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Corporate law structure in the UK and China

“The structure and legal basis of corporation law may vary from one jurisdiction to another may vary, but corporations fulfil the same basic function in all societies despite these differences”.

Discuss, with reference to English law and AT LEAST ONE other jurisdiction (France or China).

INTRODUCTION

Globalisation and the rapid internationalisation of financial and commercial activity in recent years have led to an increased interdependence of domestic legal organisations. The major commercial jurisdictions are now more aware of non-domestic legal approaches to Company Law and are increasingly willing to consider the application of foreign methods. The Law Society has been inspired by foreign jurisdictions to find resolutions to the problems surrounding the duties of directors but admit there is “no one model procedure”[1]. Although the UK Companies Act 1948 is largely credited as the model for Company Law regimes throughout what was the Commonwealth, the influence of UK Company Law has, for various reasons, significantly diminished over the past fifty years, with the situation reversed in many cases. UK legislation is now investigating foreign models on Company Law on which to base its reform[2].

Interest in the general corporate governance debate and, in particular, the desire to make company directors accountable for their actions has not been solely confined to the UK. The roles and duties of company directors has been the subject of much discussion in many similarly developed countries, with attempts to incorporate some of their approaches for an increased benefit in the UK in answer to twenty first century commercial requirements. The Organisation for Economic Co-operation and Development (OECD) “exercises an important role in setting global standards for corporate governance[3]. Their Principles of Corporate Governance, and the accountability of the Board of Directors is given prime importance.

This essay attempts to investigate the effect that the function of Corporation Law has on all societies despite the variance of their structure and legal basic between one jurisdiction and another. In order to clarify this expectation it is necessary to recognise that it is an established rule that Directors do not owe duties to individuals in the company (i.e. members, directors, employees etc) but to the Company as an entire entity as per Percival v Wright [1902] 2 Ch 421. For ease of reference the essay discusses the situation in the UK, other jurisdictions and China separately

DISCUSSION

A liability exists for a minimum standard of behaviour expected from Directors to balance public expectations against effective remedies in order to maintain public confidence and protection from incompetence[4], especially in terms of the potentially damaging effects the actions of large multinational enterprises could have on local and international communities[5]. Many competing interests require company law to retain flexibility especially where directors’ duties intrude upon statutes, doctrines of equity and other legislation. Unconditional judgement requires controlling due to the high number of harmful conventions remaining from the recklessness of some company decisions of the 1980s, although importance expressed by management, together with its inbuilt risk-taking, needs to retain its value.

Role of Corporate Opportunity

Modern British Company Law evolved from the unincorporated joint stock[6] company[7], an association akin to partnership, rather than from the corporation[8]. It is therefore based more on partnership principles[9] than corporate personality and the deed of settlement under which companies were traditionally formed was not unlike a modern-day deed of partnership[10]. Directors’ duties nevertheless developed from a variety of different sources. These can be mainly divided into fiduciary duties which are owed to the company by way of the fiduciary relationship that was thought to exist between directors and their companies and are often linked to statutory duties as stated within the Companies Act 1985, Part X, and common law duties of care and skill[11].

The role of corporate opportunity was determined based on the law of corporate identity. This would allow the law to decide when information about directors and their activities could be transferred. This approach was used in the case of Framlington[12].

Law in a Contemporary Society

Though there were few new laws made in UK company law between 1948 and 1967, between 1967 and 1986 five Companies Acts were brought out, as well as the European Communities Act 1972 that helped shape the duties owed by directors of UK companies. The law today is in a state of unrest and change where it can be seen to be “evolving in response to changes in public attitudes to corporate governance[13]. Interest in the general corporate governance debate and, in particular, the desire to make company directors accountable for their actions has not been solely confined to the UK.

The roles and duties of company directors has been the subject of much discussion in many similarly developed countries, with attempts to incorporate some of their approaches for an increased benefit in the UK in answer to twenty first century commercial requirements. The Organisation for Economic Co-operation and Development (OECD) “exercises an important role in setting global standards for corporate governance[14]. Their Principles of Corporate Governance, and the accountability of the Board of Directors is given prime importance.

