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15 JUNE, 2006


                                A COMPARATIVE STUDY

1. Introduction
Minority shareholder protection is a hot and yet most challenging topic in company law.
Difference in protections offered by state company laws influences the analysis of
investment risks. Better shareholder protection builds up investors’ confidence, creates
investment incentives and consequently stimulates national economic growth as well.
As to close companies, where no public market is available for shareholders to sell their
shares, exit remedies play an important role in minority shareholder protection. In a close
company, when personal relationship between shareholders breaks up, the cooperative
basis is gone. Locking uncooperative shareholders in the company brings no benefits, only
to waste resources. Remedies which can solve such plight and provide exit chance for
certain shareholders are thus needed under some circumstances, especially where the
reasonable expectations of minority shareholders are violated, where some special issues
occur which fundamentally change the structure of the company and where the controlling
shareholders act oppressively.
This research focuses on two exit remedies. One is the appraisal remedy, and the other is
the oppression remedy in US whose counterpart is the unfair prejudice remedy in UK.
Appraisal remedy provides shareholders who are opposed to certain corporate actions, such
as a merger, the chances to have their shares repurchased by the corporation at an appraised
fair value and then exit the company.1 This remedy is available only when fundamental
changes2 occur to the corporation. This fact limits the use of this remedy. Oppression and
unfair prejudice deal with oppressive3 or unfair prejudicial4 conducts done by the directors
or those in control of the corporation and the most frequently granted relief for this remedy
is shareholders buyout. However, the critical term of oppressive or unfair prejudicial
conducts is unfortunately not defined in the statues.
Previously, in china, a shareholder who wanted to exit a close company had two options:
either to apply for dissolution of the company or to find a party to transfer his shares. Both
of these are hard to realize. Such restrictions clearly reflect the legislator’s intention, that is,
to restrict the shareholder’s exit, to keep capital and talents in the company for the viability
of business and to protect the interests of creditors. Thus, exit chances through appraisal
rights were formerly denied in China.
However, the situation is changed with the amendment of PRC company law in 2006.
According to this new company law, shareholders in close companies are conferred
appraisal rights by article 75, which states:

    MBCA s13.02 (a). See also Principles of Corporate Goverance: Analysis and Recommedations, American
    Law Institute, 1994. part VII, Chapter 4 The Appraisal Remedy. P 292
    For example: mergers, consolidation, charter amendments, sale of substantial assets and so on.
    The Revised Model Business Coporate Act, s 14.30.
    Company act 1985, s 459.

     Shareholders who disagree with certain resolutions during the shareholder meeting, can ask the
     company to buy his stocks back at a reasonable price:
     When the company fails to pay dividends to shareholders for constructive five years, and during
     these five years, the company makes profits continuously;
     When the company decides to merge, divide or transfer its major assets;
     When term of operation expires or the occasions for dissolution occur, but the
     shareholder meeting takes the decision to continue the business.
     When such decisions are taken by the shareholder meeting, the opposed shareholders can
     bring a lawsuit in the court within 90 days upon the adoption, provided that shareholders
     and the company fail to reach an agreement as to the repurchase of the shares within 60
     days upon the adoption of such resolutions.
This article is introduced for sure with an aim to protect the minority shareholders’
rights. Nevertheless, there are many problems with it, for example, limited application
grounds, few instructions on procedural issues and no guideline for the valuation of
dissenting shares. Thus, this provision on appraisals is undeveloped. To make things worse,
no similar remedies as oppression or unfair prejudice exist in Chinese company law to offer
liquidity to aggrieved shareholders.

2. Central research objectives
The task of this paper is to examine the exit remedies in close companies in China.
Through comparison with legislations in UK and US, this paper desires to:
- Show the necessity of a broader base of exit grounds for Chinese close companies, and
- Provide modest recommendations for constructions of exit remedies in China
   a. give suggestions to improve the current appraisal remedy , and further, besides the
      existing appraisal remedy,
   b. in reference to oppression and unfair prejudice remedy, design a model exit remedy
      to broaden exit grounds in China.

