6.1 The overall picture of exit remedies in China

This section is devoted to answering one of the centra! research questions by presenting an overall assessment of the exit remedies in the new Chinese company law. The following two sections will deal with the appraisal remedy and the oppression remedy respectively, and answer the other main research question: to what extent can we learn from experiences in the UK and US for future improvement?

As widely observed, the topic of minority shareholder protection has gained considerable, unprecedented momentum in the last two decades. Globally, regulatory reforms of protective mechanisms have often been witnessed. Among the mechanisms of minority protection, exit remedies are of substantial significance to minority shareholders, especially to those in close companies, owing to the absence of a liquid market for the shares of such companies. Although the possibility of exit can be negotiated and provided in the articles of association or shareholder agreements, there are four reasons why it is not appropriate to leave such a topic wholly to private ordering. Firstly, modern company law endeavours to reduce mandatory requirements and leave freedom to shareholders. Yet, as a result of the unbalanced bargaining power between the majority and minority shareholders, such a right is not guaranteed, thus the interests of minority shareholders are not well protected. Secondly, these contractual mechanisms are sometimes costly solutions owing to lack of information, the use of imprecise expressions in drafting contracts, and inexperienced judges.1 Thirdly, in some cultures, as in China, the discussion of measures to prevent future problems causes the parties involved to lose `face', indicating a lack of trust and respect for the other parties' reputation, and is often considered a negative sign for future success. Accordingly, parties are reluctant to deal with the exit issue beforehand. Finally, again in China, it is not compatible with Chinese culture to have an extensive and detailed agreement as the starling point of cooperation. All things considered, statutory solutions are necessary in respect of exit remedies.

The statutory exit remedies examined in this book are the appraisal remedy and the oppression remedy. This research has been conducted from a comparative point of view including the legislation and practice in the UK, the United States and China. Since China has also been making efforts in improving its investment climate, which is demonstrated by the wholesale reform of its company law and securities law in 2006, the progress made on exit remedies can be observed in the new company law. Before 2006, exit remedies were a blank area in Chinese company law; neither the appraisal remedy nor the oppression remedy was provided.2 The absence of exit remedies can be explained partially by the capitalization system adopted in China, which did not leave room for a company to repurchase its shares, and partially by the inadequate attention paid to the area of minority shareholder protection.3 A weak system of minority shareholder protection will not only affect domestic entrepreneurial spirit but also foreign direct investment.

The new company law, as has long been anticipated, provides appraisal rights or so called dissenter's rights to shareholders in close companies for the first time. This right is stipulated in Article 75 and affords exit rights to dissenting shareholders under the circumstances of 1) withholding of dividends 2) mergers, divisions, or transfers of the main assets of the company and 3) extension of the operation terms prescribed in the articles of association. As a new form of remedy, Article 75 reflects improvement of minority shareholder protection in the history of Chinese company law. After a close and comparative examination, however, I have identified three main unsatisfactory aspects, i.e.: limited and unsophisticated application grounds, various unregulated issues to facilitate the application of the remedy, and inadequate instructions on procedural issues, such as the absence of guidelines for the valuation of the dissenter's shares. The current situation of the appraisal remedy in China, in a nutshell, is thus: the remedy has been introduced, but it is far from sophisticated. Abundant room is left for further development. Recommendations are therefore proposed in Section 6.2.

We will now assets the new oppression remedy. The Company Law 2006 has also made an impressive stride by recognizing the majority shareholder's fiduciary duty to minority shareholders. Article 20 reads: shareholders of a company shall comply with the laws, administrative regulations and articles of association, and shall exercise the shareholder's rights according to law. None of them may injure any of the interests of the company or of other shareholders by abusing the shareholder's rights, (..). Where any of the shareholders of a company causes any loss to the company or to other shareholders by abusing the shareholder's rights, it shall be subject to compensation.

The essence of this article resembles that of the oppression remedy in the US and the unfair prejudice remedy in the UK. It recognizes the majority shareholder's duties and tries to constrain his behaviour. This is a good start and follows the international trend by imposing fiduciary duties on shareholders, especially on the majority shareholders, but several points lead to the conclusion that a fully-fledged oppression remedy has not yet been established in China.

Firstly, the provision is principle-based. China being a civil law country, the courts and practitioners are used to relying on specific rules; standard-based remedies create a daunting impediment to application. Ways to increase certainty and predictability are therefore needed before the remedy can operate in practice.

Secondly, Article 20 does not provide the exit remedy; a court ordered buyout is the most common form of the remedies studied in this book. Under Article 20, only compensation is available, which means that even if shareholders are found to have abused their rights, minority shareholder cannot leave the company.

Last but not least, Article 20 is stipulated in Chapter 1 of general principles. Its structure is not adequate enough to take it as a specific remedy.

All in all, an exit remedy based on oppression or unfair prejudice has not been introduced in China. In my opinion, Article 20 only generates a symbolic image that breaches of fiduciary duty can be remedied onder the new company law. I advise stipulating a more detailed remedy in the company law with standards for interpreting the general words of `abuse of rights', listing assumptions of breach of fiduciary duties, inserting exit remedy, and providing guidelines on the valuation of shares. I will specify these recommendations in Section 6.3.

In brief, the details of the appraisal remedy need further improvement, and the oppression remedy needs to be established. So there is by far no well designed system of exit remedies yet in the Company Law 2006, and experiences from other jurisdictions are definitely valuable as references. Nevertheless, irrespective of these imperfections, the remedies prescribed in the new company law reflect legal progress and legislative efforts. They will benefit minority shareholders in close companies in China, including shareholders in the foreign invested enterprises.

Foreign invested enterprises are predominately close companies in China, but FlEs and companies with only domestic investment are subject to different sets of laws in China as stated in Chapter 2. Provisions of company law are applicable to FlEs only when laws on FlEs are silent on the issues concerned. Therefore, the appraisal remedy and the oppression remedy, which cannot be found in the FIE laws, are, in principle, applicable to shareholders in FlEs since they are provided in the company law.

This is good news for the shareholders in FlEs because members of FlEs are more likely to be subject to disputes and disagreements, given the disparities in ideas of corporate strategy and cultural backgrounds. It has been pointed out that differences in management preferences and market strategies lead to deterioration in relations and finally to deadlock or oppressive behaviour in FlEs.4 Therefore, a way out when conflicts occur is even more meaningful to members of FlEs, because of the different corporate structures and regulations specifically for FlEs. However, the applicability of the remedies to FlEs is controversial.5 As discussed in Chapter 5, I think the differences between FlEs and a wholly domestic invested company should not preclude shareholders of FlEs from applying the remedies. But the ultimate solution is to integrate laws goveming FlEs into company law and offer FlEs real national treatment. The generally accepted idea is that rules in the business organization part of the FIE laws should be integrated into company law and rules on national safety as well as market access should be incorporated in the need-to-be-drafted PRC investment law.6 Once this idea is accepted, it will not be necessary to discuss the applicability of the appraisal remedy and the oppression remedy to FlEs.