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A comparative study of the ownership control vs. management right issue between the Chinese enterprise… Qi, Xiaodong 1993

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A COMPARATIVE STUDY OF THE OWNERSHIP CONTROL VS. MANAGEMENTRIGHT ISSUE BETWEEN THE CHINESE ENTERPRISE LAWS AND CANADIANCORPORATE LAWSByXiaodong QiLL. B Peking University in ChinaA THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWSinTHE FACULTY OF GRADUATE STUDIES(FACULTY OF LAW)We accept this thesis as conformingto the required standard.THE UNIVERSITY OF BRITISH COLUMBIANovember 1993© Xiaodong Qi 1993In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)____________________Department of____________________The University of British ColumbiaVancouver, CanadaDate /&n4f /DE-6 (2/88)ABSTRACTAn examination of the different laws concerning the ownership control right issue in China’s legal regime as well as in Canada’s legal regime willprovide the basis of further comparison and analysis. In light of statutes as well asrelevant Canadian case law, some literal differences are shown.The analysis of legal implications of the literal differences of the laws involves fourapproaches. These are the relationships between the owners and the corporatemanagement, the ownership composition, the government treatment of the governmententities, and the commitments, interests and liabilities of the directors.In the SOECs, the government controls have been curbed and the autonomy of theenterprises has been advocated in recent years by legislation and dominant Party policy.The boundary of government control over the SOECs and the enterprise autonomy hasnot been defined clearly. In the CCCs government controls have been kept very firm bystatute and case law.In the SOECs, the ownership right of the enterprise assets belongs to the statewhereas the statutory right to possess, utilize and dispose of the enterprise entitiesbelongs to the enterprise. The division of the ownership right and the property right tothe same object - the enterprise assets - renders a certain inconsistency in managing theenterprise business. However, the ownership of the CCCs is exclusively in the hands ofthe government. The ownership of the Canadian private corporations lies exclusively inthe corporation- the judicial person itself. The pure ownership composition may reduce11the tension of the owners and management to a minimum level.A SOEC is treated by the government both as a government appendage, designed tocarry out government policy, and a self-survivor. A CCC is treated by the governmentas a special instrument. The directors of the Canadian private corporations can enjoysubstantial autonomy in managing corporations, although in many circumstances they aresubject to the courts’ involvement.The Chinese Enterprise Laws require the directors to fulfill their mandates - thecommands of the government - although at the same time they are expected to make theenterprises as profitable as possible. The directors of the CCCs have an interest infulfilling their commitments to the government, which are to serve the mandates of theCCCs. The interests and commitments of the directors in Canadian private corporationslie in making competitive capital return for the corporations and the shareholdersThe reasons why different legal implications exist in the different economic and socialmilieus. And significantly, it is found that both the legislative implications of the CCCsand the SOECs reveal a kind of compromise.111TABLE OF CONTENTABSTRACT iiTABLE OF CONTENT ivACKNOWLEDGEMENT viiCHAPTER I. INTRODUCTIONA. The Purpose of this Comparative Study . 1B. The Scope of Comparison 3C. The Structure of the Article . 8CHAPTER II. THE OVERVIEW TO THE LEGAL REGIMESA. The Chinese Regulatory Framework of the SOECs . 10B. The Legal Regime of the Canadian Corporations . 17CHAPTER III. THE DIFFERENT LEGAL STIPULATIONS ABOUT THEMANAGEMENT RIGHT VS. OWNERSHIP CONTROLA. Laws Governing the Management Right of the SOECs 20B. Laws Governing the Management Right of Canadian Corporations1. In The Canadian Crown Corporations 232. In the Private Corporations 26CHAPTER IV. THE COMPARISON AND ANALYSISA. The comparison to the legal contexts themselves 29B. Implications and Effects of the Different Legal Contexts 311. Different Relationships between theDirectors and the Government in SOEC and the CCCa. In the SOEC 32b.IntheCCC 372. The Different Ownership Compositionsa. State Ownership Right vs. Enterprise Property Right:The Two Different Owners to the Same Property - The OwnershipStructure in SOEC 42b. Advances and Sole Shareholder - Ownership Structure in CCC 44c. In the Canadian Private Corporations 483. Different Treatment to the SOEC and the CCCiva. Treatment to the SOEC1). Being Responsible for Its Own Profits and Losses 512). Internal Right Balancing in the SOEC 53a) Control from the Party 53b) Balancing Power from the Employee Assembly 57b. The Treatment of CCCs by the Canadian Government - RenderingPrivileges to the CCC1) The Origin of the Privileges 592) The Status to Enjoy the Privileges 603) The Substantial Immunities 614) International Privileges and Procedural Prerogatives 62c. Treatments of the Canadian Private Corporations - Balancing theManagement Right with Courts 634. Commitment, Interests and Liability of the Directors 65a. The Directors of the SOEC 66b. The Directors in the CCC 68c. The Directors in the Canadian Private Corporations 70CHAPTER V. THE REASONS FOR THE DIFFERENCESA. The Different Economic and Social Milieus Contributeto the Different Legal Implications and Effect1. The Changing Economic Regime in China Makesthe Role of the SOEC A Mixture of GovernmentInstrument and Self-Survivora The Changing Economic Regime - From thePlaned Economy to Plan\Market Economy . 74b The New Stage of the SOEC - From the Appendageof the Government to the Mixture of the Appendagesand the Self-Survivor 812. The Different Needs of the Canadian GovernmentMake the Laws to CCC and the Private CorporationsTwo Different Implicationsa. Making Use of the CCC as Policy Instrumentsfor Special Purposes . 84b. Utilizing the Private Corporationsto Develop the Economy and Vitalize the Market Economy . 90B. The Compromise of Ideology Practical Needs 931. The Compromise of the Ideology of Socialism andthe Utilization Market System to Stimulate the Efficiency of the SOEC . . . 