Articles CHINA'S CORPORATIZATION EXPERIMENT FANG LIUFANG* I. INTRODUCTION The corporatization of state-owned enterprises (SOEs) began as a self-initiated experiment by a group of small-scale state enterprises. Later it became a limited experiment under the control of the govern- ment, and finally was allowed to spread to the entire country. From 1984 when the first joint-stock company was established in Shanghai, until 1993 when various provinces obtained quotas to openly issue shares, China has gradually formed a corporate law framework. This framework-which constrains company formation, financing, manage- ment, and the mechanisms for issuing and trading shares-comprises law (falii), regulations (fagui), rules (guizhang), customary practices (guanli),and institutionalized state practices related to corporatizaton. It is difficult to understand the current legal framework without taking into consideration its context. From the beginning, the transitional economy produced by China's economic reforms has been characterized by a series of intense conflicts: between the divergent * Professor of Law, China University of Political Science and Law. L.L.M., Ph.D., People's University. In addition to his current appointment as professor in the Civil Law Teaching and Research Group of China University of Political Science and Law, Fang practices law. He was also part of the academic panel consulted on the drafting of the Company Law by the Legislative Affairs Commission of the National People's Congress. Professor Fang would like to express his sincere appreciation to Professor Jonathan Ocko who solicited this Article for the Duke Journalof Comparative and InternationalLaw and to Laurent M. Campo, Editor-in-Chief of the Journal,who together with Professor Ocko oversaw its translation from Chinese, its editing, and publication; to the translators, Xue Feng, Liu Shuang, and Jonathan Ocko; to Ms. Sun Zhiping of China Law Publishers for her helpful sugges- tions and substantial editorial work on the Chinese version; to Mr. Zhuang Mu of the China Securities Regulatory Commission and Professor Xu Bing of the Law Research Institute of the Chinese Academy of Social Sciences for written and oral information. Finally the author thanks the Asian Development Bank for its support of the 1994 research project on "Reform of China's State Enterprises." The author's participation in the project enabled him to conduct substantive investigations of state enterprises in Shanghai, Shenyang, and Chongqing. 150 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol. 5:149 orientations of market and planned economies; between the disparate interests of decentralization and re-centralization; between appeals for contractual autonomy and the persistence of state control; and between transplanted law and indigenous circumstances. Instead of accommodating the diversity of interests and varieties of circumstanc- es while maximizing individual and local autonomy, the current legal framework aims to unify and normalize (guifanhua) by shaping this unprecedented nation-wide experiment to a previously designed system. The ambitious endeavor of legal normalization and unifica- tion results in an omnipotent state that mandates artificial transforma- tion of social structure and individual life according to an ideal model designed by a select group of elites. This approach both replicates the features of a planned economy and totally disregards the possibility that the benefits will be substantially outweighed by the cost. This Article is intended to elucidate a number of questions: Does this legal framework comport with China's goal of developing a "socialist" market economy? What influence has it and will it have on corporatization? Until now, has China depended on legal reform to form procedures and rules of behavior that differ from those during the time of a planned economy? What sort of influence will the Company Law, which took effect on July 1, 1994, have on the current legal framework? Are there new directions that will help China improve the current legal framework and resolve the problems created as China goes through the process of trying to find its way down the road from planned economy to privatization? It is my firm belief that in exploring the above questions one must thoroughly study promulgated written laws and the background that produced them. But it is often unreliable to base one's descrip- tion, analysis, and judgments solely on written law. In reality not all efficacious rules ineluctably become written law. This circumstance arises not simply because legislators cannot anticipate all the legal questions that may arise, but also because of the gap between reality and the written law. Written law that has taken effect is not in fact always efficacious, and concrete legal problems often are resolved by following rules that are outside the written law. Procedural questions are frequently settled by force of inertia (an organization or an organization's power). This sort of administrative influence will not disappear simply because a law has been issued. Moreover, the reliability of rules lies not in how they are expressed in legal provisions, but rather in whether they are helpful to people in resolving the actual problems that confront them. Therefore, this 1995] CHINA'S CORPORATIZATION EXPERIMENT Article gives equal attention to the legal questions raised by disputes among the participants in the corporatization experiment and to how these legal questions may be resolved. The Article also attempts to identify in the facts of the disputes, questions worth considering that the participants themselves have not raised. Part II of this Article examines the formation of the legal framework in the course of the experiment in corporatization. Part III addresses the classification of stocks and the market accessibility of different kinds of stocks. Part IV considers the relationship between the shareholding rights and the power to control. Part V analyzes the litigation concerning Yuanye Industrial and Runtao,' and thereby demonstrates how law becomes reality through adjudica- tion. Part VI is an examination of the relationship between the Company Law and the prior legal framework as well as the extent to which the Company Law will change it. Part VII both concludes the Article and provides several suggestions for addressing some of the problems elucidated in this Article. II. EXPERIMENTATION IN CORPORATIZATION AND THE FORMATION OF A LEGAL FRAMEWORK A. Primitive Experiments and Local Legislation In the mid 1980s the central government's decision to tighten the money supply forced state enterprises to find ways to raise funds other than through bank loans. One approach was through corporate restructuring. Some SOEs first reorganized themselves into "joint operations" (lianying) and then transformed themselves into "share- holding system enterprises" (gufenzhi qiye) open to investment by individuals. The earliest steps in this direction were taken during 1984 and 1985 by SOEs in southern China's Special Economic Zone and in the northeastern industrial city of of Shenzhen,2 in Shanghai, Shenyang. 1. In the English language press, Yuanye Industrial is also known as Champaign Industrial, and Runtao is known as Panco. For a narrative account of the case, see, for example, Christine Chan, Ousted Pancofights Champaign deal, South China Morning Post, Sept. 7,1993, available in LEXIS, News Library, ARCH File. 2. "Joint operation" (lianying) was established on the basis of two sets of rules issued by the State Council: the Guanyu tuidong jingji lianhede zanxing guiding of 1980 [Temporary Provisions Concerning the Advancement of Joint Economic Entities] and the Jinyibu tuidong hengxiang jingji lianhe ruogan wenti of 1986 [Several Provisions on the Further Advancement of Horizontal Economic Associations]. The "joint operation" stipulated in articles 51-53 of the 152 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol. 5:149 Compared to the so-called "standardized" companies, that is, companies listed in the 1990s under the Opinions on Standards for Limited Liability Joint-stock Companies3 (the Standards Opinion), these early experimental companies were distinguished by their dispersed stock ownership and small scale. For example, Yanzhong, Feile Audio, and Aishi-the three joint-stock companies incorporated in Shanghai-had total capital of RMB 5 million, RMB 500 thousand, and RMB 300 thousand respectively. The percentage of shares held by individual investors was 94%, 70%, and 69%, respectively. There are respectively 16,000, 500, and 300 individual shareholders of each GeneralPrinciples of the Civil Law (promulgated in 1987), in fact include corporate, partnership, and contractual forms of cooperation. From 1980-84, 26,000 enterprises registered as "joint operation." See Gongshang xingzheng guanli zazhi [Industrial and Commercial Administration] 1985, at 35. The very first enterprise in the country to issue shares to the public-Shanghai Feiyue Acoustics-was originally established in August 1980 as a "joint operation." The State Commission for Reform of the Economic System proposed that "among horizontal joint operation and collective enterprise groups and newly established enterprises, the share system should be promoted." See Fagui Huibian [Compilation of the new laws and regulations of the People's Republic of China], 1988, vol. 1, at 272. We can see that "joint operation" played an accelerating role in the development of the share system. The favorite word of