CORPORATE GOVERNANCE IN CHINA

CORPORATE GOVERNANCE IN CHINA: THEN AND NOW（2）
Cindy A. Schipani Liu Junhai
H. Improve the Role of the Board of Supervisors The board of supervisors is an indispensable corporate body in the Chinese corporate governance structure. Pursuant to the Corporate Law, supervisors shall perform the following duties: (1) examine corporate financial affairs; (2) supervise directors and executives' breaches of statutes or memorandum of associations in performing their duties; (3) demand that directors and executives redress their misconduct damaging the corporate interest; (4) propose special meetings of the shareholders; and (5) other duties as stipulated in the memorandum of associations. Supervisors also have the power to audit the board of directors' meeting.[206] The board of supervisors includes shareholder representatives and certain employee representatives, with the percentage of representation of each group to be stipulated in the memorandum of association. The employee representatives are elected by the corporate employees in democratic elections.[207] In order to secure the impartiality of supervisors, "directors, executives or financial officers may not concurrently serve as supervisors."[208] As an efficient watchdog for the corporation and shareholders, the board of supervisors should obtain meaningful tools for confronting problems associated with insider control. However, the current supervisory mechanism is generally incapable of identifying and addressing managerial corruption. As a survey conducted by the State Committee of Economy and Trade indicated, some SOE-corporatized corporations have no board of supervisors, and one-third of those with a board of supervisors have difficulty performing their supervisory duties.[209] In the absence of meaningful supervisory mechanisms, many SOE-corporatized corporations have been faced with serious problems of corruption.[210] For instance, hundreds of millions of dollars of corporate funds were misused by the senior executives in Zhengzhou Baiwen Corporation in the Henan Province.[211] Therefore, further legislative reform with respect to rules governing the board of directors is necessary. First, having outside supervisors in the board of supervisors should be mandatory for large publicly held corporations. To achieve impartial supervision, the supervisors should be completely independent from the directors and executives. Supervisors should have strong expertise in essential matters, such as corporate management, corporate finance or business law. Second, the powers possessed by the board of supervisors should be redefined. The current supervisory powers recognized by the Corporate Law are of a postmortem and passive nature. To enable supervisors to obtain relevant and crucial information, the board of directors should be obligated to report to the board of supervisors on a regular basis. Moreover, the board of supervisors should have authority to take legal action against directors or executives on behalf of the corporation. The board of supervisors should become a corporate body between the shareholders and board of directors in the corporate hierarchy, and should hold the power to appoint and dismiss directors. The board of supervisors should also hold statutory decision-making powers with respect to fundamental investment decisions and transaction plans. In addition to comprehensive supervision over managerial activity, the board of supervisors should be required to oversee the financial and accounting activities. In order to fulfill their obligations, the board of supervisors should be permitted to employ outside advisers, such as lawyers, auditors, and accountants. In order to strengthen the State shareholder's supervision of SOEs, the State has begun to send special inspectors to supervise traditional SOEs and SOE-corporatized corporations.[212] The State Council appointed the first group of twenty-one special inspectors to large SOEs on April 28, 1998.[213] The main duties of the inspectors have been to conduct financial supervision of enterprise operations on behalf of the State, and evaluate the senior executives' performance in terms of legality and administrative capability. NEED CITATION The inspectors have not been involved in the production or management of the enterprises. NEED CITATION Vice-minister level officers are qualified to serve as special inspectors. NEED CITATION Each inspector has four special assistants who are chosen from officials with professional backgrounds in banking, finance, personnel, auditing and supervisory bodies, and macro-control agencies. NEED CITATION The inspector and four assistants form a special inspector's office and are generally responsible for supervising five enterprises. NEED CITATION The term of office for a special inspector and assistants is three years, and they may not serve a second term in the same enterprise. NEED CITATION Members of the special inspector's office cannot hold a position in the enterprise they supervise and may not accept any compensation, benefits, entertainment or gifts from the enterprise.[214] The inspectors have been very harsh in supervising and investigating the management of their supervised corporations. We propose that special inspectors should be replaced by the board of supervisors in the future. There is no need to have both supervisory authorities, provided that the board of supervisors actually functions as a supervisory body. I. The State as a Shareholder In China, the State acts as a majority shareholder in many listed corporations.[215] This situation will probably remain unchanged in the near future. State shareholder status may trigger a number of conflicts of interest—on the one hand, the government may be concerned about whether the State is sufficiently protected as a shareholder of the enterprise, and on the other hand, minority shareholders and potential investors may be concerned about potential misuse of the controlling shareholder position by the State.[216] Both concerns are understandable. Protective and restrictive mechanisms are, therefore, indispensable with respect to the State shareholder. 1. Conceptual Orientation: Differentiating the State Shareholders' Rights from Traditional Property Ownership There are three basic forms of State ownership in China: (1) traditional property ownership; (2) creditor's rights; and (3) shareholder's rights. Upon corporatization of SOEs, the State's property ownership over SOEs is that of a shareholder. As a shareholder, the State may not directly control, utilize or dispose of corporate property. The State shareholder may exercise its right to dividends and net assets, the right to governance participation, and other shareholder rights. When the State owns a large portion of the shares of SOE-corporatized corporations, it is very easy for the State (or the State agent) to exercise dominant influence on the corporation. The China Confederation of Enterprises Survey showed that "61.33% of respondent managers say that government and corporations need to be further separated, [and] 59.67% of respondent managers say that the establishment and duties of State shareholder's agents need further improvement."[217] As a feasible investment policy for State shareholders, shares held by the State exceeding a certain percentage might be required to be held as non-voting preference shares. Non-voting preference shares may be very helpful in preventing the State shareholder from misusing its controlling position, yet ensure the State's right to dividends and net assets. To facilitate the relationship between SOE-corporatized corporations and the State shareholder, it is essential for the State shareholder to respect corporate property rights. The Corporate Law provides that "a corporation, as a legal person, shall enjoy corporate property rights regarding all the properties formed by the shareholders' investments, and possess civil rights and bear the civil liabilities in accordance with the law."[218] The language "corporate property rights" was introduced for the first time in China by the Corporate Law. The Corporate Law also states that "the ownership of State-owned assets in a corporation shall vest in the State."