Research On The Allocation Rules Of The Differentiated Shareholders' Rights And Its Application In China

Whether it is in the star-up of private equity investment(PE)and venture capital(VC)or mature enterprise prior to Initial Public Offering(IPO),how to satisfy the demand of corporate finance diversification and investors different preferences is the a core problem face by Chinese market,since the the legal effect of value adjustment mechanism in China is uncertain,widening the single common share system was brought up by Chinese company law scholars(such as Prof Zhu Ciyun,Prof Shen Zhaohui,Prof Ge Weijun,and Prof Wang Qingsong).The essence of shares variation lies in the separation and rearrangement of different shareholders' rights,which breaks the bond between corporate voting mechanism and ratio of economic interests in the company,and enriches the substantive connotation of the principle of equality of shareholders,also,enrich the diversity of the finance market.Simultaneously,it is the evolution way of Chinese company law.The result of differentiated shares allocation is a series of classified shares,or the category shares.Domestic scholars have matured researches on it,such as the introduction of classified shares in foreign jurisdictions,the protection mechanism for shareholders of classified shares,but as for how to allocate category shares,in another word,during the proceed of diversification,what are the rules to follow,how much extent could the differences among shares be are the questions that rarely to research.Obviously,in the process of drawing lessons from or introducing of a system,theinstitutional framework itself is important,how to build a framework and the principles or rules that shall be followed during the construction shall also not be ignored.Therefore,on the ground of fruitful research results of previous scholars,this paper further studies the issues of differential shares allocation rules in the classified share system by means of historical analysis,comparative research and statistical analysis to explore the limitations set in classified shares system and its company law principles behind such rules.Through comparing with foreign realms,this paper tries to introduce differentiated shares systems for China.Apart from the introduction part and end part,this paper could be divided into four sections as follows:The first chapter aims to analyze the theoretical foundation of differential shares allocation.The company law principle of differentiated shares allocation is that the sub-rights in the shareholder's right can be separated.Company law scholars believe that shareholder's right,as a consideration of capital contribution,is a complete right,independent from property right,creditor's right or other fundamental rights in civil law.Voting rights,dividend rights and residual property rights do not necessarily have to be tied together.The separability of sub-rights of shareholder experienced some time of argumentation and evolution,especially with the understanding transfer in investor preference from “homogeneity” to “heterogeneity”,the merits and value of differentiated shares system are gradually realized by companies and regulators.Besides satisfying the “heterogeneity” of investors,it also widen the meaning of shareholder equality principle,cause if there is some objective inequality among shareholders(for example,one share with ten voting rights)which effectively enhances the interest of all shareholders,especially those who are in a weak position,such inequality is in line with the object of shareholders equality principle.In addition,differentiated shares can also contribute to institutional advantages in globally listed resource competition.One best proof is the change in the regulator's attitude in Hong Kong market.The second chapter mainly introduces the practice of the differential sharesallocation in the foreign mature capital market and in mainland China.Japan,which represents the civil law system,legalizes differentiated shares,that is,it clearly specifies in the Code the nine categories of rights and obligations that can be issued by a stock company.A model of the Anglo-American legal system,the United States adopts a liberal model,and authorizes the company's charter to make differential arrangements for shares.Although there are differences in institutional design between the two legal systems,there are some common grounds.As early as 1992,China's legal system regulations involving differentiating equity had emerged,although previous amendments to the “Company Law” did not delete the one-for-one voting system of the company's shares.However,in the legal provisions,the “State Council reserves power” is reserved for the “other types of shares”.The trial of the preferred shares system in 2013 also positively opened up the practical application of the differentiated equity system in the Chinese market.The differentiated share allocation test at the current stage in China is a preferential share system.The Measures for the Administration of Pilots for Preferred Shares promulgated by the State Council regulates the property rights(positioning of profits,allocation of surplus company assets)and voting rights of preferred shares.The limitation on the issuance ratio of preferred shares and the restrictions on the issuer are also the embodiment of the differential share allocation rules.On the basis of a comparative study of the domestic institutional arrangements for differentiated shares in the second chapter,the third chapter begins to explore the rules that should be followed and the principles of company law behind differentiated shares allocation.The actual pattern of differentiated allocation is mainly the separation and reorganization of property rights,voting rights,and disposition rights in the sub-rights of the shareholder's rights.From the perspective of horizontal comparison,the paper finds that in countries and regions where differentiated stock rights have been applied,there is basically no restriction on the differential design of property rights;there are many restrictions on the differentiation of voting rights,such as distribution ratio restrictions,and issuance.Type limitations(allowing to restrict voting rights but prohibiting multiple voting shares)and issuance time limit(thecompany may not issue multiple voting shares after listing),the company law principle behind it lies in the agency cost control of the company's major shareholders or managers.As for disposition rights,the main one is the repurchase right.Most countries and regions have experienced a trend from strict prohibition to gradual release.The company repurchase challenged one of the classic principles of corporate law-the principle of capital maintenance.The principle is to protect the interests of corporate stakeholders(especially creditors)from being infringed,but with the deepening understanding of the concept of corporate capital,Anglo-American law countries have changed from strict capital maintenance requirements to “firm ability to make payments”.That is,in the issue of company repurchases,the bankruptcy law's ability to meet the creditor's asset standards was introduced,thus “softening”the capital maintenance principle.The fourth chapter begins to discuss the introduction of China's differentiated shares system and adopts a “dual shareholding structure” for specific examples.The dual shareholding structure is one of the most discussed institutional reforms in the capital market in China.It even appeared in one of the “two sessions” bills proposed by the National People's Congress in 2018.It has the functions of protecting corporate managers' control rights and resisting hostile takeovers.At the same time,it plays an important strategic role in attracting China's domestic “Unicorn” companies to return to the A-share market.Albeit,the issue of management agency costs under the dual-tier equity structure cannot be ignored.How to protect the rights of small and medium-sized shareholders without voting rights or restricted voting rights within the company's “different voting rights” framework,and reference arrangements have been made in the series of consultation documents on the reform of the “different voting rights” listing rules recently released in Hong Kong.This includes setting sunset clauses for multiple voting rights holders and strengthening the information disclosure system.In designing a dual shareholding structure in China,the first obstacle to the legal system lies in the provisions of Article 103 of the “Company Law” concerning the voting rights of stockholders of a company limited by shares.Under the premise that the law has not been amended,the State Council's pilot approach can be adoptedto take specific measures.In the regional pilot test,when designing differentiated equity,attention should also be paid to the principle of substantial shareholder /management agency cost control and corporate capital maintenance.The corresponding measures include the limitation of issuance ratio and legal repurchase conditions.In addition,other supporting mechanisms,such as the protection of medium and small shareholders,the voting mechanism of class shareholders,the return of one-vote system,and the strengthening of information disclosure,should also be designed simultaneously.