2.1.4.1 Reflections before the reform

With hindsight, we can see that, due to the limited understanding of what a company was, the first PRC company law was bom prematurely. It was an awkward hybrid of mies from different countries with different legal cultures and failed to appreciate the essential nature of a company. Scholars have identified the two most serious problems of the company law 1993.

The first is that company law conferred little freedom in the incorporation and business activities of a company; mandatory mies exerted extensive and powerful control over the incorporation and activities of companies.1 Few default mies could be found for close companies. Most of them were mandatory in nature and required absolute compliance. Companies were overregulated. For instance, dividends, as well as voting rights, could only be distributed in proportion to the shareholder's capital contribution. Regarding incorporation, capital contribution in cash could not be less than 80% of the total amount and forms of non-cash contribution were greatly restricted.

Secondly, Company Law 1993 placed a disproportionate emphasis on creditor protection and social order maintenance at the expense of the company's and the shareholders' interests.2 It unnecessarily curbed shareholders' and company's actions and choices, especially in terms of minimum registered legal capital, capital maintenance, and shareholder exit rights. A relatively high amount of registered capital was mandated and had to be paid in full at once; it was illegal to purchase a company's own shares, and there were no buy-out remedies for shareholders. In all these respects, the scales of company law were tilted towards the protection of creditors, giving no consideration to the legitimate and economie needs of the shareholders and companies.3

In sum, among the three main functions of company law, i.e., to promote company and shareholders' interests, to protect creditors' rights, and to ensure transaction safety, the first function was neglected by Company Law 1993. Legislators and the government saw themselves as miers and regulated companies from a top-down manner, giving little consideration to business practice. Luckily, there was a shift of ideology. A company, in nature, is nothing but an investment vehicle.4 Company law should provide more optional mies and give the incorporator/shareholders more freedom to determine the interaal structure and business affairs of the company, especially shareholders in a close company. With these reflections, guidelines on how the current law should be revised were proposed, accepted and reflected in the new company law. To start with, the foundation of China's corporate legal infrastructure should encourage investment by private capital. Second, the new company law should grant more freedom and choices to companies' incorporation and activities.5 It should loosen the bonds on companies. Last but not least, the new company law should pay attention to the balance of interests among different parties involved.