6.2.3 Procedural issues and recommendations

Compared with the rules in the US, the problems with the procedural aspect of Article 75 are more serious than those with the substantive scope. The first step in Article 75 is voting against the transaction, so no information rights for shareholders are guaranteed. The second step requires dissenting shareholders to initiate the negotiation process for fair value, but there is no guarantee of the negotiation period. Neither a prepayment procedure nor a possibility of withdrawal can be found. The third and last step does provide for judicial appraisal, allowing the opposing shareholders to bring a lawsuit to the court within 90 days from the adoption of such a resolution, but there is no guidance on valuation issues. A new set of procedural rules are therefore suggested below:

If the payment demand of the previous procedure remains unsettled, within 90 days the shareholder should commence a proceeding and ask the court to determine the fair value.

Article 75 should also add consequences for the parties in case of the noncompliance with the procedures, provide the dissenting shareholders with the opportunity of withdrawal, and specify how to deal with the repurchased shares.2

As far as valuation is concerned, the law should give guidance on five issues, namely: valuation methods, the court's competence, valuation date, discount or not, and calculation of interest. Unfortunately, none of them can be found in Article 75, except the valuation date and the requirement to ensure a reasonable value of the dissenters' shares. At present, there are not enough published cases to examine courts' position on these issues, and it usually takes a long time for a court to establish the practice. As a result, the research in this book concentrates primarily on the study of the practice in the US so as to provide a reference for the Chinese courts in developing their own practice.

(1) Guidance on valuation methods and the court capacity

As to the valuation methods, the general principle at present is that the court should use customary and current valuation concepts; techniques generally employed for similar businesses.3 Although it is impossible to frame a universal formula for every case, a general policy to guide the choices as outlined above lines would still help. Methods generally used in case law are: net asset value, discounted cash flow (DCF), capitalized earnings (earnings value), comparative corporations, and a combination of methods.4 So far, the most favoured method is DCF.5

Besides giving guidance on valuation methods, Article 75 should also clarify how the court can fulfil its function to achieve a reasonable price: should an ultimate power to decide the methods be granted to the courts or must the courts choose between the methods employed by the experts representing the opposing parties? If the courts are empowered with the right to decide the methods, may the courts appoint their own experts as appraisers, and who should pay the experts' fees? One cannot expect the Chinese courts to feel comfortable in handling such issues because they are not used to exercising their inherent power regarding issues which are not explicitly written down in the corporate statute.

(2) Discount and interest

Article 75 should also explicate instructions to eliminate the application of a minority or a marketability discount in appraisal actions. The appraisal remedy onder Article 75 should also include the starting date for calculating interest, the rate, simple or compound, and the discretional power of the court. The common understanding is: interests should be calculated from the effective date of the corporate action until the date of payment. But there is no consensus on the interest rate and the calculation method.6 One way is to refer to a parameter, such as "an appropriate rate of short-term bank debt for the corporation" 7 The other is to grant the court equitable power to decide, as the Delaware statute does.8 In my opinion, power for the court to decide based on the facts of every case generates more assurance of a fair result. Nonetheless, given the initial stage of this remedy in China and the legal culture, I am in favour of a more detailed regulation of this issue to promote certainty and clarity.