Autonomy and statutory protection

For members in private companies

Introduction:

Protecting minority investors has been thought of as a key factor in operation and management of companies. It is important to keep trustworthy and equitable environment among members in companies. In a company, Minority investors usually do not have sufficient power to affect decision-making. This means their rights and interests are easily violated or ignored. As members of the company, it is reasonable to protect lawful interests of them and protect them from infringement.

In listed public companies, the protections for minority investors performs are rather necessary. Equities of listed public companies are relatively dispersive[1],the voting rights of minority investors exert limited influence when make a decision. Otherwise, as to the large amounts of minority investors in listed public companies, their total investments are vital to maintain a corporation. Also, very crucial for the future developing. In order to offer better protections for minority investors, some mandatory rules, like director’s duties, are designed.

However, there is a statement which hold opposite view with the necessarily of statutory provision when it comes to private companies. Which considers that the members of private companies should be able to change any statutory provision freely (including partial or complete waiver of directors’ duties and the unfair prejudice remedy). Comparing to listed public companies, the scales of most private companies are relatively small. Most of them only have a small number of members actually engage in the management actively. While, this reason for this statement are inadequate. It considers only one factors of management of private companies which still needs to be explored more deeply. This essay critically discusses the statement above. In particular, this essay has been divided into five themed chapters: the first chapter will examine the rationality of free rights to change statutory provisions for members in private companies. Chapter Two begins by introducing current situation that majority shareholders violating minority shareholders’ rights in private companies, then concerning with the influences which might happen on minority members attribute to this free right. Following analysing the necessity of protecting minority members through compulsory rules in private company in chapter Three.  In chapter Four, it will put forward some method and suggestion to solve the difficulties that raised before. Finally, the conclusion gives a brief summary and critique of the findings.

The main purpose of this study is to seek the proper mechanism for the free rights of members to change mandatory provision which also good for protecting minority members. This study was exploratory and interpretative in nature, it offers some important insight to management mode of private companies based on literature, legislation, and case-law.

Body:

Rationality of free rights to change statutory provisions for members in some private companies.

The internal governance of private companies is obviously different from that of listed public companies. Based on some of its own characteristics, the principle of autonomy of internal governance needs to be emphasized and strengthened in some small private companies. The reasons are as follows: Firstly, the characteristic of the person cooperation is particularly significant in private companies. The sense of trust between the shareholders of a small company is stronger than that of the shareholders of a large company. And with a small number of people engage in management filed, it is easy to agree on major issues of company management. The “resolution” produced by a company’s shareholders is mostly made by one or a part of its shareholders. They do not convene strictly in accordance with the procedures stipulated in the company law and convene shareholders’ meetings and draw a resolution.

Secondly, the shareholders of a small private company often act as the directors at the same time. The board of directors’ coincidences with the shareholders’ meeting, also, the ownership and management right are not strictly separated. In most small companies, because of relatively simple management system, the abilities of shareholders themselves are basically competent for the management and decision-making work of the company. Hence, some statutory rules like the election of the director and the establish of the board are redundant.

Furthermore, private companies cannot enter the public capital market so that the number of stakeholders are less than listed public companies. As the stock market and bond market are set relatively high access conditions, the private companies cannot issue bonds and shares to enter the capital market. In this way, shareholders and creditors will not have a large and extensive existence. Meanwhile, the number of employees is less. It can be seen that the social impact of small companies is relatively narrow and will not cause capital market problems.

Due to reasons above, the impact of private companies on social public interest will not be direct and extensive like the listed public companies. The strict regulation of corporate governance by modern company law is usually designed for strict and adequate protection for stakeholders such as minority shareholders, social shareholders, bondholders, employees, etc., or for public interest. For private companies, especially small companies of them, the strict and cumbersome legal system of corporate governance has very limited practical value and less significance.

The current situations of majority shareholders violating minority shareholders in private companies and influences which might happen on minority members attribute to this free right.

Indeed, in some respects, giving the private companies more autonomy has positive effects, such as good corporate resolution efficiency. But according to the situation that a few minority shareholders control the company’s management right, if the mandatory provisions of protecting minority shareholders can be abolished freely, the interests of minority shareholders will be violated to a large extent and hard to defend their rights.

The main purpose of a private company is to create a profit for the shareholders, and the shareholders may act as directors or secretary at the same time, or may not be. In Private Companies, the characteristics of centralization are very serious. The ownership and management rights are not separated. So, the whole company is often controlled by the majority shareholders.

Majority shareholder often abuse their voting rights by using their absolute holding or relative holding share in the shareholders’ meeting. As a result, minority shareholders are not willing to attend the shareholders’ meeting, which makes the shareholders do not play their role, as well as, minority shareholders lose their rights to be owned as a contributor.

Besides, in some situation, majority shareholders abuse the majority rule, Limit the participation of minority shareholders to get into the management of the company. Minority shareholders are unable to know about the reality of business situation of the company. Because of this, Large shareholders and operators can transfer business risks through related transactions and profit conversion easily, which It will infringe on the interests of majority shareholders and companies.

Furthermore, the limitation of shareholders’ equity transfer and withdrawal mechanism exist in private companies. Corporate type enterprises clearly stipulate that investors should not withdraw their investment（company law, s143）. At the same time, there are more restrictions on the transfer of equity, especially for the person-combination enterprise, there is a negative influence of asymmetry information on the transferring produce. This result that after the investment, it cannot be withdrawn and it is difficult to transfer.

The necessity of protecting minority members through compulsory rules in private company. (legislation)

• The private companies are the largest number of companies, and they are also the basis of the national economy. Which means they need to follow the macro regulation by nation in a variety of ways, especially through laws.
• The excessive autonomy of the private companies will lead to the expansion of social contradiction and the chaos of the market economy while statutory provisions can give them good guidance and limit their misuse of autonomy.
• Through the protection of minority shareholders by law, we can keep minority shareholders’ enthusiasm for investment in private companies. Creating a good investment environment and establish a sound company management system.
• While respecting the autonomy of the private companies, appropriate legal intervention is beneficial to the longer term, more balanced and healthier development of the private companies.

Solutions: balance between the autonomy and mandatory provisions of the private companies. (literature, legislation, cases)

• Mutual supplement of the articles of association and mandatory provisions. （literature）
• Reducing the intervention by mandatory provisions to the private companies while retaining the provisions of the necessary protection of the minority shareholders.
• Perfecting the system of information disclosure of Private Companies.
• Perfecting the company’s decision-making system and supervision mechanism

CONCLUSION:

This statement is not entirely correct. When expanding the autonomy of the private companies, the necessary legal protection mechanism of minority shareholders should be retained at the same time.

[1] Brian R Cheffins, Corporate Ownership and Control: British Businesses Transformed (Oxford University Press 2010); Janette Rutterford, ‘The Shareholder Voice: British and American Accents, 1890–1965’ (2012) 13 Enterprise Soc 120.

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