942. The Compromise of the Capitalist Ideology to thePractical Need of the Government 98VCHAPTER VI. CONCLUSIONA. The Summaries for the Comparisons1. The Management Right vs. Control from the Above Level 1022. The Ownership 1033. The Treatments 1044. The Commitments, Interests and Liabilities of the Directors 1055. The Legal Implications for the Ownership\Control Issue 106B. The Reassessment to the SOEC 108C. Potential Suggestions for SOEC1. Consummate the Market Economic Mechanism 1102. Enact the Standard Company Law to Governthe Shareholding System and the Private Firms and have them expand . 1113. Administer the real SOEC Serving thePolicy Purposes and Public Interests Specially 112SELECTED BIBLIOGRAPHY 115viACKNOWLEDGEMENTSI would like to express my deep gratitude to my thesis supervisors, Professor PitmanB. Potter and Professor Bruce MacDougall, for their guidance and encouragement duringthe course of my research.I am very much indebted to the Law Foundation of British Columbia. Without thefinancial support, It would have been impossible for me to make this study in U.B.C.I would also like to thank Lillian Ong, Gillian Cartmell and the librarians in the lawlibrary for their kindness and help. Chris Nowlin deserves a lot of thanks for the longhours spent grammatical polishing.Finally, I am grateful to my parents and all my friends for their constant support.viiThe Comparative Study of the Management Right vs. Ownership Control Issuebetween the Chinese Enterprise Laws and the Canadian Corporate LawsChapter I. IntroductionA. The Purpose of this Comparative StudyOne of the key issues in the State-Owned Enterprise in China (hereinafter citedas SOEC) is ownership/control.’ There has been a lot of discussion about it in Chinain the last couple of years.2 Its importance is recognised by all the entrepreneurs,. The issue of ownership/control is one of the most important issues in SOECs.It is clear that an entity cannot be born and exist without the assets of the owner(s).The ownership right guarantees control of the assets. However, it has been discoveredboth by western corporate experience and by Chinese economists and governmentthat the separation of ownership from control of the business entity is necessary forgood management.In western corporations, financiers of corporations - the shareholders - do nothave control of the corporations except if they themselves are the directors. In China,state enterprises have already begun, according to the new Enterprise Law (art 2),to implement the separation of ownership of the state from control of thegovernment. China’s government is trying to withdraw its direct control influence onthe SOECs as much as possible. But at the same time, it still wants to keep controlto a certain extent. Therefore there is some tension between the owner - the state -and the management - the directors. Here also involves conflict of the advocatedenterprise autonomy and the dominance of the political and ideological leader of thestate - the Chinese Communist Party.This is where the ownership/control issue comes from and the reason why theissue deserves due attention and study.2• See Wang Weiguo, “Suoyouquan zhuanhuan tanxi”, (The Exploration to theTransference of the Ownership Right) Xiandai Faxue, (1989), 1 (Modem LawScience Journal).Deng Jimin, “Jingyingquan yu suoyouquan”, (The Management Right vs.Ownership Right), (1987), 1 Faxue Yanjiu (The Journal of Law Research).Huan Minshu, “Lun liangquan fenli de xingzhi” (The Discussion to theCharacteristic of the Separation to the Two Right), (1988) 6 Xiandai Faxue, (ModernLaw Science Journal).Sun Xiaoping, “Suoyouquan yu jingyingquan fenli de xin tansuo” (The NewExploration to the Separation of the Ownership Right and the Management Right),(1987) 6 Faxue Luntan, (The Lecture of the Law Science).1the scholars, as well as the government. The ownership/control issue is perceived asa touchy question because it involves the public ownership which is related to theideology of socialism and capitalism. The legal regime also gives a lot of attentionto the issue. This article will examine how the legal implications are involved in thisparticular issue.In Canada, there are government corporations as well as private corporations. So,comparing the business entities of a capitalist country like Canada with SOECs maybe very interesting and also very useful since China is on the way to implementing themarket mechanism. Canada has a much more developed economy than China.Observing how Canadian business entities operate under the market economy willprovide very good references for understanding China’s enterprises. Thus I turnedto the study of Canadian Crown Corporation (hereinafter cited as CCC) and theprivate corporation.There are two purposes behind this comparison. One is to deepen theunderstanding of the differences of the management right issue between the twojurisdictions. With the expansion of international communication and cooperation, thedifferent nations need to acquire more detailed knowledge about each other. This willfacilitate investment and cooperation. The other reason is to arrive at some possiblesolutions to some of the problems in either part. Due to differences that have existedin the different countries, there must be different experiences that can be used byeach other. Utilizing this experience will enhance the development of each country.2B. The Scope of ComparisonThis article will address the issue of ownership vs. control concerning SOEC froma legal perspective. It will confine itself to the time period following the EconomicReform in 1978. The study of Canadian corporations in this article will fall within thecurrent legal regimes governing Canadian business entities, although some deviationsbeyond this time scope are inevitable.Since the study of company law/enterprise law is one that involves many areas andissues, I will examine only the main issues that I think relate to the ownership/controlissue of the enterprises to be discussed here. They are the issue of management right,ownership, the relationship of ownership control and management right, and liabilitiesof management3. I will approach these issues by looking at the economic, socialpolitical, and environmental backgrounds of the different legal regimes. Othersubstantial issues existing in corporate law like prospectus, share structure, mergersor liquidations will not be examined in this article.There are several forms of business entities in China: sole proprietorship,partnership and corporations and enterprises.4 The types of corporations in Chinaconsists of administrative corporations and trading corporations, as well as theAs to the reason why these issues are chosen as the approaches to study theissue of ownership control vs. management right, see infra, at p.?. See Alison W. Conner, ‘To Get Rich Is Precarious: Regulation of PrivateEnterprise in the People’s Republic of China”, in Spring 1991, 5 Journal of ChineseLaw, at p. 20.3foreign-related companies.5 An administrative corporation is actually a level ofadministration under a ministry of the central government and has a number of stateenterprises as its appendages. A trading corporation may or may not be owned by thegovernment and normally does not have any production organs. Therefore theconcept of corporation in China is different than that of western countries, where itmeans a formalized business entity. Due to the fact that China’s corporations are lessformal than traditional western corporations, they are not used in this article as thecounterpart for the Canadian corporations being compared. Instead, the state-ownedenterprises will be compared with Canadian corporations.