[219] This statement is imprecise, or even misleading, because it ignores the difference between shareholders' rights and corporate property ownership. However, the Corporate Law also states that "a corporation shall, with all its corporate assets, operate independently and be responsible for its own profits and losses according to law. A corporation shall, under the macro-adjustment and control of the State, organize its production and operation independently in accordance with market demand for the purpose of raising economic benefits and labor productivity, maintaining and increasing the value of its assets."[220] This provision implies that the above-mentioned clause regarding vesting of State-owned assets was included in the Corporate Law to confirm the shareholder's rights enjoyed by the State—not to permit the State to take away the corporate property rights of the corporation.[221] 2. The Limited Scope of Wholly State-owned Corporations In China, "the State economy is over-distributed, with its overall quality not so high, and the distribution of resources is not reasonable enough, a situation which must be tackled with great effort."[222] Many Chinese SOE managers therefore prefer that SOEs withdraw from competitive industries. The Confederation of Enterprises Survey found that "81.29% of respondents prefer that the SOE withdraw from general competitive industries, 16.22% do not believe that the SOEs should withdraw from general competitive industries, and 1.87% prefer that SOEs withdraw even from the monopoly industries of the national economy, the people's livelihood and the national defense."[223] Thus, most respondents support the idea that in competitive industries, SOEs should be corporatized into corporations with multiple shareholders. This trend may help reduce the State's investment risks and create more investment opportunities for private investors. With respect to the question of the most suitable shareholder structure for SOE corporatized corporations, "63.88% of respondents prefer multiple shareholders, 22.55% prefer [a] State-invested corporation as the majority shareholder, 7.1% prefer [the] State as the majority shareholder, 6.47% prefer private shareholders, and 55.35% prefer most medium-sized and small SOEs to be transferred to individuals or partners."[224] The Chinese government also endorses the strategy of developing sound corporate governance by encouraging multiple shareholder structures in SOE-corporatized corporations. "Diversity of equities is conducive to the formation of a standardized corporate governance. It is necessary to develop corporations featuring multiple investing entities, except for a small number of enterprises that should be monopolized by the State."[225] Nevertheless, some SOEs have been restructured into wholly State-owned corporations.[226] One reason is that SOE managers prefer to maintain the traditional governance structure and government agencies prefer to maintain traditional control over wholly State-owned corporations. Another reason is the misinterpretation of the second paragraph of section 64 of the Corporate Law [227] which provides that "corporations manufacturing special products determined by the State Council, or corporations belonging to the category of specialized industries, shall take the form of wholly State-owned corporations." [228] The wholly State-owned corporation form should be restricted exclusively to industries promoting national and public interests. All other SOEs should be transformed into corporations with more than one shareholder, or to publicly held corporations, including listed corporations. To pursue this goal, it is necessary to relinquish the existing quota control regarding initial public offerings in the Chinese securities market and allow all corporations satisfying the statutory listing requirements to be listed at the securities exchanges.[229] The general principles and regulations governing the legal relationships between common shareholders should be equally applicable to the relationship between the State-shareholder and other shareholders. 3. Parent-Subsidiary Control The corporate bodies of some SOE subsidiaries are under the direct control of their parent corporation. In response to this problem, the CSRC requires listed corporations to be independent from their parent corporations in terms of "independent personnel (renyuan duli), independent assets (zichan wanzheng) and independent finance (caiwu duli). "[230] However, "the three separation requirements are insufficient, especially with respect to listed corporations with highly concentrated share-holding and listed corporations in the industries of steel, petrochemical and power."[231] The excessive connections between listed corporations and their parent corporations have caused serious problems for some of the creditors and the minority shareholders of these corporations. For instance, the 1999 annual report of Daqing Lianyi Co. revealed that the largest majority shareholder stole RMB 620 million Yuan from this corporation, accounting for 50% of its total corporate assets.[232] There are many reasons for the excessively close connection between listed corporations and their parent corporations. First, the shareholder structure of listed corporations is not diverse enough to prevent parent corporations from firmly controlling key decisions in their subsidiaries, including personnel decisions. In contrast, corporations with a highly diversified shareholder structure have clearer boundaries between their parent corporations and subsidiaries. Examples of corporations that clearly respect the boundaries between parents and subsidiaries include Shenwanke,[233] Aishi Gufen[234] and Fangzheng Keji.[235] Second, in order to reduce transaction costs, some listed corporations rely on the procuring and marketing networks established by their parent corporations.[236] Third, some listed corporations intentionally conduct business transactions with their parent corporations to present "satisfied profits." Fourth, most listed corporations, upon incorporating, were formally separated from their parent corporations but have always acted as small factories or small parts in the broader framework of the parent corporations. Thus, the parent corporations regard the listed corporations as small isolated islands within the parent corporations.[237] Fifth, some powerful executives act as Chair, CEO and Party Committee Secretary in both the subsidiary and the parent corporation. Their dual positions make it impossible to separate the listed corporations from their parent corporations.[238] Further, many people argue that "the separation between the listed corporations and the parent corporations will be a long and hard process,"[239] and thus "the excessive connections between them will not be fundamentally changed in the near future."[240] Yet, although Chinese legislation does not recognize veil-piercing theory, the doctrine of piercing the corporate veil might be imposed to hold the parent corporation accountable for the debts of the subsidiary in cases where the corporate boundaries are not respected.[241] 4. Transferability of State-owned Shares At the present time, there are various classifications of shares in Chinese listed corporations. Some shares are transferable, while others, including those owned by the State, are not. [242] As indicated in Table 1 below, the total nontransferable equity of listed corporations was 166.484 billion shares, accounting for 65.89% of the total equity of listed corporations at the end of 1998, including 86.551 billion shares owned by the government, 71.617 billion shares owned by legal persons,[243] and 8.317 billion shares owned by employees and others. Outstanding transferable shares amounted to 86.193 billion shares, but consisted of only 34.11% of the total equity of listed corporations. The transferable shares included 60.803 billion A shares, 13.395 billion B Shares and 11.995 billion H shares.[244] In 1999, the transferable shares increased slightly. Among the 260 billion shares of the total equity of the listed corporations, there were about 185 billion transferable, which accounted for 71.15% of the total equity of the listed corporations. About 90% of the nonnegotiable shares were State-owned shares and State-owned legal persons' shares.