Chapter 6 Formation of Company Limited by Shares Similar to the establishment of a Limited Liability Company, the formation of a Company Limited by Shares

Chapter 6 Formation of Company Limited by Shares

• Similar to the establishment of a Limited Liability Company, the formation of a Company Limited by Shares is related with the followings:

The number of promoters The capital raising The articles of association The company ’s name, and its organizational

structure The company’s domicile.

Regulations

• Article 77

• Establishment of companies limited by shares shall satisfy the following requirements:

• (1) the number of promoters satisfies the quorum;

• (2) the share capital subscribed and raised by the promoters satisfies the minimum statutory capital requirements;

• (3) share issues and preparatory matters satisfy the provisions of the law;

Regulations

• (4) the articles of association of the company shall be formulated by the promoters and shall be adopted by the founding meeting if the company is established by a share float method;

• (5) a company name shall exist and the organization shall satisfy the requirements of a company limited by shares;

• (6) a company domicile shall exist.

Number and Role of Promoters

• Article 79 • The number of promoters required for the

establishment of a company limited by shares shall be more than 2 but less than 200 and half of the promoters shall have a domicile in China.

• Q: Shall a foreign resident be deemed to have a domicile in China?

• The role of promoters is purely mechanical. They arrange for the establishment of a company.

Role of Promoters• Article 80 • The promoters of a company limited by shares

shall undertake the preparatory work of the company.

• The promoters shall enter into a promoter’ agreement to specify their respective rights and obligations in the process of establishment of a company.

(the agreement constitutes the contractual liability among promoters)

Forms of Companies Limited by Shares

• Close Company Limited by Shares

(1) Establishment via promotion

(2) Establishment via private placement

• Public Company Limited by Shares Establishment via public offering

(1)Non-Listed Company

(2)Listed Company

Methods of Establishment

• A company limited by shares may be established

by promotion method or by share float method.

• Q: What’s the meaning of “promotion method” and “share float method”?

Regulations

• Article 78

• Establishment of a company limited by shares may adopt the promotion method or share float method.

• Establishment by promotion shall mean that the promoters set up a company by subscribing to the entire share capital of the company.

• Establishment by share float shall mean that the promoters establish a company by subscribing to a part of the shares to be issued by the company and offering the remaining shares to the public or to specific targets.

Capital Requirements

• Amount of Registered Capital: generally, RMB 5 million.

• Article 80(Section 3) • The minimum registered capital for companies

limited by shares shall be RMB5 million. Where the laws and administrative regulations provide for a higher amount of minimum registered capital for companies limited by shares, such provisions shall prevail.

• Q: What about the rules in laws and administrative regulations?

Special Registered Capital Requirement

• Listed Company RMB 50 million

• National Commercial Bank RMB1 billion

• Insurance Company RMB200 million

• Securities company (1) securities brokerage RMB50 million (2) securities investment consultancy RMB50 million (3) financial consultancy relating to securities trading and securities investment activities RMB50 million (4) securities underwriting & sponsoring RMB100 million (5) self dealer securities business RMB100 million (6) securities asset management RMB100 million

Capital Requirements

• The Definition of the Registered Capital

• -for corporation established by Promotion

total share capital subscribed by all the promoters

• -for corporation established by share float the actual paid-up capital contributions

Regulations

• Article 81 • The registered capital of a company limited by

shares established by promotion shall be the total share capital subscribed by all the promoters at the time of registration with the company registration authorities. The first installment of capital contribution made by all the promoters shall be no less than 20% of the registered capital;

(to be continued)

Regulations

• Article 81• the remaining balance shall be paid up by the

promoters within two years from the date of incorporation of the company (within five years for investment companies). Prior to the capital being paid up, the company shall not offer shares to others.

• The registered capital of a company limited by shares established by share float shall be the actual paid-up capital at the time of registration with the company registration authorities.

The Forms of Capital Contributions

• Article 83 The provisions of Article 27 shall apply to the methods

of capital contribution by promoters.