“Enterprise” in China is a generic term that encompasses almost all the state-owned and collective entities that engage in business.’ Of the family of enterprisesin China, there are state, collective, and private enterprises. By the end of 1985,registered industrial and commercial enterprises in the People’s Republic of China(hereinafter cited as China) totalled 4,217,800, which included 833,400 state-ownedenterprises and 3,347,400 collective enterprises.7In 1985, 7,900 large and medium-sized, and 85,805 small state enterprises accounted for approximately 70 per cent of. See Henry R. Zheng, “Business Organizations and Entities in China”, collectedin Forsom, Ralph, H. & John H. Minan (ed), Laws in the People’s Republic ofChina, Commentary, Readings and Materials, (Netherland: Martinus NijhoffPublishers, 1989).6 Both the state-owned and the collective entities in China are called “Qiye”(enterprise) in the laws and regulations to which they are subject.See Henry R. Zheng, “Business Organization and Securities Laws of thePeople’s Republic of China”, (1987/88) 43 Business Lawyer 1-2, p. 558.‘.“Woguo gongshang qiye da sibai ershi duowan jia” (Industrial and CommercialEnterprises in China Exceed 4.2 Million), People’s Daily, July 12, 1986, at 3.4the PRC’s total value of production8 and for nearly 43 percent of the state’sincome.9As time goes on, there appears a new trend. During these years, the status ofcollective and private enterprises has been increasing and the status of the SOECshas therefore been decreasing.’° This trend is also perceived by Nicholas R. Lardyas:’1“Although the Communist Party has periodically issued decrees upholding theprimacy of state ownership of the means of production, the role of nonstate firms hassteadily widened. As already noted these firms by 1990 produced almost half of alloutput industrial goods, traditionally the sector of socialist economies in which therole of the state is preeminent.”...”The transformation has been equally rapid in theservices sector in China where private and other nonstate firms have growndramatically, leaving state firms with an ever shrinking share of service activities.”But, it is, also from the statistics, clear the output of the state enterprises is still8 F. James Sensenbrenner, “The Evolving Enterprise”, China Business Review,Mar.- Apr. 1987, at p35.. See People’s Daily, Apr. 1987, at 1.o. It is held that due to the development of the private, collective and the foreignjoint ventures economy, the percentage of state sector’s industrial output droppedfrom 78% in 1983 to 66% in 1987.See supra note 5, Ralph H. Folsom & John J. Minan, Law in the People’sRepublic of China, at 859.And according to the official statistics, in 1989 the general industrial output ofChina was 1822 billion whereas the industrial output of the SOEC was 1035 billion.So the industrial output of the SOEC was 57% of the industrial output of China.See The State Statistics Bureau, Zhonggno Tongji Zhaiyao (A Statistics Survey ofChina), (Beijing: China Statistics Publishing House, 1990), at 68.See Nicholas R. Lardy, Foreign Trade and Economic Reform in China 1978-1990, (New York: Cambridge University Press, 1992), at p. 146.5occupying the biggest amount in the national economy’2.In Edward Epstein’swords:’3“Despite a rapid growth in their numbers and the diversity of their trades,individual enterprises are not intended to replace state and collective enterprise;already, however, they serve as an important supplement to commerce and servicetrades neglected by the public sector”The Amendment of China’s Constitution of 1993 still insists on the spirit that theleading force of the economy should be the state-owned economy.’4 The stateenterprises will, at least from the Constitution’s point of view, still be charged thedominant position in the national economy.Moreover, the issue of ownership and management rights in SOECs’ is asignificant issue receiving a lot of attention in China. Separation of state ownershipand the enterprise management right was fixed by the Enterprise Law 1988.’However, in practice as well as in the Enterprise Law itself, a lot of tension existsbetween the owner - the state - and the enterprise management. So the SOECs area very important vehicle for studying the ownership/control issue. Due to theimportance of the SOECs in relation to the ownership vs. management issue and itsimportance in the Chinese economy, this article will address the issues in the context12• See supra note 10, the statistics.‘. See Edward 3. Epstein & Ye Lin, “Individual Enterprise in ContemporaryUrban China: A Legal Analysis of Status and Regulation”, (Spring 1987) 21 ThInternational Lawyer, at 398.See the Amendment of the Constitution, at art. 8. Fazhi Ribao, (Legal GazetteDaily), March 31, 1993.See the Enterprise Law, infra note 32, at art. 2.6of State-Owned Enterprises only.There are four basic forms of business organization in Canada: singleproprietorships, partnerships, corporations, and cooperatives16. The relativeimportance of the type of business organization - corporation is veiy substantial.Take, for example, the manufacturing field. In 1984 about 88 percent of theestablishments in manufacturing were corporations, and they accounted for 98percent of the total sales17. Therefore the dominant economic status of theCanadian corporations makes them suitable for comparison with the SOECs.There may be various ways to divide Canadian Corporations. Even from thesimple perspective of whether the ownership of a corporation is related to thegovernment, Canadian corporations may be divided into Crown corporations, mixedcorporations and private corporations’8.Mixed corporations lie Somewhere along the line between purely privatecorporations and crown corporations. The term “mixed corporation” is normally usedto describe a corporation the capital of which has been partially subscribed by privateinterests and partially subscribed