[245] Table 1 Share Structure of Listed Corporations[246] As of 12/31/98 　 No. of Shares (100MM) Nontransferable Shares 　Sponsor Shares 　　　　　　　Owned by Government 　　　　　　　Owned by Domestic Legal Persons 　　　　　　　Owned by Foreign Legal Persons 　　　　　　　Owned by Others 　Shares Placed to Legal Persons 　Shares Owned by Employees 　Others Sub Total 1,429.33 865.51 528.06 35.77 0.00 152.34 51.70 31.47 1,664.84 Tradable Shares 　A Shares 　B Shares 　H Shares 　Others Sub Total 608.03 133.95 119.95 0.00 861.93 Total 2,526.77 The non-transferability of State shares is proving detrimental to the growth of the Chinese securities market and devalues the State's shareholdings. Given that only one third of the total shares of the listed corporations are tradable, State shares should be freely tradable. This would not only benefit the State shareholder but also fundamentally stabilize the excessively speculative stock market in China. In 1999, as a first bold step, the Ministry of Finance permitted the State-owned shares to be reduced to 51%.[247] This is a welcome step. IV. Conclusion The first Chinese Corporation Law was enacted in January 1904, during the late Qing Dynasty. When the new China was founded in 1949, business corporations gradually disappeared. This was due to importation of the highly centralized economy model from the former Soviet Union. In the late 1970s, China started to introduce a market economy, SOEs were redefined as business corporations, and private corporations were incorporated. Among other things, the traditional Chinese SOE governance system was one of the major built-in institutional obstacles hindering profit-maximization at enterprise levels. In the period of the planned economy, SOEs were treated as a branch of government, and enterprise governance was nothing more than a part of the general system of government. The purpose of SOEs was thus to fulfill the production plans of the government agencies, not profit-maximization. SOE managers became accountable to government agencies rather than to the market. The SOE leaders were in essence government officials in terms of their responsibility toward their supervising government agencies, their official ranking and their promotion. The traditional enterprise governance regime is not compatible with the market economy that China is in the midst of developing. For instance, most traditional SOE leaders are likely to be loyal to their supervising government agencies and lack the expertise and experience needed to operate the SOE business in a competitive environment. The transition from the planned economy to a market economy requires reformation of the composition and function of SOE governance. Chinese policy and lawmakers have been struggling in their efforts to determine the optimal corporate governance model for Chinese SOEs. At first, Chinese SOEs were granted more autonomous powers, and SOE leaders were given more authority to manage SOEs with a view toward profit maximization. These legislative objectives are reflected in the SOEs Law of 1988[248] and the implementing regulations of 1992.[249] However, with general managers lacking any meaningful checks and balances from other interest groups within the SOE governance structure, it is not surprising that these leaders began to misuse their power. Compared with the traditional governance structure of SOEs in the period of the planned economy, the transitional governance structure of SOEs was even worse. The transitional SOE leaders had more managerial powers than their predecessors, as well as more resources, thereby facilitating embezzlement and misuse. Moreover, this period also included unnecessary and excessive government interventions. In addition, governmental agencies did not understand that their role as a shareholder of a business corporation was different than their role as a governmental agency. There were also no predictable or feasible institutional norms established to govern the relationship among governmental agencies, SOE leaders and other constituencies, such as employees. In short, the transitional governance structure represented a creative yet unsuccessful effort to restructure the SOE governance regime. In addition to frequently reported managerial corruption, the SOE governance regime was also marked by unsatisfactory financial performance. As indicated in a report of the China Enterprise Evaluation Association, the efficiency of China's top 500 industrial enterprises was much lower than the top 500 global companies.[250] The average ratio of profits to assets of the Chinese enterprises was 2.78%, compared to 11.29% for global companies in 1988.[251] The per capita income for Chinese enterprises was $27,456 (in USD) while their global counterparts enjoyed a per capita income of $288,855 (in USD) during the same period.[252] In another example, the average total assets and sales revenues of China's top 500 industrial enterprises in 1998 was $711.6 million and $398.1 million (in USD), respectively, accounting for a mere .88% and 1.74% of the top 500 global companies.[253] Although there are other factors contributing to this poor financial performance of SOEs, unsuccessful SOE governance played a substantially negative role. In light of the shortcomings within both its traditional and transitional governance structures, China has begun to look to the successful corporate governance role models in market economies and has begun implementing some common corporate governance norms (including general meeting of shareholders, board of directors and board of supervisors). In his government working report before the NPC on March 5, 2000, Premier Zhu Rongji promised that the "Chinese government will actively encourage multinational corporations to participate [in] the restructuring and transformation of SOEs."[254] Multinational corporations will be able to acquire State shares in the future. More liberalized policies are expected to attract foreign investors to enter the Chinese securities market after China enters the WTO. Corporatization reform will not, however, be successful without sound corporate governance. It is necessary for Chinese policy makers to consider the corporate governance structure as the core of the corporate system and clarify the duties of the various corporate actors, such as the shareholders, the board of directors, the board of supervisors and the executives.[255] It is hoped that by eliminating excessive governmental control, ensuring the government's interest as an investor, and effectively holding the management accountable, Chinese SOEs will become more successful and attractive to foreign investors. Good corporate governance in China, however, will not result from mere changes in the Corporate or Securities Laws. Good corporate governance will also depend heavily upon the successful reform of government agencies and the legal system. -------------------------------------------------------------------------------- * Professor of Business Law, University of Michigan; Area Director for Corporate Governance and Social Responsibility, William Davidson Institute at the University of Michigan Business School. J.D. 1982, University of Chicago; B.A. 1979, Michigan State University. ** Associate Professor of Business Law, Institute of Law, Chinese Academy of Social Sciences. J.S.D, Chinese Academy of Social Sciences, 1995. LLM, China University of Political Sciences and Law, 1992; LLB, Hebei University, 1989. The authors wish to gratefully acknowledge Dr. Erika O. Parker, the University of Michigan Business School and the William Davidson Institute for support of this project. [1]For instance, in May 1999, the Organization for Economic Cooperation and Development ("OECD") Ministers adopted the OECD Principles of Corporate Governance with the support of the G7 member governments, international organizations, the private sector, as well as the OECD's Business and Industry Advisory Committee and its Trade Union Advisory Committee. The G7 member governments include France, the United States, Britain, Germany, Japan, Italy, and Canada. The G7 or "Group of Seven" industrialized nations have been meeting annually since 1975 to deal with the major economic and political issues facing their domestic societies and the international community as a whole. For more information, see http://www.g7.utoronto.ca/g7/what_is_g7.html (last visited Oct. 8, 2001). These non-binding Principles are intended to serve as a reference point for countries' efforts to evaluate and improve their own legal, institutional, and regulatory framework. In June 2000, the OECD launched the OECD Steering Group, whose role is to guide the work on Corporate