• Article 27 Shareholders may make capital contribution in cash, in

kind , intellectual property, land use rights and other non-monetary properties which can be evaluated and transferred in accordance with the law, except for properties prohibited by laws and administrative regulations to be used for capital contribution.

The Procedure and Formality of Capital Contribution

• For a company established by promotion:

The promoters shall subscribe in writing to the number of shares

In the case of one-off contributions, or

in the case of capital contributions in installments, or

In the case of capital contributions to be made in non-cash assets

promoters who fail to make capital contribution. Election of board and application for establishment

Regulations

• Article 84

• The promoters of a company limited by shares established by promotion shall subscribe in writing to the number of shares stipulated by the articles of association of the company.

• In the case of one-off contributions, the entire amount of

capital contribution shall be contributed forthwith; in the case of capital contributions in installments, the first installment of capital contribution shall be contributed forthwith.


• In the case of capital contributions to be made in non-cash assets, the formalities for transfer of property rights shall be completed in accordance with the provisions of the law.

• promoters who fail to make capital contribution in accordance with the provisions of the preceding paragraph shall bear default liability in accordance with the provisions of the promoters’ agreement.

•


• Q: After the first capital contribution, what procedure shall follow?

• Following the first capital contribution made by the promoters, the board of directors and board of supervisors shall be elected, and

• the board of directors shall submit the articles of association of the company, a capital verification certificate issued by a capital verification organization established in accordance with the law and other documents stipulated by the laws and administrative regulations to the company registration authorities to apply for incorporation and registration.


• For a company established by share float:

promoters subscribe to the share capital for no less than 35%

promoters get approval of public offering from CSRC (not for PP)

promoters make an announcement of the prospectus for PA

Promoters prepare a subscription form

subscribers sign and affix seal on the subscription form


• undertaking agreement with a securities company

• Custodial agreement with a bank • capital verified by a capital verification organization a

certificate issued thereafter

• founding meeting convened by promoters

• application for incorporation & registration by the board

Regulations

• Article 85

• The shares subscribed by the promoters of a company limited by shares established by share float shall not be less than 35% of the share capital of the company, unless otherwise provided in the laws and administrative regulations.

• Companies of financial industries shall always one-off capital contribution.

Regulation

• Article 93(Section 2)

A company limited by shares established by

share float shall submit the approval document

issued by the securities regulatory authorities

of the State Council to the company

registration authorities if it proposes to offer

shares to the public.

Regulation

• Article 86

Promoters shall make an announcement of the

prospectus for a share offering to the public and prepare

a subscription form. The subscription form shall state the

items stipulated in Article 87 for the subscriber to fill in

the number of shares subscribed, monetary amount and

address; the subscriber shall sign and affix seal on the

subscription form. The subscriber shall make payment

based on the number of shares subscribed.

Regulations

• Article 87• The prospectus shall include the articles of

association of the company formulated by the promoters and state the following matters:

• (1) number of shares subscribed by the promoters; (2) par value of each share and the issue price; (3) total number of bearer shares to be issued; (4) usage of the funds raised; (5) rights and obligations of a subscriber; and (6) a statement stating the commencement and cut-

off date for the share offering and that where the shares are not fully subscribed by the cut-off date, the subscribers may withdraw their subscription.

Regulations

• Article 88

• A share offering by the promoters to the public

shall be underwritten by a securities company

established in accordance with the law and an

underwriting agreement shall be entered into.

Regulations

• Article 89

• promoters offering shares to the public shall enter into a custodial agreement with a receiving bank.

• The receiving bank shall collect payments from the subscribers on behalf of the issuer in accordance with the agreement and issue receipts to the subscribers who have made payments, and shall have the obligation to show proof of collection to the relevant authorities.

Regulations

• Article 90

• Upon the issued share capital being fully paid up, a capital verification organization established in accordance with the law shall conduct capital verification and issue a certificate.

Regulations• Article 90 The promoters shall convene the founding meeting

within 30 days from the date on which the share capital is fully paid up. The founding meeting shall be constituted by the subscribers.

