Regulation On Director’s Affiliated Transaction

Director’s affiliated transaction are likely to cause conflicts between the interests of director and the company,but such conflicts are not absolute and need to be properly regulated by law to produce a good effect on the company.The rules of China’s company law on director’s affiliated transaction are too crude,which leads to divergence in judicial practice on the criteria for determining the fairness of director’s affiliated transactions.It also makes the company inaccessible in transactions.With the reform of company law toward the centralism of the board of directors,the danger of director’s affiliated transactions to the company is bound to increase.How to regulate this issue will become a hot research direction.Revolving around this proposition,theoretically,we can find the correct legal way out from the perspective of the fairness standards of director’s affiliated transactions and the regulation of non-fair director’s affiliated transactions.This paper analyzes,summarizes,and compares the current domestic and foreign legislation and theoretical viewpoints,uses empirical research methods as the starting point,and aims to improve China’s legislation.The argument is carried out through the following four chapters:The first chapter analyzes the theoretical starting point of director’s affiliated transaction.According to different identities,affiliated transaction can be divided into director’s and shareholder’s.There are significant differences between the two in terms of the background,the source of conflict of interest and the direction of transmission,the status and responsibilities of related parties,review standards,and remedies.So there is independent value on researching the former.This chapter analyzes the deficiencies of China’s existing legislative system and the impact of Provisions of the Supreme People’s Court on Several Issues Relating to Application of the Company Law of PRC(V)(Hereinafter referred to as Provisions V)on practice,analyzes the economic reasons and reasons to regulate director’s affiliated transaction,and proposes that the premise of correct regulation is to judge the fairness of transactions,and considers the need to conduct research from the point of substantial fairness and procedural fairness.The second chapter analyzes the requirements of procedural fairness from the aspects of disclosure procedure and approval procedure.Information disclosure is helpful for the approving entity to accurately get the information of transaction and make recommendations for supervision and review,so that the approval they made can truly reflect their meaning.Improving the disclosure process requires three aspects: disclosure time,disclosure method,and disclosure content.Approval of non-interested parties can prevent directors from unilaterally controlling the will of both parties to a transaction.To improve the approval process,the policy of “primarily board approval and supplementary shareholder approval” should be adhered to.Meanwhile,different approval entities should be determined according to different transaction types to ensure the efficiency of commercial activities.Implementation of voting avoidance system is also necessary.The third chapter analyzes substantial fairness.Provisions V reconstitute the concept of fairness,requiring courts to stop sticking to business judgment rules.The organizational characteristics of the company require the company to restrict its freedom to external contract behavior with internal procedures.The procedural fairness have a necessary but inadequate status in the fairness review,and constitute an auxiliary factor in the review of the substantial fairness.However,in the context of our country,legislation should encourage companies to perform internal procedures in order to establish the rule of transferring burden of proof after procedural requirements are reached,thus ensuring company autonomy and transaction stability.Therefore,three aspects can be considered for judging the substantial fairness: in terms of the transaction process,it is mainly to examine who initiated and organized the transaction,and whether the internal procedural requirements are reached;in terms of transaction conditions,the transaction consideration,the subject matter of the transaction,and other transaction conditions;In terms of company’s own situation,it mainly examines the company’s demand for transactions and the company’s ability to pay.The fourth chapter analyzes the legal regulations of non-fair director’s affiliated transaction on the basis of the foregoing.The forms of directors’ liability include disgorgement liability and damages liability.The latter complements the former and they work together to protect the company’s full interest.However,at the same time,attention should be paid to the limitation of directors’ liability.If the transaction is beneficial to the company as a whole and meets reasonable business judgment,the court can reduce the liability of the director who made transactions accordingly.The directors who made resolution violated the obligation of fidelity,and their responsibilities are the same as those of the former.But when the obligations of diligence are violated,the responsibilities are not uniform.Company’s articles should make advance provisions about this.Provisions V broadened the scope of shareholder representative litigation to disputes over the validity of related party transaction contracts,and resolved the dilemma of protecting shareholders’ rights and interests under director’s affiliated transaction.The new provisions of General Rules of the Civil Law of the PRC on the effectiveness of civil legal acts provide a new way to deny the effectiveness of director’s affiliated transaction contracts.However,the legislation still needs to further resolve the connection between directors’ liability and the effectiveness of transactions contracts in shareholder representative litigation.