Shareholders are prevented from being involved in their companies’ management these days where there is much large-scale investment and no restriction on movement of shares according to Hicks who explains this as “rights of ownership, without the responsibilities[15]. Additionally, certain new guidelines regarding power have come from the Government in an attempt to claim authority over corporate management and to make certain management plans acceptable. Particular duties are a requirement of Directors of incorporated companies, confirmed by the increase of civil and criminal obligations held back by terms stated in the Companies Act 1985. Case law is a necessary part of company law, together with other important pieces of law[16].

Furthermore, it is a basic principle for Directors to meet the terms of their Articles of Association and individual service contracts, as well as agreeing with the rules within the ‘City Code on Takeovers and Mergers[17] and, for Directors of listed companies, the rules within both the Stock Exchange’s ‘Listing Rules’ and the ‘Combined Code’. The resulting difficulty and obscurity have been recognised by Butcher (2000: 15) who comments: “Offshore, banking, tax havens, trusts, joint ventures, subsidiaries, corporate groups, satellites and the like have become de rigueur [i.e. essential] in today’s commercial and corporate world[18].

In response to current business ideas in the modern market, the Government is trying to bring in new laws that are more in keeping with the idea of globalisation of company business. Paragraph 8 of the Company Law Amendment Committee document considers this subject of directors’ duties to be of basic concern to the community with the possibility of considerable harm being associated with companies that engage in fraudulent or wrongful trading. Those affected include employees, creditors, suppliers as well as shareholders, with both Dodd (1931) and Sealy (1987) suggesting the “the local community, the national interest, exports, welfare [and] the environment[19] could become involved, as can be seen in Para 5.6A of the Hampel Committee’s Report [January 1998].

Peoples Republic of China

Although it is possible to learn a great deal from the diverse approaches to directors’ duties throughout the world, due to constraints on space this essay is limited to a brief introduction of law in other jurisdictions followed by a more detailed examination of China’s policies in corporate law. Corporation law in China truly manifests the social and environmental factors prevalent within its country’s politics, adapting according to the exigency of those conditions.

Comprehensive legislation is not a factor, although the configuration and commission of joint venture operations is quite meticulous. Formal arbitration is recognised should business transactions be impugned. The sanctioned perspective is that these disputes should be negotiated through informal consultation where possible, with future contracts being altered in accordance with that settlement. In the true spirit of this ethos Qian Qichen[20], when addressing a United Nations Conference observed that common development required the abolition of protectionism and discrimination in international economic relations and trade[21].

Commerce that especially interests China involves both capital goods and technology. The global marketplace is an important factor in China’s ‘Four Modernisations’[22] which now forms the core of their development strategy, the goal of which is a vision of modernisation and sophisticated industrialisation. China is considered, in terms of its vast population, an exciting potential for foreign trade opportunities[23]. Foreign trade[24] is administered through a coalition of a Planning Commission of the State Council, responsible for long-term economic plans[25]; the Economic Commission of the State Council, responsible for implementing these plans; and the Ministry of Foreign Economic Relations and Trade incorporates these plans into action.

It is, however, the China Council for the Promotion of International Trade who liaises with non-communist jurisdictions to promote international trade and incorporate global policies into China’s economy[26]. One particular aspect of PRC corporate law is revealed in the unique concept of the joint venture process which is administered by the China International Trust and Investment Corporation and funded by the Bank of China, owned by the People’s Bank of China [a separate entity] together with some of the more major companies in China. In 1979 China introduced its legislation on joint ventures, one of the few areas where corporation law is formally integrated. According to law, the Chairman of each Board of Directors must be Chinese and the majority of those Board Members must be citizens of the Peoples Republic. Policy allows for a two-thirds majority in agreement on all important issues, thereby protecting all parties to any Agreement.

Corporation law also asserts that the speculation of a foreign joint venture may not be sequestered or requisitioned in any other manner. Additionally, any profits accruing to a foreign joint investor may be re-appropriated[27], although these would be subject to an additional 10% tax, above the 30% to 35% rate already imposed on joint venture projects. According to Company Law in the Peoples Republic the terms a joint venture may last are up to 25 years depending on the type of commerce.

A number of small companies can obtain licences to trade with foreign businesses (Starr, 1995: 92). Much of China’s economic power is undergoing a policy change in an attempt to attain membership into the General Agreement on Tariff and Trade (GATT)[28], now the World Trade Organisation[29], mainly as a result of the foreign trade deficit experienced in 1984 which, although re-established by 1987, increasing foreign trade was a prime policy of the Chinese government[30].