Where the issued share capital is not fully subscribed by the cut-off date stipulated in the prospectus or the promoters fail to convene the founding meeting within 30 days following the issued share capital being fully paid up, the subscribers may demand from the promoters a refund of the payment and bank deposit interest for the same period.

Regulations

• Article 91 The promoters shall give notice to all su

bscribers 15 days in advance of the date of the founding meeting or make an announcement. The quorum of the founding meeting shall be promoters and subscribers holding more than half of the total number of shares.

(to be continued)

Regulations

• Article 91

The founding meeting shall exercise the following duties and powers:

(1) review the report of promoters on preparatory status of the company;

(2) adopt the articles of association of the company; (3) elect members of the board of directors; (4) elect members of the board of supervisors; (5) review the setting up expenses of the company; (to be continued)

Regulations

(6) review the consideration of the assets used for capital

contribution by the promoters;

(7) in the event of a force majeure event or a significant c

hange in the business conditions which bears a direct infl

uence on the establishment of the company, a resolution

to halt the incorporation of the company may be made.

A resolution of the founding meeting on any of the matte

rs stipulated in the aforesaid paragraph shall be passed

by a simple majority of votes held by the subscribers.

Regulations

• Article 92 The promoters and subscribers shall not

withdraw their share capital after they have made their capital contribution,

except where the shares are not fully subscribed by the

deadline or the promoters fail to convene the founding

meeting or the founding meeting passed a resolution on

halting the incorporation of the company.

Regulations

• Article 93 The board of directors shall submit the following

documents to the company registration authorities within 30 days from conclusion of the founding meeting to apply for incorporation and registration:

(1) application form for company registration; (2) minutes of the founding meeting; (3) articles of association of the company ; (4) capital verification certificate; (5) letter of appointment for the legal representative,

directors and supervisors and their identity documents; (6) legal person certificate or identity document of the

promoters; and (7) certificate of company domicile.

CG-Corporate Organs

Shareholders’ meeting

Board of directors Board of supervisors

executive

Independant

The Organizational Meeting

Shareholders’ meeting

decision making organ

Board of directors

executive organ

Supervisory board

supervisory organ

Corporation as a “little republic”?

• Blackstone described the corporation as a republic 200 years ago.

• The shareholders—the corporation’s electorate• The board of directors—the corporation’s legislative organ• The offices—the corporation’s bureaucracy• The board of supervisors—the corporation’s judicial and sup

ervisory organ

General Allocation of Power

• Traditional statutory scheme:• (1) Shareholders: a. electing and removing directors; and b. approving or disapproving fundamental changes; (2) Directors: “manage” the corporation’s business. They formulate

policy, and appoint officers to carry out that policy. (3) Officers: administer the day-to-day affairs of the corporation

Art.217 (4) Supervisors: Supervise and monitor the business of the corporation.

Powers of Shareholders• Q: Do shareholders have the power to conduct business directly on behal

f of the corporation?

• Four methods: a. Elect and remove directors b. Articles of incorporation and bylaws c. Fundamental changes d. Void or voidable transactions

• No power to bind corporation:• Shareholders cannot bind the corporation by their own direct actions.

• Shareholders exercise their powers through voting.

Shareholders’ Action: Voting Rights

• The purposes of shareholders’ voting

• The structure of shareholders’ voting:

the voting process and the voting method

• The judicial protection on shareholders’ voting

The purposes of shareholders’ voting

• Voting has many functions:

• 1.Self-help remedies to the shareholder: -- to choose their representatives in corporate structure -- to pass on the soundness of fundamental changes to their investments -- to initiate changes to corporate structure

• 2.Oversight power to respond to the changing circumstances

• 3. Protection on their position as residual claimants

Why only shareholders vote

• Why other constituencies cannot vote?

• -Creditors

• -employees

• -managers

• If shareholders do not like to vote, could they sell their voting rights for money?

The structure of shareholders’ voting

• Voting by shareholders is prescribed by corporate statues. Modern statutes are mostly enabling and permissive, authorizing a wide variety of voting schemes as specified in the corporate charter.

