Research On Interest Balance Mechanism In Differential Voting System

Differentiated voting rights refers to dual voting rights arrangements with dual-class share structure.To stimulate development of new economic enterprises,and to resolve conflicts between diluted shareholdings and controlling rights,more and more country or regional company laws are allowing differentiated voting rights structures,thus setting off a new round of competition in company law systems.Differentiated voting right system has been introduced along with the China Science and Technology Innovation Board in 2019,and it has been extended to the New Third Board in 2020,now entering the implementation stage.However,as the underlying law of the capital market,the “Company Law” still lacks direct provisions on differentiated voting rights and an interests balancing mechanism for differentiated voting rights has not been established.This paper takes the global competition in capital markets and the latest changes in China’s capital market legal environment as the research background,and focus on the conflict of interest and its balance mechanism in the differentiated voting rights system,and attempts to propose a system-wide,reasonable and feasible problem-solving package.The research content mainly covers the following 5 aspects:1.Clarification of the legal basis and function of differentiated voting rightsDifferentiated voting rights are a controversial institutional phenomenon,with vastly different attitudes from companies in different countries.This article does not intend to simplify the argument that differentiated voting rights are a betrayal of "one share,one right" and the principle of capital democracy,but rather it is a supplement and transcendence to the basic principles of traditional company law.The justification can be explained from the theory of corporate contract.The concept of "labor capital” and intellectual capital-oriented corporate governance paradigm have justified the rationale behind differentiated voting rights.All in all,the system of differentiated voting rights is a rebalancing tool to the equality of different shareholder forms,answering to the heterogeneous needs of shareholders,which provides functions of maintaining company control,locking in human capital value,preventing hostile takeovers,promoting financial development and stimulating entrepreneurship spirits.2.Analyzing legal standpoints of differentiated voting rightsAlthough China’s "Company Law" has adopted a vague statement,neither explicitly permitted nor prohibited,as to whether a joint stock company can issue differentiated voting rights shares,the reform of the New Third Board and the launch of the Science and Technology Innovation Board are forcing the legitimacy thru "trial and error" mechanism.The evolution of the system of differentiated voting rights is a gradual process,it has gone from adhering to "one share,one right" and "same shares and same rights" to allowing differentiated voting rights companies to return to China A-Share Market by issuing depositary receipts,and the creation of a Science and Technology Innovation Board sandbox which has begun experimentally accepting direct listing application of companies with differentiated voting rights.As the first and only company with differential voting rights arrangement listed on the Science and Technology Innovation Board,UCloud Technology Co.Ltd status as a pilot case to the system is extremely significant.Based on the analysis of institutional changes,this article focuses on the introduction of differentiated voting rights from the perspective of promoting the development of the new economy and leading the competition of legal systems in the global capital market.3.Revealing the system root and legal essence of conflict of interest under the differentiated voting rights systemThe conflicts of interest induced by differentiated voting rights can be sorted into internal conflicts of interest and external conflicts of interest.The former can be resulted from in-proportions among shareholders on economic rights and participation rights,high voting rights and low voting rights,dominant shareholding,changes in corporate control and controlling party’s private interests… etc..The latter can arise from companies’ mergers and acquisitions,corporate financing and regulatory corporate governance.These conflicts of interests are products of mistrusts and lack of fiduciary duties between high-voting rights and low-voting rights shareholders,limitations of governance by the elites,amplification of doubling maintenance costs of "parallel governance" and "vertical governance" within a company,split interests among shareholders and the economic interests of the company.4.Refining the framework and the rule for changes in the differential voting rights system and interests balancing mechanismThe change to an interest balance mechanism under differentiated voting right system reflects the collision of two capital market trains of thoughts.One is liberalism which stresses on the core idea of efficiency and corporate autonomy,and the other is a paternalism which protects shareholders’ interests thru power of corporate governance.The balance mechanism of differentiated voting rights combines protection for investors’ right to information,prevention of abuse of control rights,post hoc correctional course of actions,internal and external self-regulatory measures and sunset clause.Among the countries or regions that have introduced differentiated voting rights in their company law,there are certain common features that are essential and feasible for legal transplant,and should be implemented in China’s “Company Law”.5.Establishing localized legal path for designing an interests balancing mechanism under the differentiated voting rights systemThe new round of revision process of the China’s "Company Law" currently provides an opportunity to introduce a differentiated voting rights system,redesigned from top,targeting modifications to the "one share,one right" principle with different class of shareholdings.This article proposes to amend the first paragraph of Article 103 of the "Company Law" to read: "Each share of the same type held by shareholders attending shareholders’ meetings have the same voting rights;however,shares held by the company have no voting rights.” At the same time,Article 131 of the " Company Law " should be amended to read: " In additions to the types of shares specified in the Law,the State Council may make separate provisions for companies to issue other types of shares.Companies that issue types of shares other than those stipulated in the Law shall establish a class-share voting system,and specific regulations shall be established by the State Council.The company article of association shall clearly record and make public announcement of relevant matters such as shareholder rights of these various types of shares.” Such modification would ensure that while the fundamental of "one share,one right" is in tack,companies’ shareholding structure reform could be carried out with more open and inclusive mindset.Moreover,it is essential for companies to commit to corporate policy enforcement,management control arrangement,incentives and constraint measures,while optimizing an institutional environment for differentiated voting rights by balancing between regulatory and corporate governance,investor protection and optimization of management mechanism of the new economic companies.