Re-convergence in Company Law

Company law in South Africa developed along the same lines as in the UK until the Companies Act 1973 was enacted as a result of the work of the Van Wyk de Vries Commission.[31] Among other things, the Act established and developed for the first time the concept of reckless trading[32] which has since inspired similar enactments in the UK and other Commonwealth countries. However it is the South African Close Corporations Act 1984 from which the UK legislators can learn a valuable lesson. With its mixed Civil Law and Common Law legislation, the South African Close Corporations Act of 1984 displays obvious North American influences, but there are also subtle influences from European civil law jurisdictions at show.

The South African legislators’ emphasis was on simplicity. They were looking to counteract the complexities of their current UK-based model with its “meaningless”[33] formalities and make it appeal to the unsophisticated business person. Some commentators recently questioned whether the developments were sufficient and have called for further reform[34] but again, much can be learnt from the reform methods employed by the South African legislators with their emphasis on simplicity and user friendliness.

However there has been a recent re-convergence in the legal approaches to company law in different jurisdictions. Other than former Commonwealth countries, it must be accepted that, as members of the EU Community, much could be gained from becoming familiar with the approach to directors’ duties favoured by other European Member States. An agreement on which duties directors of European companies should owe to their companies would not only aid cross-border trading but also the national competitiveness “of the Union as a whole in competition with other major trading blocks”.[35]

Company Law Harmonisation Programme

The UK’s decision to leave the issue of directors duties unresolved will become more evident in light of the European Union’s ongoing Company Law Harmonisation Programme which is meant to “promote the transnational activities of companies and offers individual shareholders and creditors equal protection”, but at the same time aims to “benefit the common market”.[36] Whereas the UK has endeavoured to implement all EU Directives, those relating to the issue of worker participation have failed. This derives from the stakeholder theory and the widely held emphasis on the “importance of inclusion - so that people have a greater sense of worth and well-being”.[37] It was established that the modern company is a “private corporation with public obligations”.[38]

CONCLUSION

Despite the faults inherent in any system aimed at regulating company directors, there are valuable lessons to be learned from the approaches of foreign jurisdictions. The UK could benefit from an organization like the Australian Securities Commission (ASC) which presides over the Australian Corporations Law. The ASC is part-modelled on the US’s Securities and Exchange Commission (SEC) and has wide powers of regulation and an important interventionist role with regards to delinquent directors. the problems of UK legislative complexity could be dealt with by observing the South African approach or by following recent Australian efforts to simplify their own legislation.

US experiences with the Business Judgement Rule may have illustrated that its employment in the UK would not raise the standard expected of directors in UK companies but is to be welcomed for the much needed guidance it provides to company directors on how they properly conduct themselves.[39] Canada and New Zealand too should be commended for their efforts in escaping the straightjacket imposed upon them by UK Company Law and formulating Company Law regimes that were effective, efficient and adaptable to changing commercial practices.

With respect to the complexity of contemporary China, economic growth is amongst the highest in the world. International trade now represents a quarter of the domestic gross profit even in the continuing ethos of socialist pragmatism. Meanwhile, the review of core UK Company Law could not have come at a better time. Its inherent defects were becoming more conspicuous as Company Law was increasingly placed under the public spotlight and the political interest in solving its problems reached its peak, a position directly reflected in the position within China as well.

The structure and legal basis of corporation law might be negligible in one jurisdiction or highly evolved in another, but economic success is dependent upon the same basic function in all societies despite these differences. This can be corroborated by China’s determination to achieve GATT Agreement sanctions which, although potentially more dependent on political considerations than on economic factors, verify the same basic function as Turkey’s determination to be accepted as one of the EU Member States: in this era of global industry it is essential for economic success for corporations to integrate despite their structural and legal differences in concepts of corporate enterprise.

Total Word Count (excluding footnotes and bibliography): 2,551

BIBLIOGRAPHY

Butcher, B S (2000): Directors’ Duties: A New Millennium, a New Approach. Hague: Klewer Law International

Crane, G T (1990): The political economy of China's special enterprise zones. Armonk, New York: Sharpe.

De Voe, R F (1991): The lure of the Chinese market: Across the Board, 51-52.