• This chapter describes shareholders’ voting structures in two perspectives:

• - the matters on which shareholders can vote• - the process & procedure that shareholders’ voting shall follow

The shareholders Meeting of LLC

• Legal status: The Company’s Electorate

(Art.37,99)

• Duties and Powers

(Art. 38, 100)

• Formality and Procedure

(Art. 38, 42)

• Convention, Regular Meetings & Interim meetings

(Art. 39, 40,41)

• Voting Weight and Voting Procedure

(Art. 43, 44)

Legal status

• Article 37 The shareholders’ meeting of a limited liability company shall comprise all shareholders of the company. The shareholders’ meeting is the authority of the company and shall exercise their duties and powers in accordance with the provisions of this Law.

• Article 99 A shareholders’ general meeting of a company limited by shares shall be constituted by all the shareholders; the shareholders’ general meeting shall be the authority of the company and shall exercise duties and powers in accordance with the provisions of this Law.

Duties and Powers

• Election and Removal of Directors and Supervisors

• Approval of reports and interests-conflicted transactions

• Initiation of the fundamental changes

Duties and Powers• Art. 38(Section one) • The shareholders’ meeting shall exercise the following authorities:

• (1) decide on the business direction and investment plans of the company;

• (2) elect and remove directors and supervisors who are not representatives of the employees and decide on the remuneration of directors and supervisors;

• (3) review and approve reports of the board of directors;

• (4) review and approve reports of the supervisors or the board of supervisors;

• (5) review and approve the annual financial budget and financial accounting scheme of the company;

Duties and Powers (6) review and approve the profit distribution plan and loss recovery plan

of the company;

• (7)resolve on increase or reduction of registered capital of the company;

• (8) resolve on issue of corporate bonds;

• (9) resolve on merger, division, dissolution, liquidation or change of company structure;

• (10) amend the articles of association of the company;

• (11) other duties and powers stipulated in the articles of association of the company.

• Art. 100• The provisions of Article 38(1) on the duties and powers of the board of

shareholders of limited liability companies shall apply to shareholders’ general meetings of companies limited by shares

•

Formality and Procedure ofShareholders’ Meeting of LLC

• Convening of Shareholders’ Meeting and the Alternative Mechanism

• Notification of Shareholders’ Meeting

• Records of the Shareholders’ Meeting and the Signatures of Shareholders

Formality and Procedure of Shareholders’ Meeting of LLC

• Article 38 (Section 2) The shareholders may pass a resolution in writing unanimously for a direct decision on the aforesaid matters without convening a shareholders’ meeting and all the shareholders shall sign and affix their seals on the decision document.

• Article 42 All shareholders shall be notified 15 days before a shareholders’ meeting is convened, unless otherwise provided in the articles of association of the company or otherwise agreed by all shareholders.

• The shareholders’ meeting shall record minutes of meeting and the shareholders present at the meeting shall sign on the minutes of meeting.

Regular Meeting & Interim Meeting

• Article 40 Shareholders’ meetings include regular meetings and interim meetings.

• Regular meetings shall be convened regularly in accordance with the provisions of the articles of association of the company.

• and a interim meeting shall be held when proposed by:

--shareholders holding 1/10 or more of the voting rights --over 1/3 directors; --the board of supervisors, or by the supervisors of the

company with no board of supervisors

Q: What about the classification of shareholders’ meeting in US?

Annual vs. special meeting in US

• Generally: Nearly all states require an annual meeting of shareholders; a special meeting is any meeting other than the regularly-scheduled annual meeting.

• 1.No penalty for failure to hold annual meeting: failure does not make the corporation’s subsequent action invalid.

• 2.Purpose(s) of an annual meeting and special meeting.

• (1)to consider matters that cannot wait until the next annual meeting.

• (2)state the particular issues.