3. Research method
Comparative approach is employed in this paper. The researcher chooses UK and US for
comparative study in this field. The reasons are, on one hand, exit remedies in these two
countries are long established, quite developed through years of common law contributions
and therefore most advanced. They are undoubtedly constructive and helpful for China to
build stronger shareholder protections. And on the other hand, these two nations rank high
in foreign investment inflows in China. Learning experiences from these two countries will
promote a win-win situation by benefiting the foreign investors and meanwhile attracting
more investment as well.

4. Research questions
To fulfill the objectives of this paper, the following questions have to be answered by this

1. What kinds of events would trigger appraisal remedy?
2. Is appraisal remedy alone an adequate remedy to solve liquidity problem in close
   company? And what is the relation between appraisals and oppression remedy?
3. What do we have in PRC’s new company law to tackle shareholder oppressive or unfair
   prejudicial conducts? Does it work well?
4. Given that no similar remedy like oppression or unfair prejudice exist in China, to
   broaden the availability of exit grounds by introducing such remedies implies that we
   must answer the following question: What standards are employed in US and UK when
   applying oppression or unfair prejudice remedy? (This is a difficult question because the
   important terms as oppressive and unfair prejudicial conducts are not purposely defined
   in the legislation. Legislators leave the judges with judicial discretion to determine what
   kind of shareholder conduct is actionable, so principles have to be drawn from case
   reviews. )
5. These above remedies in UK and US require a case-by-case examination, which greatly
   affect judicial accountability and predictability. And moreover, combined with the
   absence of an articulated application standard, they are problematic in implementation
   even in UK and US, let alone if introduced intact to the civil law country as China. Then
   to what extent can we learn from UK and US experiences? How to make a workable
   model for China, which can both fill the blank of minority shareholder protection in this
   area and yet have higher efficiency?

5. Structure of the study
The first chapter of this paper is mainly descriptive. It presents some background of
Chinese company law, for instance, source of company law in China, revisions in company
law in 2006, and company forms (with emphasis on foreign invested enterprises, which are
predominately close companies in China). This part also briefly introduces the newly added
appraisal remedy in Article 75.
The second chapter is about getting knowledge on how appraisal remedy is stipulated in
UK and US statues. In this chapter two points are discussed in detail: appraisal triggering
events and procedures. Some knowledge will be gained here: 1. Through analytical
comparison, sensible scope of appraisal triggers and more hospitable procedures are
identified to inform Chinese legislators. 2. Appraisal remedy, standing alone, provides an
inadequate relief to minority shareholders in close company.                 “Any list of
appraisal-triggering transactions is likely not worth the considerable amount of ink. What
ever list may be crafted, it will not meet the needs of shareholders in non market
corporation, whose dissatisfaction is often not transaction based.”5 The Delaware supreme
court has also appropriately noticed that the appraisal remedy is unlikely to be adequate
“where fraud, misrepresentation, self dealing, deliberate waste of corporate assets, or gross
palpable overreaching are involved.” 6 Therefore, other remedies are needed to help
minority shareholders out.
Chapter III studies oppression remedy in US and unfair prejudice remedy in UK. It
explores such issues as the relationship between appraisal and oppression, unfair prejudice;

    Mary Siegel, Back to The Future: Appraisal Rights in the Twenty –First Century, 32 Harv. J. On Legis. 79,
     winter 1995, p13
    Weinberger v. UOP, Inc., 457 A. 2d 701, 714 Del. 1983

and judicial standards adopted in these remedies in US and UK.
Chapter IV applies the above knowledge to improve practice in China. With knowledge
gained in Chapter II and III, Chapter IV first evaluates the newly introduced appraisal
rights in Chinese company law and offers suggestions for reformation of this remedy.
Furthermore, it analyzes the necessity of a broader exit grounds and tries to design the exit
model in this respect.
The last chapter of this paper is a concluding chapter with answers to the research questions
listed above and these answers constitute modest recommendations for a better shareholder
protection in China in the field of exit remedies.


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