by the government. Both the two kinds of strengthexert their influence in mixed corporations. The ratio of the influences of the twokinds of strength varies a lot in different mixed corporations. This makes the16• See David Stager, ‘Economic Analysis & Canadian Policy”, (Canada:Butterworths, 1988), at. p. 482.17 See Statistics Canada, “Manufacturing Industries of Canada”. Reproduced fromDavid Stager, “Economic Analysis & Canadian Policy”, supra note 16, at. p. 483.18• See Mctetridge D. 0., Commercial Efficiency and Political Efficiency: AComparison of Government, Mixed and Private Enterprises, (1985).7situations in the mixed corporations subtle and complicated. So it is not meaningfulto compare them with other kinds of business entities. The study of them will not fallwithin the scope of the comparative study of this article.My original intention was to compare the laws between the State-OwnedEnterprises in China (SOECs) with the Canadian Crown Corporations (CCCs)because of their common feature of public ownership. Going more deeply into thefield, however, it is discovered more and more that Canadian Crown Corporationsare being put under the general corporate laws, along with the private corporations.This made me extend the scope of the study to the laws governing the whole familyof Canadian corporations, both public and private. Another reason for extending thescope is that the intention of China’s government to have the SOECs act under amarket economy is compatible with their intention to make SOECs more similar totypical western corporations.19 In order to coordinate these factors it will makemore sense to study the general corporate law which governs private companies ina market economy like Canada.C. The Structure of the ThesisChapter I is the introduction part. It gives an overview to the thesis. The readermay get rough ideas about the central issue of the article and about the scope within19 This has been reflected through the implementation of the shareholding systemin China. The shareholding enterprises in China are still operating at a trial stage sothey have not come to play a significant role in the economy yet.8which the writer is discussing it.Chapter II will give an overview to both the legal regime governing the SOEC andthat of the Canadian corporations in Canada. Readers may get a rough idea of thetwo jurisdictions.Chapter III will compare the legal context as to the ownership/control issue in thetwo jurisdictions of China and Canada. Rather than table all the legal provisionsneeded in this article, this Chapter will show only the very relevant stipulations andregulations. Some other relevant provisions and rules may appear where necessaryin other Chapters. Chapter W will compare the legal implications and the spiritof the different legal contexts. Four approaches will be used to clarify the issue ofmanagement right vs. ownership control. They are the relationship between thedirectors with the owners, the relationship of ownership assets vs. corporate property,the treatment of the corporations by the owners, and the interest, commitment andliabilities of the directors. This comparison may allow the readers to acquire a deeperunderstanding of the differences of the objects being compared.Chapter V will explore the reason for the different legal spirit surrounding theownership/control issue. Some economic, social, political as well as environmentalfactors will be employed to analyze the different legal contexts and implications ofSOEC and Canadian corporations.Chapter VI is the conclusion. It will constitute a summary of the comparisons.Since a reassessment of the legal regime in China concerning the specific issue ofmanagement right of the directors will appear, some possible solutions will be9rendered.Chapter II. Overview of the Legal Regimes1. The Chinese Regulatory Framework for the SOECThe regulatory framework in China consists of three sources: the policies of theChinese Communist Party (hereinafter cited as CCP), the laws adopted by theNational People’s Congress(NPC), and the administrative regulations enacted by thegovernment. As to the structures of the three institutions, see the diagram in nextpage.Since the CCP established the People’s Republic of China in 1949, its leadershipof the country on an overall basis has been constitutionally fixed2°. Its power covers2o China’s Constitution expressly states that one of the tasks of Chinese peopleis to achieve the four modernizations under the leadership of the Party.Article 1 provides that leadership is vested in the “working class.” Since the Partyhas always been recognized as the “advanced organization” representing the “workingclass”, the leadership of the Party over the state is thereby confirmed. Furthermore,the Constitution clearly indicates that the guiding principle of the Constitution is the“Four Basic Principles,” one of which is the adherence to Party’s leadership. See PengZhen, “Report on the Draft of the Revised Constitution of the People’s Republic ofChina to the Fifth Session of the Fifth National People’s Congress” (Nov. 26, 1982),reprinted in Chinese in Constitution of the People’s Republic of China at p. 48.For English version of 1982 China’s Constitution and the 1988 Amendment, see[1 Business Regulation] China laws for Foreign Business (CCH Australia). For the1993 Amendment, see Fazhi Ribao (Daily of China’s Legal System), at March 30,1993.10all aspects of China from politics and ideology to economics, and certainly includinglaw. Generally speaking, any big changes or movements in the nation are launchedby Party policy21. Any actions the Party deems appropriate must be enforcedthrough its Party committees.Institutions Structure FunctionCentral Communist -the Provincial Party The mandate of theParty Committee Committee Party Committees inthe provincial level is-the Party Committee in just to cariy out theMinistries policies of the centralParty committees.-the Party Committee in thedirect Municipalities LikeBeijing, Shanghai and Tianjin.The Party committees in thefollowing level are the ones ofmunicipalities and the ones inthe bureaus and enterprises.National People’s the provincial people’s congress Elect the peopleCongress and the ones of the representatives andmunicipalities. make policiesconcerning theirlocalities.21 For details, see Ralph, & Minan, Law and Politics in the People’s Republic ofChina, supra note 5, at p. 54-76.11the State Council -the provincial government Their mandates are(the Government) to carry out the-the Ministries instructions of thecentral governmentThe following government as well as ministeradministrations are the ones at the local affairs.municipal level and the ones ofbureaus and the enterprises.