• 3. Who may call a special meeting (1) Board of directors—always be called this way

(2) Any person or group authorized by the bylaws

A. the president, under many bylaws

B. Shareholders holding certain percentage of shares

(a) Ten percent of shares--RMBCA

(b) Not allow even a larger percentage of

shareholders to call a special meeting.

Discussion: theory of raider or not


• 4. Quorum: A quorum be present at the shareholders’ meeting equal to a majority of the outstanding shares.

• (1) Minimum: Many statutes require that at least one-third of shares be present as the minimum allowable quorum. But RMBCA differs. See P.87

• (2) Higher numbers: Nearly all states allow articles or bylaw to set a higher percentage.

• Discussion: the Quorum can be used as a control device in close corporation.

Annual vs. special meeting in US• 5. Vote required for approval (1) Only if a majority of the shares actually present

vote in favor of the proposed action. (2) Not a majority of the total shares eligible to vote in

favor of the proposed action. (3) A majority of the shares present must affirmatively

vote in favor of the proposal. --an abstention is the equivalent of a vote against. --RMBCA changes rule: Abstentions the same as votes

that are not cast: §7.25(c) “is approved if the votes cast …favoring the action exceed the votes cast opposing the action …”

Case: 1000 shares outstanding. 600 shares are represented. 280 in favor, 225 opposed and 95 abstaining.


• 6. Super-majority for fundamental changes:

• -majority is enough to constitute approval does not apply to issues that are of fundamental importance.

• -Most states allow the articles or bylaws to set a higher percentage as the minimum percentage.

• Q: what are issues of fundamental importance?


• 7. Breaking of quorum• Comparison: A quorum of directors’ meeting and that

of shareholders’ meeting.

• Case: 1000 shares outstanding, 700 present, 300 leave the meeting.

• Rule: RMBCA§7.25(b): Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.


• 8. Written consent:• (1)Nearly all states allow shareholders to act by

unanimous written consent without a meeting.

• (2) Some states even allow shareholder approval in the form of written consent by the number of votes needed to approve the action, even if this is non-unanimous.(Del. GCL§228)

• Comparison: directors must either meet or consent unanimously.

Convention of the Shareholders’ Meeting

• The first shareholders’ meeting• The regular shareholders’ meeting

• Board of Directors (Chairman)

• Deputy Chairman

• One Director Appointed by more than ½ Directors

• Executive Director

• Board of Supervisors or Supervisor

• Shareholders (holding more than 1/10 of voting rights)


• Article 39• The first shareholders’ meeting shall be convened

and chaired by the shareholder who made the largest amount of capital contribution and shall exercise its duties and powers in accordance with the provisions of this Law.

Q: And what about the regular meeting after the establishment of a LLC?


• Article 41 In the case of limited liability companies which have established a board of directors, the shareholders’ meetings shall be convened by the board of directors and chaired by the chairman.

Q1: And what if the chairman fail to perform the duties?

where the chairman is unable or fails to perform his/her duties, the deputy chairman shall chair the shareholders’ meeting.


Q2: Then what if the deputy chairman of the board of directors fail to perform his duties?

where the deputy chairman is unable or fails to perform to do so, a director appointed by more than half of the board of directors shall chair the meeting.


Q3: And how about when the company does not establish the board of directors?

In the case of limited liability companies which have not established a board of directors, the shareholders’ meetings shall be convened and chaired by the executive director.


Q4: Then what about when the board of directors or executive director fail to perform the duties of convening the shareholders’ meeting?

Where the board of directors or the executive director is unable or fails to convene a shareholders’ meeting, the board of supervisors or the supervisor (in the case of companies which have not established a board of supervisors) shall convene and chair the meeting


Q5: Then what about the board of supervisors or the supervisor of the company with no board of supervisors fail to perform such a duty?

where the board of supervisors or the supervisor does not convene and chair a meeting, shareholders holding one-tenth or more of the voting rights may convene and chair the meeting.

Voting Weight and Voting Procedure

• Article 43 The shareholders shall exercise their voting rights at the shareholders' meetings on the basis of their respective percentage of the capital contributions, unless it is otherwise stipulated by the articles of association.