Governance. In the context of cooperation between the OECD and the World Bank, the OECD is also taking the lead in establishing a set of Regional Corporate Governance Roundtables. The Roundtables provide a framework for policy dialogue and multilateral exchange of experience between public and private sector experts. Four Regional Roundtables have already been established in Asia, Eurasia, Latin America, and Russia. See http://www.oecd.org/daf/corporate-affairs/governance/ (last visited Sept. 14, 2001). For further discussion of other various issues of global corporate governance, see, e.g., Lawrence A. Cunningham, Commonalities and Prescriptions in the Vertical Dimension of Global Corporate Governance, 84 Cornell L. Rev. 1133 (1999) (explaining traditional models of corporate governance and models for global corporate governance); Eileen M. Filliben & Michael D. Goldman, Corporate Governance: Current Trends and Likely Developments for the Twenty-First Century, 25 Del. J. Corp. L. 683 (2000) (discussing current trends in corporate governance and theorizing on the likely impact of those trends for the twenty-first century); Bernard Grossfeld, Loss of Distance: Global Corporate Actors and Global Corporate Governance—Internet v. Geography, 34 Int'l Law. 962 (2000) (discussing the effect of the Internet on global corporate actors and the importance of global corporate governance systems); Craig LaChance, Nature v. Nurture: Evolution, Path Dependence and Corporate Governance, 18 Ariz. J. Int'l & Comp. L. 279 (2001) (examining the last seventy years of corporate governance and discussing where corporate governance is headed); Amir N. Licht, The Mother of All Path Dependencies Toward A Cross-Cultural Theory of Corporate Governance Systems, 26 Del. J. Corp. L. 147 (2001) (discusses the growing awareness of the relevancy of national culture to corporate governance and introduces a framework for analyzing problems). [2]In addition to differences in corporate governance regimes existing between developing and developed countries, differences also exist among developed countries. For instance, the U.S., Germany, and Japan each has its own institutional features regarding corporate governance. See, e.g., Michael Bradley et al., The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads, 62 Law & Contemp. Probs. 9, 50-77 (1999); Timothy L. Fort & Cindy A. Schipani, Corporate Governance in a Global Environment: The Search for the Best of All Worlds, 33 Vand. J. Transnat'l L. 829, 842 -58 (2000). See also Brian R. Cheffins, Current Trends in Corporate Governance: Going From London to Milan Via Toronto, 10 Duke J. Comp. & Int'l L. 5 (1999) (discussing whether governance reforms in Canada are suitable for similar reforms in the United Kingdom and Italy); John H. Farrar, The New Financial Architecture and Effective Corporate Governance, 33 Int'l Law. 927 (1999) (discussing the impact of globalization on corporate governance and national corporate laws); Craig Ehrlich, Dae-Seob Kang, U.S. Style Corporate Governance in Korea's Largest Companies, 18 UCLA Pac. Basin L.J. 1 (2000) (examining the history of corporate governance in the United States and Korea, and then discussing the reforms that have been instituted or recommended in Korea over the past three years). [3]22 U.S.C. § 6901 (2001); H.R. 4444, Pub. L. No. 106-286, 114 Stat. 880 (2000), (enacted "[t]o authorize extension of nondiscriminatory treatment (normal trade relations treatment) to the People's Republic of China, and to establish a framework for relations between the United States and the People's Republic of China"), http://thomas.loc.gov/cgi-bin/bdquery/z?d106: HR04444:@@@L&summ2=m& (last visited Sept. 14, 2001). For details regarding PNTR issues, see http://www.uschina.org/ public/wto/archive. html#pntr (last visited Sept. 14, 2001). For coverage by the Chinese media, see Xinhua News Agency, Clinton Signs China Bill, Sends Barshefsky for Crucial Talks, China Daily, Oct. 11, 2000. [4]China is one of the founding members of the General Agreement on Trade and Tariffs (“GATT”), which was succeeded by the World Trade Organization (“WTO”). See General Agreement on Tariffs and Trade: Final Act Embodying the Results of the Uruguay Round of Trade Negotiations, Apr. 15, 1994, 33 I.L.M. 1125, art. III, 1145. Now as the world's tenth largest trading country, China seeks to enter the world trade body. See http://www1.chinadaily.com.cn/highlights/wto.html. According to Shi Guangsheng, minister of foreign trade and economic cooperation, China has been working to join the organization at the earliest possible date. China has virtually completed all bilateral negotiations with other member economies, although there are still several unresolved issues. Such issues include the implementation of agreements on agriculture and industrial subsidies and market accession to certain service trades. See Xinhua, Trade Minister: China's Stance on WTO Accession Unchanged, China Daily, Mar. 13, 2001. [5]For a discussion of the possible benefits (including investment opportunities) inured to the United States by China's WTO entry, see sources cited at http://www.uschina.org/public/wto/archive.html#pntr (last visited Sept. 14, 2001). [6]State ownership was considered the highest form of public ownership and the goal of socialism. To secure State ownership, different levels of legal validity were granted to different types of ownership. In other words, State ownership is superior to collective ownership, which is superior again to individual ownership. The rationale was to diminish the threat to State ownership from the private sectors. [7]For instance, Article 11 of the Chinese Constitution of 1982 provided for the existence of self-employed businesses, but not the existence of private businesses. On April 12, 2001, the NPC amended this Article to allow the existence and development of private businesses. However, this recognition carried some restrictions, as this amendment only considered private businesses as those that supplemented the socialist public-sector economy. These restrictions were lifted after the amendment of the Chinese Constitution in 1999. The amendments updated Article 6 of the Chinese Constitution of 1982 to read as follows: In the primary stage of socialism, [China] shall uphold the basic economic system in which public ownership is dominant and diverse forms of ownership develop side by side. It shall also uphold the distribution system with distribution according to work remaining dominant and with a variety of modes of distribution coexisting. This article supports the development of the non-State sector. The terms of Article 6 are reinforced by changes made to Article 11 of the Chinese Constitution of 1982 which states: "the non-public sector, including self-employed and private businesses, within the domain stipulated by law, is an important component of [China's] socialist market economy. The state shall protect the legitimate rights and interests of the self-employed and private enterprises, and China should also exercise guidance, supervision and management over them according to the law." Zhonghua Renmin Gongheguo Xianfa Xiuzheng (Amendments to the Constitution of People's Republic of China), passed by the NPC on March 15, 1999. [8]The traditional SOEs in the period of the planned economy were not regarded as independent legal persons. This is why the Decision of the Central Committee of Chinese Communist Party on Several Issues Concerning the Reform of the Economic System of 1984 found it necessary to offer a lengthy explanation on why traditional SOEs should become legal persons and gain more managerial powers to make them more competitive. See Zhonggong Zhongyang Guanyu Jingji Tizhi Gaige De Jueding (The Decision of the Central Committee of Chinese Communist Party on Several Issues Concerning the Reform of Economic System), Renmin Chubanshe (People's Press) (1984). The phrase "legal person" became a popular phrase associated with SOE reform in China only after this Decision was published in 1984. [9]Article 15 of the Chinese Constitution of 1982 declared that, "the State practices planned economy on the basis of socialist public ownership." Such language was replaced by "the State practices socialist market economy" when the NPC amended the Constitution on March 29, 1993. See Zhonghua Renmin Gongheguo Xianfa Xiuzheng (Amendments to the Constitution of