The Study On Preemptive Right Under Corporate Self-Governance Through Articles Of Association

The system of preemptive right of the shareholders in limited liability Company which was established in the first Company Law of the People's Republic of China has lots of problems and defects in the beginning. With the amendment to the Company Law promulgated in 2005 and the subsequent issuance of judicial interpretations, the system is under the process of constant improvement. However, the implementation of the system calls for the exercise of the self-governance rights by the shareholders. For many years in course of the development of the Company Law, the mandatory norms have dominated the main framework, with the arbitrary ones playing a complementary role. The trend is now being reversed with the arbitrary norms dominating the Company Law, which provides broad room to a limited liability company and its shareholders in terms of self-governance. As an important serf-governing part of the national economy, limited liability companies should bring their self-governance rights into full play. Formulation of the articles of association, as a main method for the investor to achieve self-governance, should be given due attention by the investors. Articles of association should be a place where the investors compete for their interest and regulate the orders of the company rather than a dead letter. This author, while discussing the problems related to the system of preemptive right, hold onto the principle of achieving self-governance by taking full advantage of the articles of association to guide the investor to find their own need for self-governance so as to solve the problems that are not clearly defined by means of self-governing management. This paper is focused on the study of (both statutory and discretionary) the preemptive right of the shareholders of limited liability companies, while the preemptive right established by the shareholders of stock companies by means of agreements entered into among them will not be discussed in this paper.This article is composed of three parts:introduction, the main body and the conclusion.In the introduction, a brief discussion is made on the history of development of limited liability companies and the status quo of the system of preemptive right in the current corporate system of China. It argues that, given the enormous room provided by the revised company law (2005) to limited liability companies for self-governance, the investors need to improve the system of preemptive right by utilizing the corporate articles of association.The main body is divided into five chapters. In the first chapter, analysis was made of the definition and the attributes of the preemptive right of the shareholders in China. Meanwhile, the first chapter which expounds the juridical basis for preemptive right in terms of a limited liability company is focused on the comparative analysis of the restrictive provisions of the company law systems of German, France, Taiwan province and the mainland China on equity transfer of a limited liability company, and is intended to provide valuable and prudent suggestions on the current system of preemptive right of China and on its future development. In chapter two, the reasons for the disputes arising from the practice of the Chinese system of preemptive right are analyzed. To solve the numerous problems related to the preemptive rights of the shareholders, this author, by proposing the compliance with the mandatory provisions of the laws, the use of articles of association as the basis and the utilization of shareholders'agreement as the supplement, mainly discusses the theory of guarding against legal risks by exploiting the articles of association to make up the deficiency and defects of the system of preemptive right. While Chapter three, from the perspective of exploiting articles of association to fully exercise self-governing right, analyzes in detail the notice for equity transfer, determination of same conditions, partial exercise of preemptive right of the shareholders, the exceptions to which the preemptive right is inapplicable and the protection of the interest of the shareholders in the mandatory auction of equity interest, and puts forward a constructive solution. Considering that the verification of the actual contributor as the shareholder will also cause damages to human unity of the limited liability company, it is the view of this author in principle that other shareholders are entitled to exercise their preemptive right. This author, after making balanced analysis of the protection for the interest of the actual contributor and the preemptive right of the shareholders, consider it reasonable that such provisions are absent in the Company Law of China. However, the shareholders are able to protect their right and interest by adding special provisions to the articles of association. Chapter four analyzes the measures for safeguarding and remedying the preemptive right (statutory and those created by means of agreements among shareholders) of the shareholders. The problems closely related to remedies in case of infringement upon the preemptive right are determination of effect of the equity transfer agreement, and the effectiveness theory is considered to have provided the balanced protection to all the parties concerned to the maximum extent, which was also recognized in the final judgment rendered by the Supreme Court of the People's Republic of China. But, in the judicial practice of China, the judgment and decisions rendered by different courts are quite inconsistent. According to the Judicial Interpretationâ…£(draft) of the Company Law by the Supreme Court, the shareholders may protect their interest if they exercise their preemptive right by filing an action thereof within the prescription and such an act will not affect the outbound effect of the shareholders agreements. The promulgation of the Judicial Interpretationâ…£of the Company Law of China and its implementation will conduce to the unified judicial practices of the various courts in handling the disputes related to the preemptive right of the shareholders.In the conclusion, the gradual improvement in the preemptive right system of the Chinese Company Law has been recognized. Meanwhile, by coming the self-governance mechanism in the corporate articles of association, it proposes that the investors follow the trend of development of the Company Law and fully exercise their self-governing right to guard against the relevant legal risks.