5.3.2.2.3 Disposition of major assets

As in the RMBCA and the ALI Principles, Article 75 grants appraisal rights in case of disposition of major assets. The paramount question is what the standard is to define the scope of major assets. Article 75 does not give any guidance on this issue. According to Article 1 of "Notice on Sale and Purchase of Major Assets for Listed Companies", promulgated in 2001 by China Securities Regulatory Commission (the CSRC),1 a transaction is a disposition of major assets if the assets involved in the transaction represent at least (1) 50 per cent of the total assets at the end of the most recently completed fiscal year, or (2) the revenues of the assets involved account for at least 50 per cent of the revenues of the listed company in the most recently completed fiscal year. Though this notice is lower than law in the legislative hierarchy, it is indicative of what major assets mean in China. Nonetheless, it is still an urgent task for the company law to clarify this point.

Compared to provisions in the RMBCA and the Principles, major problems in this category of Article 75 are summarized as below:

In the RMBCA, shareholders are entitled to appraisal rights if they are entitled to vote on a disposition which leaves the company with no significant business. The standard adopted by the RMBCA is therefore a qualitative test and the court can make a judgment with the assistance of guidelines extracted from case law.2 In Article 75, there is no indication of any standard and the 50 per cent criterion in the CSRC Notice is an obsolete quantitative test, which gives the impression of rigidity and arbitrariness. I suggest that a qualitative standard should be provided in this regard.

As we already know, shareholders should first be informed of the matter to be voted on, and then vote on the matter. Once the matter concerned has been approved, those shareholders who did not vote in favour of the sale can enjoy appraisal rights. The relevant transaction must therefore give rise to a shareholders' vote in the first place before shareholders are entitled to appraisal rights.

In China, no division between the power of the board and the shareholders' meeting concerning the issue of disposition of assets can be found in the company law. The sale of major assets is not explicitly listed as an issue on which the shareholders vote, but is subject to provisions in the articles of association.3 If shareholders fail to consider this matter in the AOA, then without an opportunity to vote, there is no question of the applicability of appraisal rights. This aspect of the appraisal remedy should be improved. The RMBCA offers a good example.

In the RMBCA, on the one hand, transactions for which shareholder approval is not required are clearly listed in Section 12.01. On the other hand, the voting rights are explicitly given to shareholders if the disposition leaves the company with no significant business. Additionally, the introduction of the 25 per cent safe harbour rule in the RMBCA is also desirable, which means shareholder approval is not required for a transaction in which the corporation will retain a business activity that represented at least (i) 25 per cent of total assets at the end of the most recently completed fiscal year, or (ii) 25 per cent of either income from continuing operations before taxes or revenues from continuing operation for that fiscal year.

It goes without saying that shareholders in the acquired company should be protected and granted appraisal rights. But, according to the same reasoning in respect of mergers, shareholders in the acquiring company should also enjoy appraisal rights if such a transaction amounts to substantial changes in the company as well as to their interests, for example, if the consideration to pay for the acquired assets accounts for 70% of the acquiring company's assets. This issue should be regulated in the remedy.