Abig event in China’s capital market in 2019 is the launch of the SSE Star Market (Sci-tech Innovation Board). The SSE market has drawn extensive attention because it represents innovation for the fundamental systems of securities issuance and listing in China’s capital market, such as more diversified and inclusive listing conditions, and the arrangement for the differentiated shareholders’ voting rights of A shares.
The equitable treatment of shareholders is one of the basic principles of the company system. In other words, for the purpose of exercising voting rights, shareholders have equal voting rights.
However, in practice, the actual demand of a company’s equity financing will almost certainly be diluted with the shareholding ratio of the founders/founding teams of the company. Therefore, how to solve the problems arising out of the separation of the ownership and the control of a company has become an important issue. The Organization for Economic Co-operation and Development (OECD) has also mentioned in its documents that if all structures separating the ownership and control of a company were prohibited, its cost would exceed the earnings.
The Company Law, when first promulgated, adopted a relatively rigid equitable principle for shareholder’s voting rights, i.e., shareholders of a limited company exercised their voting rights in proportion to their capital contribution, and shareholders of a joint-stock company had one vote for each share they held.
The revised Company Law, taking effect in 2006, left room for differentiated voting rights. Although the Company Law specifies that shareholders of a limited company shall exercise their voting rights under the principle of “exercise voting rights in proportion to capital contribution”, it also says, “unless it is otherwise specified in the articles of association of the company”. In addition, the 2006 Company Law specifies that each share of a joint-stock company shall rank pari passu with other shares of the same class; by extension, this means that the shares of a class do not rank pari passu with the shares of a different class.
To that extent, the Company Law lays a foundation for differentiated voting rights for shareholders.
Attempts in China
There are various models of differentiated voting rights for shareholders, such as dual-class equity structure, limited voting shares and non-voting shares.
In China, in a broad sense, the Guiding Opinions on Launching Pilot Programme for Preferred Shares issued in 2013 formally put forward a clear system of differentiated voting rights for shareholders in A-share markets – preferred shares. In other words, “holders of preferred shares take precedence over ordinary shareholders in the distribution of profits and residual property of a company, but their rights of participating in corporate decision-making and management are restricted”.
However, at that time, issuers of preferred shares were only listed companies and unlisted public companies, and companies with an arrangement for differentiated voting rights still faced substantial obstacles in IPOs. Fortunately, with the launch of the SSE market, differentiated voting rights for shareholders broke the ice in China’s IPO system. Relevant rules of the SSE market have stipulated detailed provisions on differentiated voting rights.
About the legal basis
At present, the Company Law leaves autonomy space for voting rights of shareholders of a limited company apart from the principle of “shares of the same class shall rank pari passu with each other”, and also adds “of the same class” at the end of “each share of a joint-stock company shall rank pari passu with other shares”. However, the articles related to voting by shareholders of a joint-stock company still rigidly specify that “shareholders of a joint-stock company have one vote for each share they hold”. In view of the existence of preferred shares and special voting rights on the SSE market in current practice, it is recommended to modify the provisions of the Company Law on voting rights of shareholders of a joint-stock company so as to unify the internal logic of China’s company system related to relevant matters.
Protecting minority shareholders
At present, the relevant rules of the SSE market of China have specified detailed arrangements for differentiated voting rights on the SSE market, such as the mechanism of approving the difference in voting rights, the timing of setting such difference, the upper limit of the difference between the numbers of voting rights of special voting shares and ordinary shares, and the trading restrictions on special voting shares and conversion of special voting shares. However, in practice, it is still necessary to cautiously treat the problem of how to balance the effectiveness of corporate control and the equality of shareholders’ rights to ensure that the legitimate rights and interests of minority shareholders are not unduly damaged.
The Several Opinions of the Supreme People’s Court on Providing Judicial Guarantees for the Establishment of the Sci-tech Innovation Board and Pilot Programmes for Registration System Reform focused on this problem, stipulating that “if legitimate rights and interests of ordinary shareholders are infringed due to the violation of the listing rules of the Sci-tech Innovation Board by way of implementing company autonomy, the people’s court shall, by law, deny the validity of such acts, and forbid the misuse of rights by shareholders with special voting rights, so as to prevent the deviation of system functions”.
However, if legitimate rights and interests of minority shareholders are infringed by using differentiated voting rights, how to collect evidences remains a difficult problem. The opinions of the Supreme People’s Court has a focus on such problems and points out that “efforts shall be made to explore and establish the system of investigation orders for attorneys in civil actions, so as to facilitate the exercise of relevant investigation rights by attorneys of investors and enhance the ability of investors to collect evidence. Efforts shall be made to research and explore properly strengthening the obligations of relevant informed organizations and individuals to support investors in collecting evidence, and the organizations and individuals refusing to perform such obligations to support evidence collection shall be subject to civil punishment by law.”
The above opinions have fully indicated the judiciary authorities’ attitude towards the protection of minority shareholders’ rights in the new scenario, but the specific means, measures and mechanisms still need to be gradually set in stone and improved in future practices.
Xue Yuting is a partner at Grandway Law Offices