Farrar, J H and Hannigan, B M (1998): Farrar’s Company Law (4th ed). London: Butterworths

Finch, Vanessa (2002): Corporate insolvency law : perspectives and principles. Cambridge ; New York : Cambridge University Press, Pages 8 – 10

Gower, L C B (1954): The Principles of Modern Company Law. London: Stevens and Sons

Hicks, J (1982): Limited Liability: the Pros and Cons. In Orhnial, T (ed) Limited Liability and the Corporation. London: Croom Helm

Hsiao, G T (1990): The foreign trade of China [4th ed] Los Angeles: Huang

Lardy, N R (1995): Integrating China into the world economy. World of Banking 14(3) June/July Issue, Pages 16-17

Modern Company Law for a Competitive Economy, An International Survey of Companies Law in the Commonwealth, North America, Asia and Europe, DTI London, August 1998.

Murley, Richard [introduction] (2003): A Practitioners Guide to The City Code on Takeovers and Mergers 2003 – 2004. Button, Maurice [ed]. Old Woking, Surrey: City & Financial Publishing

Savada, A M, and Dolan, R E (1993): Education and Culture. In Worden, R L; Savada, A M; and Dolan, R. E. (Eds). China: A country study. (5th ed.) Washington: U.S. Government Printing Office, 150-204.

Starr, R (1995): East-West business transactions. (6th ed.). New York: Praeger Publishers, Page 90

Ziyu, G (1992): China's new economic policy. Vital Speeches of the Day October Pages 763-765.

Legislation

Consultation Paper No 153 [1999] at Page 7

The Kommissie van Ondersoek na die Maatskappywet issued two reports: the main report – Hoofverslag, RP 45/1970 and a supplementary report with a draft Bill - Aanvullende Verslag en Konsepwetsontwerp, RP 31/1972

The Law Society (UK) Company Law Committee, Memorandum, The Reform of Company Law, July 1991 at p.21.

(South African) Companies Act 1973, s.424

Online Resources.

Burdette, D; Boraine, A; Smith, A (2002): Business Rescue in South Africa. Paper prepared for a symposium hosted by the Asian Institute of International Financial Law at the University of Hong Kong, 7th October 2002. Available online at: http://law.hku.hk/aiifl/research/October%202002/Business%20Rescue%20in%20South%20Africa.doc.

Articles

Dine, J (1998): The Comprehensive Review of Company Law: The Consultative Document (1998) Co Law 19(3) 82 at 84

Drury, R (1992): A Review of the European Community's Company Law Harmonisation Programme (1992) 24 Bracton Law Journal 49 at 50

Du Plessis, J J (1993): Some International developments in Company Law: A South African Perspective (1993) Co Law 14(11) 224 at 224

Goldstein, C (1992). Changing showcase. Far Eastern Economic Review, 48-50.

Muchlinksi, P T (2002): Holding Multinationals to Account: Recent Developments in English Litigation. Company Law Review [2002] 23 (6) 168 at 178

Naudé, S J(1982): The Need for a New Legal Form for Small Businesses (1982) 4 MBL 5 at 6.

Pettet, B (1998): Towards a Competitive Company Law (1998) Co Law 19(5) 134 at 139

Sealy, L S (1987): Directors’ wider responsibilities – Problems, conceptual, practical and procedural. 13 MULR 164 at 170

Sealy, LS (1991): Reforming the Law on Directors’ Duties (1991) 12 Co Law 175 at 177

Sheikh, S (1995): Corporate Governance: Reflections on the American Law Institute Report (1995) ICCLR 6(7) 254 at 254

Table of Cases

Bligh v. Brent (2 Y & C Ex. 268), decided in 1837

Framlington Group plc v. Anderson [1995] 1 BCLC 475.

Ex parte the Lancaster Canal Co. (Mont & Bligh 94 [1828])

Salomon v. Salomon and Co. Ltd ([1897] AC 22

1


Footnotes

[1] The Law Society (UK) Company Law Committee, Memorandum, The Reform of Company Law, July 1991 at p.21.

[2] Modern Company Law for a Competitive Economy, An International Survey of Companies Law in the Commonwealth, North America, Asia and Europe, DTI London, August 1998.