(file contents of the diagram digest from some relevant laws anliteratures22.)These are set up everywhere by the government administrations, various entities andlocalities. The legal regime was also set up by the Party’s will, so Party policies22• See the Constitution of the Chinese Communist Party adopted by the 12thNational Member Conference of the CCP on September 6, 1982, at Chapter W. andV., in Zhonggong Zhongyang Wenxian Yanjiushi, (the CCP Source Studys of theCentral CCP Committee), Xinshiqi Dang De Jianshe Wenxian Xuanbian, (theSelected Sources of the Construction of CCP in the New Era), (Beijing: People’sPublishing House, 1991).See the Constitution of the People’s Republic of China, supra note 20.See the Organic Law of the State Council of the People’s Republic of China,at infra note 85.And also see Wei Dingren (ed), Xianfa Xue (the Study to the Constitution),(Beijing, Peking University Press, 1989); Xiao Weiyun, Wei Dingren & Chen Baoyin,Xianfaxue Gailun (the Survey to the Constitution), (Beijing, Peking University Press,1982).. The legal regime may be set up by the Party and also ruined by it. Forexample, when the Party launched a wave of extra-judicial persecution and“liquidation of class enemies” in 1950s, law was casted by Mao Tse-tung (the supremeleader of China after the P.R. China was established in 1949) as an obstacle toachieving socialist ideology. So law schools were closed, legal research ended, and thelegal profession disappeared...See Folsom and Minan, supra note 5.This point is also perceived as:” Since 1949, the dominant state philosophy towhich law became subordinated has consisted of Mao Zedong’s Communism and theideology, organization and tactics of a Marxist-Lenisnist-Stalinist CommunistParty.”...”(T)the function of law was to serve policy and mobilize support for theParty.”See Stanley B. Lubman and Gregory C. Wajnowski, “Criminal Justice Process”, inWilliam P. Streng & Allen D. Wilcox (ed.), Doing Business in China, (US.: Matthew12are seen as the most important guidelines, even superior to laws.The NPC is the organization in charge of legislation. Its legislative power isconferred by the Constitution. After the advocation to the consummation of thelegislation after the Economic Reform, the NPC has enacted quite a few laws inChina.China has been an administrative management system since its establishment in1949. The State Council - the representative of the government - possesses adominant role in economic matters. It administers the nation by decreeing variousadministrative rules.Generally speaking, the three sources are interrelated. The Party may initiate aBender & Company Incorporated, 1992), at p. 27.02[3].. According to the Constitution, the NPC and its standing committee exert thelegislative rights.See infra note 20, the Constitution, at art 58.. For example, among the 1979 enactments were a Forestry Law and a revisedAct on Arrest and Detention. In 1980 a Nationality Law, a revised Marriage Law aJoint Venture Income Tax Law, and others were enacted by NPC. There are more,such as the Economic Contract Law (1981), the Act on Land Requisition for NationalConstruction (1982), The Trademark Law (1982) and the Law on Statistics (1983).. From the year of 1977 on, some 200 administrative rules in the economicsector, made by 51 departments or organs of the State Council, were brought to thescene.See State Council, Guowuyuan Jingji Fagui Yanjiu Zhongxin (The State CouncilResearch Centre on the Economic Stipulations), “Guanyu Jiaqiang Jingji LifaGongzuo de Jidian Jianyi”(Several Advices Concerning How to Strengthen theEconomic Legislative Work), in the Legal Bureau of the State Planning Committee,1977-1986 Zhongvao Jingji Fagui Ziliao Xuanbian (The Selected Compilation ofSubstantial Economic Regulation Materials from 1977-1986), (Beijing: the StatisticsPublishing House, 1987), at p. 5.13particular issue, and then promulgate a Party policy. The administrators in the -government may later make relevant administrative rules, advices, or directives tostart implementing the Party policy spirit. Sometimes if the issue is proposed at along-term benefit, the administrative rules, after a period of trial, may be renderedto the NPC to be considered for enactment. Although it is sometimes argued that inChina laws are far less important then the Party policy, the Party policy and theadministrative rules are normally effective just for a short time before they becomethe law or are substituted by new policies or rules. The effect of a policy orregulation can be fixed by law only after is reaches maturity, so in this sense a Partypolicy or an administrative regulation may become a law in the future29. However,it appears from time to time that Party policies and administrative rules can have thesame power and effect as laws.A State-Owned Enterprise in China (SOEC) is also subject to the above threesources. After the Economic Reform, the SOECs began to change. The discussionin this article concerns the period after the Economic Reform. The major Party27• Normally a Party policy will be drafted by the Central Committee of the Party.Then it will be disseminated through the affiliated committees and branches.. It is said, “between 1949 and 1979, implementation of China’s few formal lawswas more a matter of Communist Party policy and will than any attempt at aconsistent application of legal principles”See, Hisa & Zeldin, “Legislation and Legal Publication in the PRC’, ChinaExchange News, 9-12 (1987), at p. 13-14.29 See “Qiao Shi’s speech in the Eighth National People’s Committee”, FazhiRebao (Legal Gazette Daily), Apr. 1, 1993.Qiao Shi, who is now the director of the National People’s Congress, held thatwhenever an administrative rule reached maturity, it could be passed as a law.14policies about the Economic Reform3° and the decision to confirm it3’ will bereferred to here. The Enterprise Law3 is the main body to govern matters inrelation to SOEC. As a legal person, a SOEC is also subject to the Civil Lawn.Certainly China’s Constitution needs to be referred as to some major and principleThe economic reform was first initiated at the third Plenary Session of theEleventh Chinese Communist Party Central Committee in 1978. At that meeting, theCCP Committee called on the people to focus on economic development. Chineseleaders realized that “in order to achieve socialist modernization, the economicstructure must be reformed.” See the “Communique of the Third Plenary Session ofthe 11th Chinese Communist Party Central Committee”, reprinted in People’s Daily,Dec.24, 1978.In 1978, when the CCP launched the Economic Reform, the key point theyperceived was to improve the performance of the SOEC. Therefore the CCPdeveloped Party policies relating to economic reform in the SOEC.31, See Central Committee of the Chinese Communist Party, “Decision of theChinese Communist Party Central Committee on Reform of the Economic Structure”,adopted by the Third Plenary Session of the 12th Chinese Communist Party CentralCommittee on Oct. 20, 1984, reprinted in Chinese in 10 Xinhua Monthly, (1984), atp. 21.32, See ‘The Law of the People’s Republic of China on Industrial EnterprisesOwned by the Whole People, effective on Aril 13, 1988. [1 Business Regulation]China Laws, for Foreign Business (CCH Australia.) I I 13-534 I I.