5.3.1 History of the appraisal remedy

No appraisal remedy for close companies existed in Company Law 1993. This remedy could only be obtained onder two regulations for listed companies, i.e., "Compulsory Articles in the Articles of Association for Companies Listed Abroad" and "Guidance of Articles of Associations for Listed Company" (1997), revised in 2006.1 These regulations are lower than law in the legislative hierarchy, and lack specific rules and procedures. Article 173 of the "Guidance of the Articles of Associations for Listed Company" (1997) stated that: "The board of directors should take necessary measures to protect the legal rights and interests of shareholders who are against the decision to merge or divide." However, the question of what constitutes necessary measures remained unanswered. We will see in the following case that some companies had interpreted the necessary measures as something similar to appraisal rights applied in the US.

A historical reason accounted for the lack of appraisal rights in China. Previously, China adopted the capitalization system employed in Germany, i.e., capital certainty and capital maintenance. All subscribed shares must have been issued at once, and shareholders were forbidden to withdraw their capital contributions once registered because such repurchases were against the principle of capital maintenance, and were also taken as fraud in capitalization by shifting business risk to creditors.2 Close companies were thus not allowed to initiate a share repurchase scheme, nor were the shareholders able to require a purchase. Public companies could only devise a repurchase scheme in case of capital reduction and merger with another company which holds its shares.3 Individual shareholders had no right to ask for a buyout under any circumstances. So the way for shareholders to enforce an exit by way of a corporate buyout was blocked. The only way lelt for a shareholder to exit was by share transfers.4

With the rejuvenation of the capital market and intense market competition, structural changes to a company, such as merger activities, occur more often than before. The complaints filed at the court about inadequate share value determined by the majority shareholders were also on a constant rise. But there were no relevant remedies in the company law. Based on Article 173 of "Guidance of the Articles of Associations for Listed Company", several listed companies improvised "necessary measures" on their own initiatives with reference to the appraisal remedy in the US, for example, in the case of ZhengBaiWen and the merger between ShangHai Yibai Shopping Mall and Hualian Shopping Plaza.5

The case of ShangHai Yibai Shopping Mall and Hualian Shopping Plaza in April 2004 is representative. The two companies planned to merge. They had devised a repurchase scheme (called gu dong xian jin ging qiu quan in Chinese), which set the 28^th of April as the last day for the realization of the cash-out rights and dissenting shareholders could ask the company to buy out their interests in the company. The purchase price for Hualian was 7.74 RMB per share, and 7.62 RMB for Yibai. The day before their suspension on the stock market, however, Hualian closed at 9.27 RMB, and Yibai at 9.53, which was much higher than the prices set in the scheme. Therefore, not surprisingly, most of the minority shareholders were unhappy to sell at the price set in the scheme.

Though there is limited access to more details in this case, several reflections can already be made. Firstly, the repurchase scheme in this case was devised by way of an offer by the company on the presumption that if the shareholders accepted the offer, they objected to the transaction. Resembling the appraisal remedy in the US, this scheme offered the dissenting shareholders a way out with the share value decided by the company, but the difference was that the transaction was conducted in a reverse, i.e. instead of first objecting and then being bought out, the shareholders who chose to be bought out were assumed to oppose the transaction. Secondly, the repurchase price was unilaterally decided by the company, and obviously lower than the market price, but there was no chance for the minority shareholders to challenge the reasonableness of the price. They either accepted the price or followed the merger. As a result, selfconceived plans by the majority often, if not invariably, led to unfairly prejudicial treatment of minority shareholders. Last but most importantly, this case together with the case of ZhengBaiWen reflected the fact that the commercial needs and practice of Chinese companies had outgrown the law and companies were forced to devise procedures and remedies by themselves on account of the Jack of relevant legislation. So it was time for Chinese company law to consider the practical need of shareholders and accordingly lay down a statutory remedy allowing shareholders to have their shares purchased by the company onder certain circumstances.

In the first draft of the revised company law, appraisal rights were not proposed. This problem was, however, pointed out during the consultations on the draft. After discussion and study by the Law Revision Committee and the SPC, it was agreed in the end that the appraisal remedy should be established in China to meet the need in practice.

Article 75 in the final version of the Company Law 2006 where appraisal rights are provided has become a landmark of exit remedies in the history of the Chinese company law. In the following part of Section 5.3, three main questions are discussed comparatively, namely the appraisal triggers, the relevant procedures, and the valuation issues. In comparison and with reference to the study in the US chapter, reflections and modest recommendations are then proposed.