People's Republic of China), passed by the NPC on March 29, 1993. [10]Prior to the Constitutional Amendments of 1993 referring to these entities as "State-owned enterprises," SOEs had been referred to as "State-managed enterprises" (Guoying Qiye). On March 29, 1993, the Constitutional Amendments adopted the language of "State-owned enterprises" to replace the old term of "State-managed enterprises." Liu Junhai, Gufen Youxian Gongsi Gidongqua De Baohu (Protection of Shareholder's Rights), The Press of Law 336 (Beijing, 1997), available at http://www.sinolaw.net.cn/wszh/fzjy/liujumhai/ljunhaizt04.htm. [11] Decision on SOEs Reform, 15th CPC Central Committee (Sept. 22, 1999) [hereinafter Decision on SOEs Reform], available at http://www.china.com.cn/focus/cpcdecision/text2.html;http://english.peopledaily.com.cn/199909/27/enc_19990927001005_Top News.html. (declaring that "official rankings should not be granted to enterprises and their leaders any more," meaning that SOE executives are no longer treated as government officials). [12]For instance, the typical traditional SOE offered housing benefits to their employees. American workers seldom enjoy such benefits. [13]For instance, the State Council enacted several provisions on expanding the autonomous managerial powers enjoyed by SOEs in 1979, enacted Provisional regulations on SOEs in 1983, and enacted several provisions on deepening enterprise reforms and increasing enterprise vigor in 1986. [14]Zhonggong Zhongyang Guanyu Jingji Tizhi Gaige De Jueding (The Decision of the Central Committee of Chinese Communist Party on Several Issues Concerning the Reform of Economic System), supra note 8. [15]Id. [16]This language was used only to qualify the language "dispose of," not "possess" and "use." [17]SOEs Law § 2 (1988). [18]Id. § 7. [19]Id. § 45. [20]Id. § 47. [21]Id. § 8. [22]Id. § 10. [23]Id. §11. [24]Ding Genxi & Zhang Jianping, Brave Exploration and Stable March: SOE Reform in Progress, Economic Reference Daily, Oct. 26, 1998, at 2. The State Council enacted the Provisional Regulations on Contracting Management System in SOEs on February 27, 1988. In 1994, the government required SOEs completing contracting terms to not renew contracts. Yang Peixin, Reexamination of Contracting System, Economic Reference Daily, Nov. 24, 1998, at 4. [25]The Provisional Regulations on Contracting Management System in SOEs § 14 (1988). [26]Id. §§ 26-28. [27]Id. § 30. [28]Id. § 5. [29]Peixin, supra note 24, at 4. [30]Genxi & Jianping, supra note 24, at 2. [31]Id. [32]Id. [33]Id. [34]Id. [35]The wording "modern enterprises" triggered heated debates regarding its exact meaning in China. "Modern enterprises" could refer to various enterprises existing in the modern market economy, including modern partnerships, modern co-operatives, modern proprietorship, modern corporations and other derivative enterprise forms, such as the European Economic Interest Groups (EEIGs) in the European Union. However, the most suitable modern enterprises for SOE restructuring are modern corporations, especially publicly held corporations, including listed corporations. [36]Decision on SOEs Reform, supra note 11. [37]Some Western scholars are inclined to use the term "privatization of SOEs" to describe the process of SOE reform. In China the term "corporatization of SOE" is used instead of "privatization of SOEs" in the official documents. One of the reasons is that corporatization of SOEs is not a tool for encouraging privatization, but rather a tool for "magnifying the functions of State capital." See id. [38]Under Article 57 of the Constitution of People's Republic of China of 1982 ("Constitution"), the NPC is "the highest organ of state power." Xianfa, art. 57, (1982). Pursuant to Article 62 (3) of the Constitution, the NPC has the power to enact and amend criminal law, civil law, state organ law, and other basic laws. Id. art. 62 (3). [39]Article 67 (2) of the Constitution gives the Standing Committee of the NPC the power to enact and amend laws other than those already enacted and amended by the NPC itself. Id. art. 67 (2). [40] The Corporate Law (Gongsi Fa) of 1993 [hereinafter Corporate Law], available at www.lawyers.com.cn/lawcom/lawcenter/lawcontent. jsp?lawid=931202 64. Corporate Law is the first comprehensive piece of legislation on business corporations since the founding of the People's Republic of China in 1949. [41]Securities Law of 1998, available at http://www.chinaonline.com/ refer/legal/laws_regs/pdf/pdf_e/securitylaw_a4.pdf. In addition, other legal sources include administrative regulations promulgated by the central government, the State Council and its ministries. In recent years, for example, the State Council promulgated two acts: the Special Regulations for Overseas Listed and Traded Shares of Corporations Limited by Shares (July 4, 1994), and the Regulations for Domestically-Listed Shares Held Overseas of Corporations Limited by Shares (Dec. 25, 1995), available at http://www.lawyers.com.cn/lawcom/lawcenter/lawcontent.jsp?law_id=95120216 (last visited Feb. 15, 2002). The State Committee of Economy and Trade and China Securities Regulatory Commission ("CSRC") promulgated the Measures on Further Promoting Standardized Operations and Deepening the Reform in Overseas-Listed Corporations (Mar. 29, 1999) [hereinafter Measures on Further Promoting Standardized Operations], available at http://www.csrc.gov.cn/ CSRCSite/eng/enews/efi1999060401.htm. Local legislatures also have power under the Constitution and the Legislation Law of 2000 to enact local regulations that do not conflict with national legislation. CITE/DELETE or id. [42]The Corporate Law requires that the Memorandum of Associations ("Memorandum") shall be formulated when a company is incorporated, and provides that it shall be binding on the company, its shareholders, directors, supervisors and managers. See Corporate Law §§ 11, 22, 29. [43]The CSRC promulgated two administrative regulations to provide the guidelines for listed corporations in the formulation of their Memorandum of Associations. The first guideline is The Indispensable Provisions of Memoranda of Associations in Overseas-Listed Corporations (Sept. 29, 1994), and the second is The Guidelines on Memorandums of Associations in Listed Corporations (Dec. 16, 1997) [hereinafter Guidelines on Memorandums]. The former deals with overseas-listed corporations and the latter with generally listed corporations. [44]For specific provisions regarding the general meeting of shareholders, see Corporate Law §§ 37-44, 102-110. For provisions concerning the board of directors, see id. §§ 45-49, 51, 68, 112-18. For provisions regarding the board of supervisors, see id. §§ 52-54. [45]For the legal status of the Chair, see id. §§ 45, 113-14. For the legal status of the CEO, see id. §§ 50, 69, 119. However, because the Chair is a member of the board of directors, and the CEO is an employee and agent of the corporation, they are generally treated within the framework of the three above-mentioned corporate bodies. Additionally, the Corporate Law provides that the vice-Chair of the board shall assist the Chair and shall, upon authorization by the Chair, perform the Chair's duties in the event the Chair is unable to do so. See id. § 114. In practice, the secretary of the board of directors of listed corporations is also an indispensable corporate position. The board secretary, however, is not recognized by the Corporate Law or the Securities Law. Instead, this function is required only by administrative regulations. CITE TO SUCH AN ADMINISTRATIVE REGULATION [46]German Stock Corporation Act (Aktiengesetz) (1965); Fort & Schipani, supra note 2, at 852; Bradley et al., supra note 2, at 52-53. See e.g., Thomas J. Andre, Jr., Some Reflections on German Corporate Governance: A Glimpse At German Supervisory Boards, 70 Tul. L. Rev. 1819 (1996) (exploring the composition of the supervisory boards of the largest German companies and attempts to document the frequency and extent of the supervisory board relationships among those companies); Susan-Jacqueline Butler, Models of Modern Corporations: A Comparative Analysis of German and U.S. Corporate Structures, 17 Ariz. J. Int'l & Comp. L. 555 (2000) (providing a detailed analysis of German and U.S. corporate law); David Charny, The German Corporate Governance System, 1998 Colum. Bus. L. Rev. 145 (1998) (discussing the basic features of German corporate