to the principle of capital maintenance in China from three aspects: the protection of creditors,the maintenance of the company’s ability to sustain business and the development of the principle of capital maintenance.Finally,by taking the principle of capital maintenance as the theoretical foundation,taking the protection of creditors and the company’s ability to sustain business as the ultimate goals,and absorbing the beneficial experience of the two modes and overcoming their disadvantages,the rule of financial constraints are set up as: In principle,based on the protection of the creditors,the company may only use the assets other than the assets needed to maintain the registered capital and the legal and contractual amount of the reserve fund,however,after the use of assets above-mentioned,if the directors have made a declaration to the effect that the company is able to repay all the debts,the company may successively use the statutory surplus reserve fund and the capital reserve fund to implement share repurchase;For the purpose of protecting the company’s ability to sustain business,when using assets other than the assets required to maintain its registered capital and the legal and contractual amount of the reserve fund to buy back shares,the decision shall be made by the board of directors on the premise of maintaining the company’s ability to sustain business based on the duty of diligence.Part Four: The integration and guarantee of financial constraints.First of all,by demonstrating that the existence of the hard-to-be-paid-up capital contribution under the comprehensive subscription system,is likely to set the financial constraints in an empty frame,and the repurchase of the shares which have not been paid-up will promote the share repurchase to become the channel to evade the capital reduction procedure,it is concluded that the difference between the amount of the subscribed capital contribution and the amount that can be paid off should be deducted from the net assets of the company when the financial constraints are applied,and that the repurchase of the shares which have not been paid-up should be prohibited.Secondly,it is difficult for the rule against capital flight to deal with the complicated evasion behaviors,so financial support rules should be established to restrict the flow of company assets to shareholders in disguised forms.Finally,in order to prevent the interests of creditors and shareholders from being violated when the financial constraints are broken intentionally,the company should entrust an outside service organization to issue an audit report independently,and disclose the repurchase information fully and timely,namely forcing the company to act prudently and legally by increasing the cost of the illegal repurchase.In case of a repurchase in violation of the financial constraints,the act shall be deemed null and void except for the public repurchase by the listed company,and the amount involved shall be returned to the company;the responsible shareholders and directors shall be liable for compensation to the company when losses are caused to the company;the company and the responsible persons shall be jointly and severally liable to the creditors,if the company fails to pay off the debts due.