1.1.1 Minority shareholder protection and close companies

Modem company law endorses the norm of majority rule. If properly used, this rule is significant in promoting shareholders' investment enthusiasm, balancing interests among shareholders and enhancing the efficiency of decision-making within the corporation.1 But it also generates the risk that majority shareholders abuse the ample power conferred on them and harm the interests of minority shareholders. Therefore, throughout the world, legislatures are engaged in improving the protection of minority shareholders. There are strong justifications for minority shareholder protection. It makes equity investment attractive, lowers the cost of finance for the company, and keeps the economy prospering.2

Protection of minority shareholders is necessary both in public and close companies, but the research scope of this book is limited to close companies for the reason that shareholders in a close company are more easily subject to the abuse of power, owing to the distinctive attributes of such a company. The first attribute is the shareholders' close involvement in the business. Usually, in a close company, there are a small number of shareholders, and all or many of them expect to have a role in the management of the company.3 Accordingly, it is relatively easy to identify control power held by a single shareholder or a group of shareholders. The second attribute is the illiquidity of shares in a close company. Shareholders of such companies usually contribute their personal skills or some talents to the company rather than mere capital.4 As a result, there are restrictions on free transfer of shares. And even if there were no restrictions in the articles of association, there is a limited market for share transfers compared to listed companies. The combination of concentrated management power and illiquidity of shares leads to disproportionate occurrences of problems in a close company, such as oppressive conduct by the majority shareholders towards the minority. This research therefore focuses on minority shareholder protection in close companies.

Another reason for this study to focus on minority shareholder protection in close companies is the special situation in China. Firstly, much attention in the academie field in China has been devoted to the study of publicly held companies. Public companies, in China, account for 26% of the total number of companies, but 67% of the national economic contribution.5 They for outweigh close companies in terms of economic importance. But close companies should not be ignored. More than two thirds of the companies registered in China are limited liability companies (close companies). In the EU, close companies are regarded as "job creators, firmly anchored in their local and regional communities, and a guarantee of social cohesion and stability". The EU commission has therefore adopted the principle of "think small first" and try to help them grow.6 The same notion is also valid for China. Though close companies are generally small-scale businesses, "they provide the seedbed out of which the large companies of the future may grow."7 So research concerning issues in close companies is by no means less important.

Secondly, foreign investment enterprises (hereinafter FlEs) in China are mainly close companies. As we already know, foreign direct investment (FDI) promotes national economic development and countries are in competition to Wroet FDI. China is no exception to this. For a long time, China has been quite an attractive destination for foreign investors, and it will remain so in the future. In an EU consultation paper in 2008, there was a question: "Is there a need to establish European Business Centres in some fast-growing countries and, if yes, in which ones?" The answer to the question was that more than half of the respondents were in favour of establishing EU centres in the fast-growing countries and China featured as the preferred destination.8 But abuse of power and oppressive conduct are no less common in FlEs in China. Even though shareholders may intend to go to the court to defend their rights, in the absence of relevant remedies, their claims would not be supported. Consequently, a close study to improve shareholders' protection in close companies will benefit both foreign investors and China's economic development. On account of the foregoing reasons, this research concentrates on minority shareholder protection in close companies.