governance); Jeffrey N. Gordon, Pathways to Corporate Governance? Two Steps on the Road to Shareholder Capitalism in Germany, 5 Colum. J. Eur. L. 219 (1999) (discusses the influence of cross-border stock mergers on the corporate governance landscape in the context of two recent transactions); Joaquin F. Matias, From Work-Units to Corporations: The Role of Chinese Corporate Governance in a Transitional Market Economy, 12 N.Y. Int'l L. Rev. 1 (1999) (exploring the tension between Chinese corporations and the government within the context of corporate governance); Oliver Seiler & Bernd Singhof, Shareholder Participation in Corporate Decisionmaking Under German Law: A Comparative Analysis, 24 Brook. J. Int'l L. 493 (1998) (discussing the structural rules that govern the decision-making power in German corporations). [47]Corporate Law §§ 38(2), (3), 103(2), (3). [48]German Stock Corporation Act (Aktiengesetz), §84 (1965); Fort & Schipani, supra note 2, at 852; Bradley et al., supra note 2, at 52-53. See also Andre, Jr., supra note 46; Butler, supra note 46; Charny, supra note 46; Gordon, supra note 46; Matias, supra note 46. [49]Corporate Law § 2. [50]The general meeting of shareholders, the board of directors and the board of supervisors are mandatory for both types of corporations. In both types, the board of directors and the board of supervisors function on an equal level, and are independent from each other. In both types, the general meeting of shareholders, as the supreme authority of the corporation, has indisputable power to hold the two boards accountable. Id. §§ 38-126. The wording used in the Corporate Law with respect to the duties of the general meeting of shareholders (§§ 38-103), the board of directors (§§ 46-112), the CEO, (§§ 50-119) and the board of supervisors (§§ 54-126) are substantially similar. [51]Id. § 51-52. [52]Id. § 41. [53]Id. § 35. [54]Id. § 64. [55]Id. § 66. [56]Id. [57]SOEs are governed by legislation predating the enactment of the Corporate Law: the SOEs Law of 1988. For instance, under the SOEs Law of 1988, an SOE is defined as "a socialist commodity production and operation unit which, shall make its own managerial decisions, take full responsibility for its profits and losses and practice independent accounting in accordance with law." See SOEs Law § 2. Although Article 2 of this Law recognized that "SOEs shall obtain the status of legal person in accordance with law and bear civil liability," it did not recognize SOEs as business corporations in the sense of western company law or even in the sense of the Corporate Law of 1993. Despite the fact that both SOEs and wholly State-owned corporations are invested in by the State or the government, SOEs under the regime of SOE Law of 1988 enjoy significantly fewer autonomous powers than wholly State-owned corporations under the Corporate Law of 1993. SOEs operating under the SOE Law of 1988 have neither a board of directors, nor a Chair of the board. The only power center is the general manager or CEO. See SOEs Law § 45. Under the Corporate Law, wholly State-owned corporations are required to establish a board of directors and a Chair of the board in addition to a CEO. China is now determined to "introduce standardized corporate system reform into large and medium-sized SOEs." Decision on SOEs Reform, supra note 11. In other words, large and medium-sized SOEs will be encouraged to be transformed into either wholly State-owned corporations, closely held corporations or publicly held corporations. [58]As the director of the State Council Office of Legislative Affairs indicated, [A]lthough the Corporate Law has clear provisions regarding the composition and function of the board of supervisors in closely held corporations and publicly held corporations, it is silent on the board of supervisors in wholly State-owned corporations. In reality, many financial and managerial problems exist in wholly State-owned corporations. Cui Shixin, Yang Jingyu Explains the Corporate Law Amendments, People's Daily, Dec. 18, 1999, at E. [59]Quanguo Renmin Dabiao Dahui Changwu Weiyuanhui Guanyu Xiugai Gongsifa De Jueding (The Decision on Amending Corporate Law by the Standing Committee of the NPC) (1999). [60]Id. [61]Id. The State Council is considered the central government in China. It is the supreme executive branch and is responsible to the NPC. [62]This Law was enacted by the NPC on April 12, 1986, available at LEXIS, China Law no. 345. [63]This Law was enacted by the NPC on July 1, 1979 and was amended by the NPC on April 4, 1990, available at LEXIS China Law no. 41. [64]This Law was enacted by the NPC on April 13,1988, available at LEXIS China Law no. 463. [65]Corporate Law § 18. [66]Wholly Foreign-invested Enterprise Law of 1986, supra note 62. [67]Chinese-foreign Equity Joint Ventures Law, supra note 63, § 4. [68]Id. § 6. [69]Id. § 4(1). [70]Chinese-foreign Contractual Joint Ventures Law, supra note 64, § 2(1). [71]Chinese-foreign Equity Joint Ventures Law, supra note 63, § 4(3). [72]Chinese-foreign Contractual Joint Ventures Law, supra note 64, § 22(1). [73]Chinese-foreign Equity Joint Ventures Law, supra note 63, § 4(3). [74]Chinese-foreign Contractual Joint Ventures Law, supra note 64, § 22(2). [75]See Chinese-foreign Equity Joint Ventures Law, supra note 63, § 6; Chinese-foreign Contractual Joint Ventures Law, supra note 64, § 12. [76]Corporate Law §§ 2-3. [77]Id. § 151. [78]See, e.g., Chapters 3, 4 and 5 of the Corporate Law of 1993. [79]See, e.g., Chapters 2, 3 and 4 of the Securities Law of 1998. [80]SOEs Law, supra note 17, § 9. [81]Each shareholder shall pay the capital contribution subscribed for under the articles of association of the company in full. If a shareholder makes its capital contribution in currency, it shall deposit the full amount of such capital contribution in currency in the interim bank account opened by the limited liability company to be established. If a shareholder makes its capital contribution in the form of material objects, industrial property rights, non-patented technology or land-use rights, the transfer procedures for the particular property rights shall be handled in accordance with the law. See Corporate Law § 25. [82]Id. [83]Corporate Law § 75. [84]Corporate Law § 159. [85]Survey Team of Reform in 100 Pilot SOEs & Cheng Yuan, Enterprises Demand Supportive Reforms, Jingji Ribao (Economic Daily), Jan. 10, 2000, at 5. [86]Id. [87]Id. [88]Id. [89]Id. [90]Id. Many SOEs at the local levels have also been corporatized. For example, approximately 40% of the large and medium-sized SOEs in the Liaoning Province have been transformed into corporations, twenty-six listed corporations have raised RMB 13.8 billion Yuan ($1.66 billion in USD) of capital by issuing stocks, and one-third of these enterprises were out of difficulty by September of 1999. See China Daily Briefs, State Firms Start to Make Profits, China Daily, Sept. 21, 1999. [91]China Confederation of Enterprises, The Comments and Proposals from SOE Managers, Zhongguo Jingji Shibao (China Economic Times), Sept. 2, 1999, at 5. [92]Id. [93]Id. [94]Zhao Huanxin, State Assets Need to be Restructured, China Daily, Sept. 22, 1999, at 5. Among over 238,000 non-commercial SOEs, only 170 SOEs are under the direct supervision of the central government. See Che Haigang & Bo Jingwei, Corporate Governance in SOEs Should not be too Exceptional, Zhongguo Jingji Shibao (China Economic Times), Jan. 21, 2000, at 2. [95]Zhao Huanxin, Training to Improve Management of SOEs, China Daily, Jan. 30, 1999. [96]Survey Team of Reform in 100 Pilot SOEs & Cheng Yuan, supra note 85, at 5. [97]Id. [98]Id. [99]Id. [100]Id. [101]Wang Yanchun et al., Listed Corporations Walking on the Old Way in New Shoes, Zhongguo Jingji Shibao (China Economic Times), Jan. 20, 2000, at 1. [102]See Chen Qingtai, The Chair is Not the Number One Leader in the Corporation, Renmin Ribao (People's Daily), Jan.10, 2000, at 12. [103]Wang Yanchun, supra note 101, at 1. [104]Chen Qingtai, supra note 102, at 12. [105]Wang Yanchun, supra note 101, at 1. [106]Id. [107]The subsidiary administrative regulation is called the Regulations on Transformation of Management Mechanism in the SOEs law of 1992. [108]Junhai, supra note 10. [109]Enterprise Needs Management Freedom, China Daily, Jan. 16, 1999, at 4. [110]China Confederation of Enterprises, supra note 91, at 5. [111]Id. [112]Id. [113]Id. [114]Id. [115]Id. [116]Id. [117]Id. [118]The