1.1.2 Exit remedies and minority shareholder protection in close companies

I am fully aware that the aim of minority shareholder protection can be achieved by alternative approaches. The law, for instance, can operate preventively through ex-ante methods, which prevent misconduct and reduce agency costs.1 Or the law can provide ex-post remedies, which provide relief to the injured party and hold the wrongdoers accountable.2 Either way has its own strengths and limitations, and the exit remedies, which have been chosen as the research topic of this book, are only one of the ex-post remedies. For the following reasons, however I attach more significance to the exit remedies for minority shareholder protection in the context of close companies.

Firstly, although other kinds of remedies are undeniably helpful to minority shareholders, compared to exit remedies, they all have certain disadvantages, taking into account the special characteristics of close companies. Even if the deliberately wrongful conduct of a majority shareholder can be cured by other remedies, such as invalid and revocable resolutions, compulsory distributions or derivative actions, nothing can ensure that the same misconduct will not occur again in the future if the relationship has deteriorated after the litigation, since the minority shareholder remains in a vulnerable position. The derivative action has the drawback that it can result in compensation being paid to the company which is under the control of the officers or directors who committed the wrongdoing. Although the dissolution remedy allows minority shareholders to leave the company, it is generally considered too drastic and is therefore not easily available.3 Consequently, minority shareholders are either subject to risks of potential misbehaviour stemming from the breakdown of relations, or suffer from restricted accesses to adequate relief.

Secondly, though not as obvious as in a public company, remedies listed in the previous paragraph can prompt the problem of "free ride". Shareholders have the tendency to wait for other shareholders to spend energy and money in order to bring a lawsuit.

Thirdly, the area of exit remedies is a brand new field to explore under the Chinese Company Law 2006.

Finally, unlike public companies, the formation of a close company does not simply mean a pool of capital, but also requires trust and devoted cooperation among the members. "People enter closely-held businesses in the same manner as they enter marriage",4 and a close and trustful relationship between members is fundamental to the success of the business. When the trust and confidence between the members are irretrievably damaged, the cooperative foundation is undermined. By providing the injured party with a way out, exit remedies help to maintain the close relationship and cooperative foundation between members and prevent further waste of resources.

All things considered, exit remedies are significant in solving the minority shareholders' plight in close companies, and play an important role in maintaining the close relationship and cooperative foundation between parties.