Strengthening the Regulation of Affiliated Transactions

An affiliated transaction is a special type of self-transaction involving a conflict of interests. A fair affiliated transaction can stabilize a company's business and reduce transaction costs, which is beneficial to the company's development, and therefore the PRC Company Law (Company Law) (中华人民共和国公司法) does not simply prohibit such activity. Nevertheless, affiliated transactions are a double-edged sword. For the purpose of misappropriating company funds and transferring the profit, the management, controlling shareholder or de facto controller of a company might seek to take advantage of its affiliated relationship with, or controlling position in, the company to demand that the company engages in unfair affiliated transactions with it or other affiliated parties. This would severely prejudice the interests of the company and minority shareholders as well as the company's creditors. Article 21 of the Company Law specifies that an affiliated party will bear liability if it uses its affiliation to prejudice a company's interests. However, it can be complex to identify affiliated transactions and therefore difficult to regulate unfair affiliated transactions by way of court actions under the existing legal system. To address this difficulty, the Supreme People's Court promulgated the Provisions on Several Issues Concerning the Application of the (5) (Judicial Interpretation V) (关于适用<中华人民共和国公司法>若干问题的规定（五）) on April 28. The interpretation is expected to further restrict affiliated transactions by refining liability for compensation of the affiliated transactions and expanding the scope of application of shareholder representative litigation.