5.3.3.1 Specific procedures

When a remedy is transplanted from other jurisdictions, detailed study of the substantive scope is crucial to ensure the intended consequences; procedural mies shouldn't be ignored either. One outcome of this comparative study is: to better protect minority shareholders, considerable improvements of the procedural mies in Article 75 is necessary.

There are three steps to qualify for this remedy under the current article. Firstly, dissenting shareholders have to vote against the motion at a meeting of the shareholders. The second step is that dissenting shareholders must initiate the negotiation process for fair value. If the shareholders and the company fail to reach agreement on the repurchase price within 60 days of adoption of the resolution, in the last step, the opposing shareholders can then bring a lawsuit to the court within 90 days of adoption of such a resolution.

The most unsatisfactory aspect of this procedural design is the starting of `voting against', which means that shareholders first have to attend the meeting, and then vote against the proposal. In the US, dissenting shareholders only need to refrain from voting for the proposal. Whether to attend the shareholder meeting or not does not affect the availability of this remedy. There is quite a difference between `voting against' and 'not voting for'. The former increases the cost for minority shareholders to resort to this remedy. Besides, since the procedure begins with voting against, whether shareholders are fully informed of the occasion for voting is not procedurally guaranteed. As commonly understood, access to information is always the precondition for an effective exercise of shareholder's rights. The current procedure should therefore be reformed from the very beginning and commence with a notice of appraisal rights from the company.

Besides the point identified above, a few missing points in the current procedures can be found by studying the procedures in the RMBCA and the ALI Principles, for instance, no consequence explicated if parties fail to follow the procedural mies and no provision offering the possibility of withdrawal. After the comparative study, a new set of procedures with 7 steps is advised. The outlook for the proposed procedures and reasons for amendments are presented as follows:

The procedure should start with a notice of appraisal rights. Before a vote is taken on a corporate action, the corporation is required by section 13.20(a) of the RMBCA to notify its shareholders that a transaction has been proposed and that the corporation has concluded that either appraisal rights are or are not available. When the corporation is uncertain about the availability of appraisal rights, it may inform shareholders of the possibility of the rights, as in the case of disposition of assets.1 Notice of appraisal rights has the purpose of preventing shareholders from failing to exercise the rights owing to ignorance of the availability of those rights.2 So instead of starting with `voting against', it makes more sense for the procedure of Article 75 to start with a notice of appraisal rights. In effect, considering the provisions of Chinese company law, it is quite important to do so because, unlike the requirement for public companies,3 Article 42 does not mandate the company to notify shareholders of the matters to be deliberated at the shareholders' meeting. So if a shareholder does not attend the meeting in person, he may not be aware that there is a transaction to vote on based on which he is entitled to appraisal rights. Accordingly, it is reasonable for the appraisal procedure to start with a notice of the rights.

If the procedure does not begin with voting against, it is reasonable to ask dissenting shareholders to deliver written notices to express their objections and relieve them of the requirement of attending the meeting. If a dissenting shareholder chooses to attend the meeting, he must not vote in favour of the proposed action. Here, I advise introducing the step of written notice in Article 75 and deleting the requirement of `voting against' at the shareholders' meeting, unless the shareholder is willing to do so.

After the shareholders vote, the company should notify the dissenting shareholders of the results of the vote, and at the same time supply a forma! application form for the dissenting shareholders to assen appraisal rights if the transaction has been approved.

Because the setting of a timeline and availability of more information and instructions on how to exercise shareholders' rights are always desirable, I suggest here that provisions should be introduced in the RMBCA which provide that no earlier than the date the corporate action became effective and no later than ten days after such date, the corporation must deliver a written appraisal notice together with a form on which the following information should be indicated: (1) where the form must be sent and where certificates for certificated shares must be deposited, (2) a date by which the corporation must receive the form (3) the corporation's estimate of the fair value of the shares and (4) the dissenting shareholder 's rights to withdraw the appraisa1.4 The company is in the best position to know its financial situation and is the proper party to give the relevant information on how it has determined the reasonable value.

The final step in Article 75 is: if the shareholders and the company fail to reach an agreement on the price of repurchase within 60 days of adoption of the resolution, the opposing shareholders can bring a lawsuit to the court within 90 days of adoption of such a resolution. The problem in this provision lies in the absence of a starling point regarding when the shareholder should start the negotiation process after the resolution is adopted. In other words, the provision fails to guarantee an effective period of negotiation. If the dissenting shareholders start to negotiate 50 days after the resolution, there are only 10 days left for the parties to reach agreement on the price, and it is not difficult to imagine that a shorter time will lead to a greater chance of litigation, which is contrary to the original legislative intention. A deadline to perfect the rights is missing in Article 75, so it is advisable to add a time limit to perfect the rights, for instance, the shareholder should initiate the negotiation process within 20 days after he receives the written notice of the voting results from the company.

A step strongly recommended to insert in Article 75 is the prepayment requirement. In the RMBCA and the ALI Principles, the corporation must pay the dissenters in cash the amount it estimates as fair value plus interest within a limited period of time, without waiting for the conclusion of the appraisal proceeding.5 The amount of payment must equal or exceed the corporation's estimate given in the appraisal notice. A difference of opinion on the total amount to be paid should not delay payment of the amount that is undisputed.6

If the dissenting shareholders are dissatisfied with the fair value estimated by the corporation, they should notify the corporation to that effect and offer a price they deem appropriate. A negotiation period should be guaranteed. The shareholder whose demand is deemed as arbitrary, unreasonable or not in good faith runs the risk of being assessed litigation expenses.

The possibility of withdrawing appraisal rights within a certain period should be also offered to dissenting shareholders. Before the company receives the written application form for appraisal or within a certain period after it is received, the law should allow the dissenting shareholders to waive their appraisal rights. The law may, however, impose restrictions on withdrawal after the company has received the written form, such as written consent by the company.

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