most comprehensive official interpretation on the separation between corporation and government (Zhengqi Fenkai) reads as follows: The government performs the functions of shareholders in the SOEs or state share-holding corporations via its designated representatives, enjoys the rights to share profits from assets, make major decisions and select managers in accordance with the scale of investment, bears limited responsibilities for enterprises' debts, and will not interfere in the daily operations of enterprises. Enterprises will operate business independently according to law, pay taxes in accordance with relevant regulations, be responsible for preserving and increasing the value of the net assets of the owners, and not be allowed to tamper with the legitimate rights of the owners. In terms of personnel and financial management, Party and government agencies at different levels should fully separate themselves from the economic entities they run or enterprises they directly administer. Decision on SOEs, supra note 11. [119]See Measures on Further Promoting Standardized Operations, supra note 41 (stating: [T]he administrative subordinate relations between the Companies and government departments should be renounced and their relations in assets, finance, personnel management and other aspects must be thoroughly separated. Government departments are not allowed to interfere in the production and operational management of the Companies, and must not collect from the Companies [sic] management fees or supervisory fees in whatever forms.) [120]Professor Asbjorn Eide at Norwegian Institute of Human Rights described the responsibilities of the political states in promoting human rights as the obligation to respect, the obligation to protect, the obligation to facilitate, and the obligation to fulfill. See A. Asbjorn Eide, The Human Rights Requirements to the Social and Economic Development, Food Policy (London, Mar. 1996). See also, Liu Junhai, Legal Strategies for Preventing Financial Crisis, 1 Academic Journal of China Law Society (Beijing, 1999), available at http://www.sinolaw.net.cn/wszh/fzjy/liujum hai1junhaizt02.htm. [121]Decision on SOEs Reform, supra note 11. [122]Id. [123]Id. [124]Id. [125]Corporate Law §§ 37, 102. [126]Id. §§ 38, 103. In addition to the above-mentioned powers enjoyed by the general meetings of shareholders in both closely and publicly held corporations, the meeting of shareholders in closely held corporations enjoys two extra powers, including the power "to adopt resolutions on the assignment of capital contribution by a shareholder to a person other than the shareholders," and "to adopt resolutions on the change of corporate forms." Id. § 38. These two powers are not available to the shareholders in publicly held corporations. Shareholders in publicly held corporations enjoy more freedom in transferring their shares to third parties. Privately held corporations may be transformed into publicly held corporations, while publicly held corporations may not be transformed into privately held corporations. [127]Zhonghuo Renmin Gongheguo Xianfa [Constitution of the People's Republic of China] art. 57 (1982). [128]Id. art. 3. [129]Chen Hongyu, Boring General Meetings of Shareholders, China Securities Daily, May 11, 2000. [130]Id. [131]Id. [132]Id. [133]Id. [134]Id. [135]Chen Xue, Meetings of Shareholders are Not Silent, Zhongguo Zhengquan Bao (China Securities Daily), June 1, 2000, at 1. [136]Id. [137]Id. [138]Standard Opinions on Meeting of Shareholders in Listed Corporations (2000) [hereinafter Standard Opinions], available at http://www.peopledaily.com.cn/zcxx/2000/05/052611. html (last visited Sept. 16, 2001). [139]Id. § 19. [140]Id. [141]Zhou Dao, Shareholders May also Convene Meeting of Shareholders, Zhongguo Zhengquanbao (China Securities Daily), Sept. 28, 2000, at 7. [142]Id. [143]Id. [144]Standard Opinions, supra note 138, § 34. [145]Corporate Law § 110. [146]Melvin Aaron Eisenberg, Corporations and Other Business Organizations 157-62 (8th Ed. 2000). [147]Corporate Law § 114. [148]Id. [149]Id. [150]Corporate Law § 113. [151]Id. § 120. However, the Chair may not exercise these powers unless he or she has valid authorization from the board of directors. [152]Id. § 117. [153]Id. [154]The CEO enjoys great statutory managerial powers, including but not limited to the responsibility of directing corporate production, operation and management; organizing the implementation of resolutions of the board of directors; and organizing the implementation of annual corporate business plans and investment plans, etc. The CEO is also entitled to observe the meetings of the board of directors. See id. § 119. [155]Id. [156]Id. §§ 50, 119. [157]Id. § 119. [158]This problem has been identified by other authors. See, e.g., Chen Qingtai, supra note 102, at 12. [159]Model Bus. Corp. Act §8.01(b) (1999). [160]Principles of Corporate Governance, Analysis and Recommendations §3.02 (1994). [161]Model Bus. Corp. Act, Official Comment to §8.25 (1999). [162]China Securities Regulatory Commission, supra note 41 §5. [163]Model Bus. Corp. Act §8.25(f). [164]See Zhang Yiyong, Independent Directors Should not Become the "Deaf Ears", Jingji Ribao (Economic Daily), July 10, 2000, at 2. [165]China Securities Regulatory Commission, supra note 41, §6. This document defines "outside directors" as "directors who do not hold posts within the corporations," and defines "independent directors" as "directors independent of the shareholders of the corporations and holding no positions in the corporations." Thus, it seems that this document subclassifies outside directors into the categories of independent directors and non-independent directors. [166]Id. [167]Id. [168]Guidelines on Memorandums, supra note 43, § 112. [169]The Basic Regulations for Large and Medium-Sized SOEs to Build up Modern Enterprise System and Strengthen Governance § 7 (2000). [170]Zhang Wei, Lanzhou-Based Huanghe Corporation: A Big Mess, Zhongguo Jingji Shibao (China Economics Times), Jan. 11, 2001, at 2. [171]Zhang Yiyong, supra note 164, at 2. [172]Luo Xinyu, Embarrassed Independent Directors, China Youth Daily, Jan. 13, 2000. [173]Id. [174]Id. [175]Id. [176]Ding Pinyu, How to Make Supervision Effective in SOEs, Renmin Ribao (People's Daily), June 9, 1998, at 11. [177]Id. [178]Cui Shixin, Do not Put the Fate of an Enterprise into One Person's Hand, Renmin Ribao (People's Daily), Apr. 21,1998, at 11. [179]Pinyu, supra note 176, at 11. [180]Shixin, supra note 178, at 11. [181]Id. [182]Id. [183]Zhang Zhuoyuan, Which Sort of Corporate Governance Structure will China Need? China Economic Daily, Apr. 19, 2000, at 5. [184]Id. [185]Pinyu, supra note 176, at 11. [186]Id. [187] Shixin, supra note 178, at 11. [188]China Confederation of Enterprises, supra note 91, at 5. [189] Cindy A. Schipani, Integrating Corporate Law Principles with CERCLA Liability for Environmental Hazards, 18 Del. J. Corp. L. 1, 11-22 (1993); Michael Bradley & Cindy A. Schipani, The Relevance of the Duty of Care in Corporate Governance, 75 Iowa L. Rev. 1, 16-28 (1989). See e.g., Harry G. Hutchison, Presumptive Business Judgment, Substantive Good Faith, Litigation Control: Vindicating the Socioeconomic Meaning of Harlan v. Brown, 26 Iowa J. Corp. L. 285 (2001) (looking at a recent Massachusetts Appeals Court case that amplifies a debate as to whether courts should engage in a procedural or a substantive review of the board's attempt to control litigation); Robert Cooter & Bradley J. Freedman, The Fiduciary Relationship: Its Economic Character and Legal Consequences, 66 N.Y.U. L. Rev. 1045 (1991) (describing different economic risks and how the duty of loyalty and duty of care affects these risks). [190]Shixin, supra note 178, at 11. [191]Corporate Law §§ 59-63. [192]See id. §§ 214-215. [193]Principles of Corporate Governance § 4.01(a) (1994). [194]See Eisenberg, supra note 146, at 651-66; Harvey Gelb, Corporate Governance Guidelines—A Delaware Response, 1 Wyo. L. Rev. 523 (2001) (examining governance guidelines involving board independence and director liability for breaches of fiduciary duty); Kenji Utsumi, The Business Judgment Rule and Shareholder Derivative Suits in Japan: A Comparison with Those in the United States, 14 N.Y. Int'l L. Rev. 129 (2001) (discussing the legal practice of and issues in shareholder derivative suits in both the United States and Japan); William