5.2.2.1.3 Strengthen the minority shareholder's rights

The present subsection attempts to illustrate the progress made in the Company Law 2006 in strengthening the minority shareholder's rights in terras of information availability and management participation, both of which can counterbalance the chances of being oppressed by the parties in control. In close companies, one of the main reasons that the minority shareholders are often oppressed for a long time and cannot receive the profits of their investment is information asymmetry. It has been proved that better access to information has a dual function: on one hand, it helps minority shareholders to enforce their statutory rights and defend their interests effectively; on the other hand, it deters the controlling shareholders and the management board from self-interested transactions.1

Company Law 1993 only allowed shareholders to examine the financial and accounting reports of the company, which are open to the public and can easily be falsified for the benefit of the majority shareholders.2 The request to examine accounts which are private, as well as the basis of the financial and accounting reports, was usually refused by terming them "business secrets".3 Article 34 of the new Company Law provides better protection by allowing shareholders in close companies to review both the accounting reports and the company's accounting records. The possibility to examine the accounting vouchers which include original vouchers and recording vouchers, and which are, according to accounting law, the basis of accounting books, is, however up for discussion.4

No threshold is set in Article 34 for the entitlement of shareholders to examine the books; practically every shareholder has the right to request an examination. To prevent abuse of this right, the company may refuse to allow a review if it can prove that it has a reasonable basis to believe that the shareholder's request to review the accounting records may harm the company's interests. As to shareholders in the public companies, they are not granted the right to review accounting records, but only accounting reports.5

According to Article 151, shareholders can make an enquiry during a shareholders' meeting (limited liability companies) and a shareholders' general meeting (public companies). It is an individual shareholder's right as well as a right of common benefit, but it applies only to individual shareholders who have attended the meeting. The directors, supervisors or senior officers who attend the meeting have a duty to respond to the enquiries.6 Needless to say, the provision of such a right in the new company law is an improvement, but the article is too general and simple. As a result, a vacuum remains in three areas: 1) what is the scope for enquires? The leading opinion in the current scholarly field is that the scope of enquiry should be confined to questions relating to resolutions of the meeting.7 2) What is the standard to assess whether the enquiry was answered effectively and adequately? Adoption of an objective standard is recommended, i.e., the adequacy of the answers is assessed with a view to whether a common shareholder with average comprehension ability and skifis is subsequently well able to understand and make sense of the issue to be vote upon.8 3) Are there any exceptions to allow the board not to answer the enquiries, for instance in case of business secrets or if the enquiring shareholder is also engaged in a competing business? I think the answer to this question should be yes, and the limitation on examining the accounts should be added here as well, namely that the company may refuse to give any explanation if it can prove that it has a reasonable basis to believe that the shareholder's questions may harm the company's interests.

Shareholders' meetings can take the form of regular meetings or extraordinary meetings. In a close company, regular meetings shall be convened on time in accordance with the company's articles of association. The improvement of the Company Law 2006 is that, not only at least one-third of the directors or the supervisory board, but also shareholders representing at least 10% of the voting rights can propose to convene an extraordinary meeting.9 When both of the boards fail to convene and preside over such a meeting, shareholders representing at least 10% of the voting rights may themselves convene and preside over such a meeting.10

The new company law changed the previous mandatory rule that shareholders shall exercise their voting rights in a close company in proportion to their capital contributions into a default rule stating "The shareholders shall exercise their voting rights at the shareholders' meeting on the basis of their respective percentage of the capital contributions, unless otherwise specified in the company's articles of association".11 The quorum and threshold for adopting a resolution are subject to provisions of the articles of association, except certain issues like amending the articles of association, increasing or reducing the registered capital, merger, division, dissolution or change of the company type.12 This affords the shareholders themselves great freedom to determine the voting arrangement. But greater discretion also means a greater chance to abuse power. Hence, remedies to control voting issues, both procedurally and substantively, are becoming more important.13 Currently, class voting rights which may also help to protect minority shareholders are not stipulated in the company law.14

Similar to provisions in other countries, there are few restrictions on share transfers among members within a close company, subject to the articles of association or shareholder agreements.15 But in terms of transferring to a nonshareholder, there are a few limitations in the company law, for instance approval of more than half of the other shareholders, and pre-emptive rights to purchase the shares.16 The new company law has made amendments to facilitate the following three aspects of the process of transfer: 1) introduction of tacit approval. If the shareholders fail to reply within 30 days after having received written notice of the transfer, they are deemed to have agreed to the transfer,17 2) change from approval by more than half of the shareholders to more than half of the other shareholders and, 3) deletion of the compulsory requirement for shareholders' meetings: a written notice suffices.