• Article 44 The discussion methods and voting procedures of the shareholders' meeting shall be prescribed in the articles of association, unless it is otherwise provided for by this Law.

A resolution made at a shareholders' meeting on: --amending the articles of association --increasing or reducing the registered capital --merger, division, dissolution or change of the company form

shall be adopted by the shareholders holding 2 / 3 or more of the voting rights.

The shareholders Meeting of Company Limited by Shares

• Regular Meeting & Interim Meeting (Art. 101)

• Convention of the Shareholders’ Meeting (Art. 102)

• Notification of Shareholders’ Meeting (Art. 103)

• Shareholders’ Proposal Rights (Art. 103)

• Quorum of Shareholders’ Resolution (Art. 104)

• Cumulative Voting of Shareholders (Art. 106)

• Voting Proxy of Shareholders (Art. 107)

• Minutes & Records Reserved (Article 108)


• Article 101

• A shareholders’ general meeting shall be convened once every

year. A shareholders’ general meeting shall be convened

within two months of any of the following events:

(1) the number of directors falls below two-thirds of the quorum

stipulated in this Law or articles of association of the company;

(2) the losses of the company which have not been made up

equal one-third of the paid-up capital of the company;


(3) requisition of a shareholders’ general meeting by a

shareholder who holds 10% or more of the company’s shares

or shareholders who hold 10% or more of the company’s

shares jointly;

(4) the board of directors deems it necessary to convene a shareholders’ general meeting;

(5) the board of supervisors proposes to convene a shareholders’ general meeting;

(6) other events stipulated by the articles of association of the company.


• Article 102

• Board of Directors (Chairman)

• Deputy Chairman

• A Director Appointed by more than ½ Directors

• Executive Director

• Board of Supervisors or Supervisor

• Shareholders (holding more than 1/10 of voting rights)


• General meeting initiated by shareholder (s)

a shareholder who holds 10% or more of the shares

of the company or several shareholders who hold

10% or more of the shares of the company jointly for

90 days or more consecutively may convene and

chair the meeting.

Notification of Shareholders’ Meeting

• Art. 103

• Regular Meeting: 20 days in advance

• Interim Meeting: 15 days in advance

• Company issuing bearer shares: 30 days in advance

• Notification contents: Date, venue, and agenda

• Shareholders’ right of proposals: 3%, 10 days before

• Holders of bearer shares deposit share certificates:5 days before

Notification of Shareholders’ Meeting

• Art. 103

• All the shareholders shall be informed in writing 20 days in advance

of a shareholders’ general meeting of the date and venue of meeting

and the agenda.

• All the shareholders shall be informed 15 days in advance of an

interim general meeting;

• For companies issuing bearer shares, a notice of the meeting

stating the date and venue of the meeting and the agenda shall be

given 30 days in advance

Shareholders’ Rights of Proposal

• Article 103

• A shareholder who holds 3% or more of the shares of the company or

shareholders who hold 3% or more of the shares of the company jointly may

submit a written proposal of an agenda item ten days before a shareholders’

general meeting to the board of directors;

• the board of directors shall inform other shareholders of the proposal within

two days from receipt of the proposal and table the proposal at the

shareholders’ general meeting for review.

• The contents of the proposed agenda item shall be within the scope of duties

and powers of the shareholders’ general meeting and shall contain a specific

topic and specific resolution.

Quorum of Shareholders’ Resolution

• Article 104• Shareholders attending a shareholders’ general meeting

shall exercise one vote per share. Company shares held by the company shall not carry voting rights.

• Resolutions of a shareholders’ general meeting shall be passed by a simple majority of votes cast by shareholders present at the meeting.

• Resolutions of a shareholders’ general meeting on amendment to the articles of association of the company, increase or reduction in registered capital, merger, division, dissolution or change of company structure shall be passed by two-thirds majority of votes cast by shareholders present at the meeting.