S. Laufer, Corporate Liability, Risk Shifting, and the Paradox of Compliance, 52 Vand. L. Rev. 1343 (1999) (discussing the evolution of corporate criminal law in the United States, the evolution away from entity liability, and the emergence of the good citizen corporation movement). [195]Japanese Commercial Code §§ 267-268(a-c) (1950). [196]Zhou Hanmin, Consciousness is not the Most Reliable Stuff: Perspective on the Values of the SOE Managers, 1 Window of South Wind 6 (China, 1999). [197]Id. [198]Id. [199]Liu Jie, State Firms Offered Stock Options, China Daily, Jan. 25, 2000. [200]Id. [201]Id. [202]Id. [203]Id. [204]Id. [205]Jing Xian, Officials Awarded Shares, China Daily, Jan. 21, 1999. [206]Corporate Law §§ 54, 126. [207]Id. §§52, 124. [208]Id. [209]Survey Team of Reform in 100 Pilot SOEs & Cheng Yuan, supra note 85, at 5. [210]Id. [211]Corporatization Should not Become A Camouflage, Jingji Ribao (Economic Daily), Nov. 2, 2000, at 6. [212]Xinhua News Agency, Premier Highlights Role of New System: Inspectors to Assist Reform, China Daily, May 11, 1998. [213]Id. [214]Id. [215]As of June 2000, there were 999 A or B Share listed companies, with a total market capitalization of 4069 billion Chinese Yuan (about 500 billion USD), negotiable market capitalization of 1322.909 billion Chinese Yuan (about 160 billion USD), and stock turnover of 608.455 billion Chinese Yuan (about 72 billion USD). In aggregate, there are about 51.3034 million securities investors. See http://www.csrc.gov.cn/CSRC site/eng/tongjiku/199908/ ehtml/y2000/07/a200007.html (last visited Sept. 16, 2001). [216]See Office of Investment AFL-CIO, The Initial Public Offering of Petro China: A Report by the AFL-CIO's Office of Investment, PetroChina Watch, at http://www.petrochinawatch.com/ipo/ (last visited Sept. 16, 2001). [217]China Confederation of Enterprises, supra note 91, at 5. [218]Corporate Law § 4. [219]Id. [220]Id. § 5. [221]In the end, the legislative language should be further refined when the Corporate Law of 1993 is amended. For instance, a more suitable term such as "corporate property ownership" should replace "corporate property rights." Similarly, the phrase "the ownership of State-owned assets in a corporation shall vest in the State" should be deleted in order to permit the existence of sound corporate property ownership. [222]Decision on SOEs Reform, supra note 11. [223]China Confederation of Enterprises, supra note 91, at 5. [224]Id. [225]Decision on SOEs Reform, supra note 11. [226]Qingtai, supra note 102, at 12. [227]Corporate Law § 64. [228]Further interpretation of the phrase "special products" is expected. The Decision on SOEs Reform declared that "industries and sectors that need to be controlled by the State economy include: industries that are related to State security, are naturally monopolized, that supply major products and services to the public, and pillar industries and backbone enterprises in high and new technology sectors. In other industries and fields, the entire quality of the State economy could be improved through regrouping the assets and readjusting the structure to centralize their capacity and strengthen the key SOEs." Decision on SOEs Reform, supra note 11. However, it does not provide an exact definition for the term "special products." Rather, it lists the industries in need of control by the State. See id. The exact meaning of "special products" should be interpreted as flexibly as possible so as to accommodate industry changes. [229]Under current practice, there are annual ceiling requirements regarding the number of newly-listed corporations. Consequently, not all the corporations satisfying the statutory listing requirements are permitted to be listed on the securities exchanges. NEED CITATION [230]Guanyu Dui Ni Faxing Shangshi Qiye Gaizhi Qingkuang Jinxing Diaocha De Tongzhi (The Notice on Survey of Restructured Enterprises Proposed to be Listed) of 1998; Guanyu Shangshi Gongsi Peigu Gongzuo Youguan Wenti De Tongzhi (The Revised Notice on Distribution of New Shares in Listed Corporations) of 1999. [231]Wen Che, Prevent the Insider Trading by Multiple Means, Zhongguo Zhengquanbao (China Securities Daily), Apr. 19, 2000, at 7. [232]Id. [233]Id. [234]Id. [235]Id. [236]Id. [237]Li Yinghong, Hard Porridge: The Obstacles Against the "Three-Separations" and Relevant Proposals on Venture Shares (Sept. 16, 2000), at http://business.sohu.com/20000906/file/203,000,100124.html.. [238]Id. [239]Id. [240]Che, supra note 231, at 7. [241]The issue of piercing the corporate veil is raised at different levels in China. Since Shenzhen is a Special Economic Zone in China, and its local congress enjoys certain legislative powers, some representatives at Shenzhen People's Congress proposed in early 2000 that this local congress should authorize the Court to apply the doctrine of piercing corporate veil on a pilot basis. See Wang Li, Guanyu Jianyi You Renda Shouquan ShifaYuan Shixing Faren Zige Fouren Zhidu De Yijian [Proposal on Authorizing the Courts by the Shengzhen Congress to Apply the Doctrine of Piercing Corporate Veil on Pilot Basis], at http://rdcwh.sz.gov.cn/RDconference/dhwj/gg06171.htm (June 16, 2000). For a discussion of veil piercing theory in the United States, see Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. Corp. L. 479 (2001) (discussing the history of limited liability and the veil piercing doctrine); John H. Matheson & Raymond B. Eby, The Doctrine of Piercing the Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving Owners' Limited-Liability Protection, 75 Wash. L. Rev. 147 (2000) (describing the history of veil piercing analysis and a proposal for an improved approach); Douglas C. Michael, To Know a Veil, 26 J. Corp. L. 41 (2000) (discussing the history and origins of veil piercing analysis as well as modern analysis); Dana M. Muir & Cindy A. Schipani, The Intersection of State Corporation Law and Employee Compensation Programs: Is it Curtains for Veil Piercing?, 1996 U. Ill. L. Rev. 1059 (1996); Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036 (1991) (empirical study evaluating piercing the veil cases). [242]A shares and B shares are divided based on citizenship differences of the investors. Therefore, a listed corporation could issue both A shares and B shares. A shares are domestically-invested shares issued domestically by Chinese corporations. B shares are foreign-invested shares issued domestically by Chinese corporations. B shares are also known as "Renminbi Special Shares." B shares are issued in the form of registered shares and carry a face value denominated in Renminbi. B shares are subscribed and traded in foreign currencies, listed and traded in securities exchanges inside China. According to scholars, "[a]lthough owners of the A and B shares share equal rights in the same companies, they react to different underlying forces." Hung-Gay Fung, et al., Segmentation of the A- and B-Share Chinese Equity Markets, 23 J. Fin. Res. 179, 193 (2000). This research argues that "the segmentation of the A and B markets in China seems to provide profitable opportunities to U.S. companies that have access to both markets as the Chinese government" deregulates the financial markets or "loosens its regulation of the financial markets." Id. [243]Theoretically speaking, most legal person shares belong to the State. [244]H shares are foreign-invested shares issued by Chinese domestic corporations, but listed at the exchanges in Hong Kong. For similar reasons, the foreign-invested shares issued by Chinese domestic corporations, but listed at the New York Stock Exchanges, are called N shares. [245]Yin Guohong, Stock Market Structure in 2000 Needs More Changes, Zhongguo Jingji Shibao (China Economic Times), Jan. 3, 2000, at 3. [246]China Securities regulatory commission, Introduction to China's Securities market, see http://www.CSRC.gov.cn/CSRCsite/eng/ esmintr.htm (last visited Sept. 16, 2001). [247]Id. [248]SOEs Law § 1. [249]The Regulations Concerning Transformation of Management Mechanism in SOEs §1 (1992). [250]Zhu Qiwen, Catch up by Raising Efficiency, China Daily, Jan. 17, 2000. [251]Id. [252]Id. [253]Id. [254]Zhu Rongji, Government Working Report, submitted to the 3rd session of the National People's Congress on March 5, 2000, available at http://www.peopledaily.com.cn/zgrdxw/lianghui/news/0317/031701.html (Mar. 17, 2000). [255]See Decision on SOEs Reform, supra note 11.