Compulsory Acquisition of Shares in Limited Liability Company;An Analysis of Article 89(3)of the Chinese Company Law
To more effectively deal with shareholder oppression in limited liability com-panies,Article 89(3)of the newly revised Chinese Company Law provides that shareholders who have suffered serious damage due to the abuse of shareholder rights by controlling share-holders can apply for compulsory acquisition of shares.In common law,this remedy is also known as"buy-out order"or"buy-out remedy".Because of its institutional purpose to regulate the abuse of shareholder rights and protect oppressed shareholders and its constituent elements and legal effects different from those of the dissenting shareholder appraisal right prescribed in paragraph 1 of this article,this remedy should be distinguished from the dissenting shareholder appraisal right.In legal interpretation theory,this distinction means that legal dogmatics should be independently constructed for Article 89(3).When oppressed shareholders sue for compul-sory purchase,the court needs to determine whether the controlling shareholder's act consti-tutes an abuse of shareholder rights,whether the interests of minority shareholders have been in-fringed upon,and whether the damage is serious enough:the controlling shareholder'abuse re-fers to the illegality of his or her behavior,which can be determined by"subjective illegality","direct violation of law",or"superficial legality but substantial breach of fiduciary duties";the protected interests of shareholders are not only explicitly defined in a company's article of association or shareholder agreement but may also exist in the informal understanding among shareholders;and"serious damage"means that minority shareholders'interests have been damaged to such an extent that they would not be sufficiently protected unless compulsory acqui-sition of their shares is ordered.When determining a"reasonable price",the court may consid-er adopting a time-limited mediation mechanism to encourage the parties to negotiate.When the parties cannot reach an agreement,the benchmark date and the method of evaluation should be determined based on the inherent requirement of fairness and reasonableness,and discount should not be considered in principle.But if there is an agreement between the parties on price,the agreement should be followed in principle.To implement the normative intention of this pro-vision,the court should expansively interpret the responsible party,the legal effect,and the subject of right:a shareholder should be allowed to request the court to order the controlling shareholder to undertake its compulsory purchase liability;minority shareholders should be al-lowed to sue for compulsory purchase of controlling shareholder's shares;and a shareholder should be allowed to sue for compulsory acquisition of shares against a non-controlling share-holder'abuse of shareholder rights.In specific cases,the court should,based on the analysis of the aforementioned three elements,contextually judge whether and how to expand the appli-cation of Article 89(3).
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