•

Cumulative Voting of Shareholders

• Art. 106 A cumulative voting system may be implemented for the

election of directors and supervisors at a shareholders’ general meeting in accordance with the provisions of the articles of association of the company or a resolution of the shareholders’ general meeting.

The cumulative voting system referred to in this Law shall mean that the voting rights carried by each share shall correspond to the number of directors or supervisors to be elected and the shareholders may use their voting rights collectively for election of directors or supervisors at a shareholders’ general meeting.

Example of Cumulative voting

• Case: One company limited by shares, 1000 shares in total, majority shareholders hold 700 shares, minority shareholders hold 300 shares, 3 directors are to be elected.

• Straight Voting Cumulative Voting A 700 700 900 1000 B 700 700 800 900 C 700 700 400 200

D 300 900 0 0 E 300 0 900 0 F 300 0 0 900

Voting Proxy

• Article 107

Shareholders may appoint their proxies to attend a shareholders’ general meeting; the proxies shall submit an authorization paper for proxy to the company and exercise the voting rights within the scope of authorization.

Minutes & Records Reserved

• Article 108

Minutes of shareholders’ general meetings shall

be recorded and signed by the chairman and

directors who attended the meeting. The minutes

of meetings shall be kept together with the record

of shareholders’ signatures and copies of

authorization paper for proxy.

Other Shareholders-Related Issues

• Shareholders’ Rights to be Informed

• Share Transferability in LLC —Succession on Shareholders’ Qualification —Preemptive Rights of Shareholders in LLC —Shareholders’ Appraisal Rights

• Share Transferability in Companies Limited by shares —Par Value of Shares —Two Forms of Shares —Transfer of Registered Shares & Bearer Shares —Limitation on Transfer of Shares of Promoter —Limitation on Transfer of Shares of Managers —Limitation on Shares Repurchase of Company

Rights to be Informed

• For the purpose of facilitating shareholders’ voting rights, Shareholders are entitled to access:

• Financial reports: end-year balance sheet, income statement, and statement of changes in shareholders’ equity.

• Inspection of corporate books and records: minutes of shareholders’ meetings, resolutions of the board of directors and board of supervisors


• Q: Please pick up the items shareholders can inspect.

• 1. the articles of association

• 2. register of shareholders (list of shareholders)

• 3. corporate bonds counterfoil book

• 4. minutes of meetings of the shareholders

• 5.minutes of meetings of the board of directors

• 6.minutes of meetings of the board of supervisors

• 7.financial reports of the company.

Case: Shanghai Automobile Company Limited by Shares


The Minutes of Two Boards’ Meeting -Commercial Secretes -Decision-making Process

The Register of Shareholders -Facilitating hostile takeovers? -Shareholding Percentage Requirements?

Financial accounts of the Company: Balance Scheme

Rights to be Informed• Article 34 (for LLC) Shareholders shall have the right to check and make c

opies of the articles of association, minutes of shareholders’ meetings, resolutions of the board of directors and board of supervisors and financial reports of the company.

• Article 97 (for Companies Limited by Shares) Companies limited by shares shall keep the articles of

association of the company, register of shareholders, corporate bonds counterfoil book, minutes of general meetings of shareholders, minutes of meetings of the board of directors, minutes of meetings of the board of supervisors and financial reports at the company.


• Article 98 (for Companies Limited by Shares)

Shareholders shall have the right to inspect the articles of association of the company, register of shareholders, corporate bonds counterfoil book, minutes of general meetings of shareholders, resolutions of the board of directors, resolutions of the board of supervisors and financial reports and may provide suggestions on or query the operations of the company.

Rights to be Informed• Article 34 (Section 2 for LLC)• Shareholders may request to check the accounts of

the company. A shareholder who requests to check the accounts of the company shall make a written request and state the purpose.

• If the company has reasonable grounds to believe that the shareholder who makes the request has an ulterior motive and may cause damage to the lawful interests of the company, it may reject the request and shall give a written reply to the shareholder stating the reason within 15 days from the date of the written request of the shareholder.

• Where the company rejects the request, the shareholder may apply to a people’s court for access to the company’s accounts.