(hereinafter cited as the Enterprise Law).See “General Principles of Civil Law of the People’s Republic of China”,adopted at the Fourth Session of the Sixth National People’s Congress on April 12,1986, art. 48, [2 Business Regulation] China Laws for Foreign Business (CCHAustralia) I 119-150, (hereafter cited as the Civil Law). Supra note 20, Constitution of the People’s Republic of China was adopted bythe Fifth Session of the Fifth National People’s Congress on Dec. 4, 1982,(hereinafter cited as the China’s Constitution). The 1982 China’s Constitution wasenacted after the Economic Reform. It was revised twice after 1982. In 1988, 2articles was amended One of which recognized the private economy as thesupplementary role to the state-run economy. In April 1993, 10 articles wereamended, one of which recognized the “socialist market economy” as the dominantrole of China’s economy.15affairs.Since the laws in China cannot stipulate eveiything in detail, some regulationsconcerning some detailed matters are also in effect. The Enterprise Regulations35governed the matters of the SOECs before the Enterprise Law was enacted. TheGeneral Manager Regulations and the Employee Representative AssemblyRegulations37 are currently in effect together with the Enterprise Law. They,respectively, deal with specifically the matters about the directors of the SOECs andthe Employment Assembly. Since the Leasing, Contracting and Shareholding Systemsare several new trials to increase the efficiencies of SOECs for the last few years, theRegulations on the Leasing SOECs, the Regulations on Contracting SOECs39The Provisional Regulations of State-Owned Industrial Enterprises,promulgated by the State Council on Apr.1, 1983, (2 Business Regulation) ChinaLaws for Foreign Business (CCH Austl. Ltd.) (hereinafter cited as “EnterpriseRegulations”)It was replaced in 1988 by the Enterprise Law.. See “Regulations on the Work of General Manager of Industrial Enterprisesunder the Ownership of the Whole People”, promulgated by the State Council onSept. 15, 1986, reprinted in Daily of China’s Legal System, Oct. 22, 1986. (hereinaftercited as the “General Manager Regulations”).‘. Regulations on Employee Representative Assembly of Industrial Enterprisesunder the Ownership of the Whole People, promulgated by the State Council onSept.15, 1986, reprinted in Daily of China’s Legal System, Oct.22, 1986, at p.2.(hereinafter cited as “Employee Representative Assembly Regulations”).. See ‘The Temporary Regulations on the Leasing of Small-Scale IndustrialEnterprises Owned by the Whole People”,See Zhonghua Renmin Gongheguo Xingzheng Fagui Xiuanbian (The SelectedCompilation of the Administrative Laws and Rules of PRC) Beijing: Law PublishingHouse, 1990.(hereinafter cited as the Regulations on the leasing SOEC).16and a set of regulations on the Shareholding enterprises4°may be mentioned. SinceChina is implementing the Market Economy, the Regulations on Price Control41would be useful in reference.B. The Legal Regime of Canadian CorporationsOriginally, when a CCC was incorporated it was accompanied by a special act, bywhich it was generated. So a lot of CCCs are governed by these kinds of special acts.As time progressed, more and more CCCs were established simply by the generalcorporate law such as Canadian Business Corporations Act (hereafter cited asC.B.C.A), or the respective provincial corporate laws42 by which the privatecorporations are generally incorporated. Therefore, the laws governing the CCC andThe Temporary Regulations on Contracting Operational Responsibility inEnterprises Owned by the Whole People. (hereinafter cited as the Regulations onContracting SOEC).See Zhonghua Renmin Gongheguo Xingzhen Fagui Xiuanbian (The SelectedCompilation of the Administrative Laws and Rules of PRC), at supra note 38.See Guoyou Zichan Guanliju, (the Administration of the State Property),Zhongwai Gufenzhi Fagui Huibian (the Selected Compilations of the Laws Regardingthe Shareholding systems of China as well as some other countries), Beijing, the Pressof the University of Politics and Law, 1992.41• The Regulations of PRC on Price Controls, effective by the State Council, onSeptember 11, 1987. (hereinafter cited as the Regulations on Price Control).See Zhonhua Renmin Gongheguo Xingzheng Fagui Xiuanbian (The SelectedCompilation of the Administrative Laws and Rules of PRC) Supra note 38.42 Since Canada, as we know, divides political-legal responsibility between thefederal state and the provinces some relevant provincial statutes and case law will beanalyzed in this thesis.17those governing the private corporations overlap to an extent.At the federal level, all the crown corporations are created by one of threemethods: a special constituent act of Parliament43,letters patent issued by theministries of the government or articles of incorporation under the currentC.B.C.A., or the respective provincial corporations acts.45 After a crowncorporation is created it naturally possess a corporate status.Recently, there has been a tendency to put the CCCs under the general corporatelaw. For example, it is provided that a minister may, subject to the approval of theGovernor in Council, procure the incorporation of corporations pursuant to theCanada Business Corporations Act or acquire all of the issued and outstanding sharesof any existing corporation. So in this article, the relevant laws used concerningSome examples of these are Economic Council of Canada, Canadianarsenals Ltd, Canadian Film Development Corporation, Air Canada, Petro Canadaand Canadian Broadcasting Corporation, etc.Under special acts of Parliament, examples of these corporations would includeAtomic Energy Control Board, National Harbours Board, National BattlefieldsCommission, and National Research Council, etc.. Canadian Business Corporations Act and Canadian Companies Act.Examples of these are Atomic Energy of Canada Ltd., Defence Construction Ltd.,Uranium Canada Ltd., and Polysar Ltd, etc.See M.J. Trebilcock & J.R.S. Prichard, “Crown Corporations: The Calculus ofInstrument Choice”, in 3. Robert & S. Prichard, Crown Corporations in Canada,Studies in Law and Economics, (Canada: Butterworths & Co., 1983), at p. 16.46 See Bill c-153, in Canad. House of Commons. Bills. Sometimes a mixedformula has been adopted in the case of share capital parent corporations: theenactment of a special act creating a share capital corporation, which then falls partlyunder the Canada Business Corporations Act or the Canada Corporations Act.18the Canadian corporations are a number of special Acts by which some Crowncorporations were generated, some federal statutes concerning some specific issuesin the Crown corporations such as the Financial Administrations Act,47 someBills, the administrative regulations of the government such as the GovernmentBlue Paper, and the federal general corporate law - the C.B.C.A.49Canada, as a member of the common law system, has a case law mechanism. Lotsof case decisions may be used to form a integrated legal source system.Financial Administration Act, Revised Statute of Canada (R.S.C.). 1970, c. F10.. See Canada, House of Commons, Bills.See in Frank & Taylor, Corporate Law for Canadian Business: A Case Book& The Canadian Business Corporations Act. (Vancouver: Butterworth PublishingGroup, 1980)19Chapter ifi. The Different Legal Stipulations about the Management Right vs.Ownership ControlA. Legal Provisions to the Management Right of the SOECThe most important chapter of the Enterprise law50, Chapter Three, details therights and obligations of the enterprise. It gives the rights to arrange its majorbusiness activities like production (art22) purchasing (art25) and seffing (art 24)including setting its own prices except for those under price control by the StateCouncil (art26). It also gives the SOECs financial rights to exert budgetary controlover retained funds (art28) and to fix wages and bonuses (art 30). It expressly grantsthe SOECs the right of control over the state assets - fixed assets - and theirdisposal(art 29). Certainly the law permits the SOECs to hire, fire or redeploypersonnel (art 31 & 32). Most importantly, it is provided that the SOECs can requestadjustment of the mandatory plan and can reject assignments outside the mandatoryplan(art23). In addition, the SOECs may lawfully deal with foreign parties and signSee supra note 32, the Enterprise Law, passed by China’s First Session of theSeventh National People’s Congress.It has 69 articles and is divided into eight chapters. They cover the issues of thegeneral principles; the establishment, change and termination of the enterprises;rights and obligations of the directors, employees and the employee assemblies; therelationship of the enterprises to the government; legal liabilities; and other issues.The Enterprise Law is seen as a major development in China’s legal and economicreform and a key element in the country’s attempt to open its economy to marketforces.See James V. Feinerman, “The New State Enterprise Law: China Takes A StepTowards Comprehensive Corporate Law”, (June 1988), East Asian Executive Reports,at 9.20contracts with them, subject to State Council provisions (art 27); and to engage injoint operations and to issue bonds in accordance with the State Council provisions(art34). Finally, the law confers on the SOECs a right to reject the exaction ofmanpower, materials and financial resources by any state organ or unit (art 33). Itcan be seen that the rights given to the SOECs are very detailed and nearlycomprehensive. And it seems the rights are designed to point at the governmentorgans, at least having some defensive attitude to them.Although the directors are called the legal persons of the SOECs (art 45), ChapterIV of the Enterprise Law states only that enterprise directors appointed by thegovernment or elected by the workers (art 44) have the rights stipulated in art 45,which grant them the rights to decide only several aspects such as the enterprise plan,the administrative setup of the enterprise, the middle-level administrative personnel,and reward or punishment of staff and workers. So comparing with the rights of theenterprises defined by the law, the rights of the directors are very limited.It may seem amazing that the rights of the enterprise and those of the directorsare set forth separately. In light of the provision that the directors should makedecisions on important issues with the help of an administrative committee of whichhe is the chairman (art 47), it is evident that the rights conferred separately to theenterprises other than the managers can be realized only through the decisions madecollectively by the administrative committee. Actually the laws stipulate that manager21can enjoy those management rights only indirectly, through the committee5’wherehe is serving as the chairman.On the other hand, the ownership52 control of the enterprises, namely therestriction to the enterprise right, is also provided in the Enterprise Law. Under thecurrent Enterprise Law53, a competent authority department54 may issue directiveplans to its subordinate enterprises, provide guidance and consultation services tohelp them in the formulation of policies, and even order them to dissolve. It also hasthe authority to approve major capital construction and technical transformationplans submitted by enterprises, to approve actions taken by enterprise directors andto appoint, remove, award, and penalize enterprise directors. The competentauthorities may also coordinate relations between the enterprises and other units. So,the Enterprise Law gives the competent authorities powers and rights in almost all51• See art. 11 of the “State Enterprise Directors’ Working Regulations”, collectedin Yuan Baohuo & Ni Zhengmao, Ouanmin Suoyouzhi Gongye Oiyefa Jianghua.(Kunming: Yunnan People’s Publishing House, 1988), at 294.52• In China, the true names of the state-owned enterprises are the enterprisesowned by the whole people. The state may just be seen as the symbolic owner of thestate assets including the enterprises property. Since the people are too dispersedto exert any ownership right to the assets, control of the ownership can only berealized by the state government.See Zhou Yousu, Gongsi Falu Wenti Yanjiu (The Research to the LegalQuestions in a Corporation), (Chengdu, China, Sichuan People’s Publishing House,1991), at 36.. The Enterprise Law, at art.55, 56(1)-(2), 19(2), 44, 48, 56(3), 35, 37, 38, 41, 36.