Corporate Groups and Strategic Alliances: New Reform Instruments to the Chinese

Abstract

The advent of corporate groups is the result of corporate development. A corporation can become a shareholder of other corporations by purchasing their shares. By the holding and cross-holding of shares, a number of companies connected together may form a corporate group. The controllers of the group may plan, instigate and co-ordinate its managerial, operational and financial activities on a group basis, while implementing these activities through individual group companies. In doing so, the corporation can enjoy the advantages of maximizing financial returns, limiting commercial risks and expanding markets. However, the practice adds new complexities to the already complicated corporate system, which stems from the fact that the fundamental norms and legal framework of the corporation had been built up prior to the emergence of corporate groups in the early-industrialized countries. As a result, the use of corporate groups inevitably brings certain contradictions and challenges to the well established corporate notions and practice. Since the 1970s, the People’s Republic of China has undertaken a great deal of effort to establish a network for enterprise cooperation for the purpose of enhancing the competitive ability of its enterprises. Various trials were carried out, including setting up various enterprise alliance, enterprise groups and corporate groups. China’s 1994 Company Law only addresses the terminology of parent companies and subsidiaries, but has no further provisions specific to corporate groups. The 1986 Civil Code does not contain a definition of corporate group, but only defines an enterprise alliance as a joint operation between enterprises or an enterprise and an institution. Such a joint operation may result in the establishment of a new legal entity or a partnership, or may be simply based on the cooperative contract. With the development of corporate practice, the patchy provisions relating to enterprise alliances in the 1986 Civil Code become less and less relevant. China urgently needs to develop an effective legal framework to guide the practice of corporate groups, because more and more state-owned enterprises are being corporatized and most newly established firms take the form of a company. This article will examine the theoretical challenges and difficulties brought by corporate groups in China.