Succession on Shareholders’ Qualification

• Case:

One LLC has five shareholders, A, B,C,D and E. A has two sons, one of which is a criminal now in jail. One day, unfortunately A died in a car accident.

Could the criminal succeed to be a shareholder?

Political & economic rights

Succession on Shareholders’ Qualification

• Article 76

Upon the death of a natural person shareholder, the lawful successor of a natural person shareholder may succeed the shareholder’s qualifications, unless otherwise provided by the articles of association of the company.

Enabling rule or Supplementary rule?

Preemptive Rights of Shareholders in LLC

• The Reason of special Rule: To Maintain the close relationship and internal trusts.

• Special Rules and Procedures

• Transfer among shareholders

• Transfer to non-shareholders• Inform in Writing consent or not acquire shares

• preemptive right not acquire

Rules & Regulation

Article 72The shareholders of a limited liability

company may transfer all or part of their equity interests among themselves.

A shareholder proposing to transfer its equity interests to a non-shareholder shall obtain the consent of more than half of the other shareholders.

Rules & Regulation

The shareholder shall inform the other shareholders of the proposed equity transfer in writing and seek their consent.

Failure to reply within 30 days from receipt of the written notice shall be deemed as consent to the proposed transfer.

Where more than half of the other shareholders do not consent to the proposed transfer, the non-consenting shareholders shall acquire such equity interests, or else they shall be deemed to have consented to the proposed transfer.

Rules & Regulation

Where the shareholders consent to the proposed transfer, the other shareholders shall have pre-emptive right to acquire such equity interests on the same terms.

Where two or more shareholders intend to exercise their pre-emptive rights, they shall negotiate and determine the acquisition ratio.

Rules & Regulation

Where the negotiation fails, the shareholders shall exercise their pre-emptive rights based on the ratio of capital contribution at the time of the proposed transfer.

Where there are provisions in the articles of association of the company for transfer of equity interests, such provisions shall prevail.

Questions & Discussions

• What the consent of more than half of the other shareholders should be calculated?

• Shall other shareholders have the right to claim partial pre-emptive purchase rights?

• Shall the non-shareholder bid in an incremental manner?

Case of Partial Pre-emptive Purchase Rights

• One LLC has 3 shareholders:

• A- 51% B- 23% C-26%

• A 51% Non-shareholder (RMB10)

• 28% 25%

B C

Whose claim shall be supported?

Great Fluctuation of Stock Market in China

The Defects triggered by Shareholding Structure

• The scarcity of transferable shares distorts share prices.

• Non-tradable nature of state-owned shares suffocate the M&A market.

• Insider control become a persistent disease.

• The unfair transaction between parent and subsidiary listed company

Example and Analysis State shares 70% (non-tradable)

One Listed Company

Public shares 30%

• IPO, par value 5 USD, price 10 USD

• Secondary Transaction, price 30 USD

• State shares offered to the public at market price, eg. 30USD

• State shares transferred without paid to public shareholders at 10:2

Example and Analysis• The par value of share of a listed company is 5 USD.

However, due to demand was much higher than the offering, the IPO price was 10 USD, and the trading price on the stock market jumped to 30 USD.

• At that point, the government declared to sell the remaining non-tradable shares to the public at the market price. The stock price dropped dramatically, and the practice was ceased.

• As a compromise scheme, the government decided to offer state shares at the ration of 10:2 to public shareholders for the trading rights on the stock market.

The Most Controversial Case in Recent Years

A Bank Debts 1.5 Billion(Ⅰ) A Listed Company

(Construction Bank) (Zheng Baiwen Comany)

Due Claim allotment 1.5 Billion (Ⅱ) exemption(Ⅳ) 50% Shares Transfer(Ⅴ)

Assets Management Com. Sale (Ⅲ) A Company Limited by Shares

(Xin Da AMC) (San Lian Company)

Documents

Chapter 6 Formation of Company Limited by Shares Similar to the establishment of a Limited Liability Company, the formation of a Company Limited by Shares