[3] Consultation Paper No 153 [1999] at Page 7

[4] Farrar, J H and Hannigan, B M (1998): Farrar’s Company Law (4th ed). London: Butterworths

[5] Muchlinksi, P T (2002): Holding Multinationals to Account: Recent Developments in English Litigation. Company Law Review [2002] 23 (6) 168 at 178

[6] See Bligh v. Brent (2 Y & C Ex. 268), decided in 1837

[7] Gower, L C B (1954): The Principles of Modern Company Law. London: Stevens and Sons

[8] see Ex parte the Lancaster Canal Co. (Mont & Bligh 94 [1828])

[9] Scott, 1912, vol. I, p. 45

[10] Salomon v. Salomon and Co. Ltd ([1897] AC 22

[11] Finch, Vanessa (2002 ): Corporate insolvency law : perspectives and principles. Cambridge ; New York : Cambridge University Press, Pages 8 - 10

[12] Framlington Group plc v. Anderson [1995] 1 BCLC 475.

[13] Hoffman, LJ, 1994: 264

[14] Consultation Paper No 153 [1999] at Page 7

[15] Hicks, J (1982): Limited Liability: the Pros and Cons. In Orhnial, T (ed) Limited Liability and the Corporation. London: Croom Helm

[16] Finch, Vanessa (2002 ): Corporate insolvency law : perspectives and principles. Cambridge ; New York : Cambridge University Press, Pages 8 - 10

[17] Murley, Richard [introduction] (2003): A Practitioners Guide to The City Code on Takeovers and Mergers 2003 – 2004. Button, Maurice [ed]. Old Woking, Surrey: City & Financial Publishing

[18] Butcher, B S (2000): Directors’ Duties: A New Millennium, a New Approach. Hague: Klewer Law International

[19] Sealy, L S (1987): Directors’ wider responsibilities – Problems, conceptual, practical and procedural. 13 MULR 164 at 170

[20] Deputy Prime Minister and Minister for Foreign Affairs of the PRC

[21] United Nations Meeting, 1995: 53

[22] Savada, A. M., and Dolan, R. E. (1993). Education and culture. In Worden, R. L., Savada, A. M., & Dolan, R. E. (Eds.). China: A country study. (5th ed.) Washington: U.S. Government Printing Office, 150-204.

[23] De Voe, R. F. (1991, October). The lure of the Chinese market. Across the Board, 51-52.

[24] Hsiao, G. T. (1990). The foreign trade of China. (4th ed.). Los Angeles: Huang, Page 17

[25] Hsiao, G. T. (1990). The foreign trade of China. (4th ed.). Los Angeles: Huang, Page 19

[26] Starr, R. (1995). East-West business transactions. (6th ed.). New York: Praeger Publishers, Page 90

[27] Crane, G. T. (1990). The political economy of China's special enterprise zones. Armonk, New York: Sharpe, Page 66

[28] Lardy, N. R. (1995, June-July). Integrating China into the world economy. World of Banking, 14(3), 16-17)

[29] Goldstein, C. (1992, 5 November). Changing showcase. Far Eastern Economic Review, 48-50.

[30] Ziyu, G. (1992, 1 October). China's new economic policy. Vital Speeches of the Day, 763-765.

[31] The Kommissie van Ondersoek na die Maatskappywet issued two reports, the main report – Hoofverslag, RP 45/1970 and a supplementary report with a draft Bill - Aanvullende Verslag en Konsepwetsontwerp, RP 31/1972.

[32] (South African) Companies Act 1973, s.424

[33] Naudé, S.J, “The Need for a New Legal Form for Small Businesses” (1982) 4 MBL 5 at 6.

[34] See for example Du Plessis, J.J, “Some International developments in Company Law: A South African Perspective” (1993) Co Law 14(11) 224 at 224; or Burdette, D, Boraine, A, Smith, A, “Business Rescue in South Africa”, Paper prepared for a symposium hosted by the Asian Institute of International Financial Law at the University of Hong Kong, 7th October 2002. Available online at: http://law.hku.hk/aiifl/research/October%202002/Business%20Rescue%20in%20South%20Africa.doc.

[35] Dine, J, “The Comprehensive Review of Company Law: The Consultative Document” (1998) Co Law 19(3) 82 at 84.

[36] Drury, R, “A Review of the European Community's Company Law Harmonisation Programme” (1992) 24 Bracton Law Journal 49 at 50.

[37] Pettet, B, “Towards a Competitive Company Law” (1998) Co Law 19(5) 134 at 139.

[38] Sheikh, S, “Corporate Governance: Reflections on the American Law Institute Report” (1995) ICCLR 6(7) 254 at 254.

[39] Sealy, L.S, “Reforming the Law on Directors’ Duties” (1991) 12 Co Law 175 at 177.


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