‘. Government control has mainly been exercised through a “competentauthority” (or “responsible institution”) that takes charge of enterprises. TheCompetent Authority (Zhu Guan Bu Men) appears in all the laws and regulationsconcerning the relationship of the enterprises and the government administration.22the management aspects. If the competent authorities so desires, they can stillintervene the SOECs very freely.B. The Laws Governing the Management Right of the Canadian Corporations(1). In The Canadian Crown CorporationsThe management right of a director in a CCC is not set forth in the same detailedfashion as occurs in SOEC. It is expressed roughly. In a passed parliamentary Bill55it is provided merely that the directors of the CCCs are in charge of the daily affairsof the corporations.On the other hand, government control of a CCC is stipulated at length. Afterexamining the special acts and some passed Parliamentary Bills,56 one observes thatthe stipulated controls of the government over CCCs include nearly every aspect. Asto the policy or guidance matters of a CCC, approval of the corporation by-laws57. Bill c-24 made some Amendments to the Financial Administrations Act.56 The Parliamentary bills are the proposed laws. Only after a bill is passed,which requires three readings at the House of Commons, does it have bindingauthority.See Sharrie Barnhorst, Joan Mather, Judith Keene & Malcolm Davidson,Introduction to Canadian Law, (Ont: Prentice Hall mc, 1985), at 28.In some cases, the government has the power to make by-laws, such as thecases of the Canada Mortgage and Housing Corporation and Teleglobe Canada. Inother cases, the board of directors make the by-laws, subject to the approval of thegovernment.23and approval of the development plan58 are required. The managementorganizations of CCCs are constituted by the government’s appointment ofdirectors59. The CCCs need to fulfil the requirement of the government to submitthe annual report6°.The government influence may go to such a detailed extent thatcertain categories of contracts need to be approved61.Since the CCCs are generally financed by the government their major financialactions, such as spending the budgets62 borrowing money63, declaring dividendsM58 Bill c-153 (1983) provides in section 70 that each agency corporation andproprietary corporation shall annually submit to the appropriate Minister forapproval of the Governor in Council, a corporate plan for the corporation.Both the Lambert Report and Bill c-24 have devoted several provisions to theappointment, dismissal, remuneration, duties and the prevention of conflicts ofinterest of directors, chairmen and chief executive officers of the crown corporations.See Royal Commission on Financial Management and Accountability(Lambert Report), Final Report at p. 387., and “Bill c-24” which was passed at June28, 1984, Canada, House of Commons. Bills 21-34, (Ottawa: The Minister of State<Finance>, 1983\84), at section 114-126.60• The Lambert Report, Bill c-27 and especially Bill c-24 have payed attentionto this question. The latter provides that parent corporations file an annual reportand it specifies its contents: financial statements, auditor’s report and statement ofsteps taken to achieve objectives.61• This issue is often stipulated in the special acts by which the crowncorporations are created. For example, under the CBC Act, the corporation “can not,without the approval of the Governor in Council, enter into any transaction for theacquisition of any real property or the disposition of any real or personal propertyother than program material or rights therein for a consideration in excess of$250,000.” (CBC Act, R.S.C., c. B-il, s.41.)62 Section 131 of Bill c-24 requires all the parent companies and their whollyowned subsidiaries to have their capital approved by Treasury Board.63 See s. 100 of Bill c-24; s. 134 of F.A.A.24acquiring subsidiaries and transferring shares65 normaI1y have to be approved bythe government. To facilitate the government’s needs to interfere in the CCCs, lawsgrant the government power to issue directives67.So the government may givecommands to CCCs whenever it thinks necessary.For example, substantial government control may be stipulated very clearly in theActs, such as in the Telesat Act. This Act assigns the federal government a preeminent role in the board’s decision-making and provides the state with both awindow on developments and levers of control. Under its provisions, all thetransference of common shares, the change of the objects of the corporation and allprocurement and construction proposals need to be approved by the government.And the federal government is assigned a veto power in the annual election of. For example, in Quebec the constituent act of the crown corporationsempowers the Minister of Finance or the appropriate minister to declare dividends.65 As to the necessity of getting approval to acquire shares, see Lambert Report,supra note 59, at 337. And see s.102 of Bill c-24.. Some crown corporations governed by C.B.C.A., such as the Canada PostCorporation, the Export Development Corporation and Air Canada, have theauthority to borrow on capital markets.See at infra note 98, Patrice Garant, “Crown Corporations: Instruments forEconomic Intervention”.67• Early in 1975, the report of the inquiry into Air Canada recommended “amechanism by which the Government can from time to time and when the nationalinterest calls for it...” Then the 1977 blue paper, Lambert Report, Bill c-27 containsimilar provisions.Bill c-24 provides in section 99 that, upon the recommendation of the appropriateminister, the Governor in Council may give instructions to a parent company “if itdeems it to be in the public interest to do so”.... See Telesat Act, at s.20 (2) (3), s.33, s.8.25Telesat’s president69.(2). In the Canadian Private CorporationsThe general corporate laws specify the management rights of the directors7°ofthe general corporations71.According to the statutes72, a director has rightsconcerning company policy matters- making by-laws; concerning the organization ofa company - appointing officers and auditors; concerning financial matters - makingbanking arrangements and concerning, certainly, some minor matters such asadopting forms of security certificates and corporate records. Most importantly, adirector has the right to transact any business especially some key transactions suchas authorizing the issuance of securities73.However the directors’ management rights are somewhat subject to theshareholders. This results in tensions. The responsibility of caffing the shareholders’69 See Telesat Act, at s. 14(1).70• The directors and officers constitute the management team in a company.Since the officers are appointed by the directors, their management right could beseen as included in the directors management right. So in this article, the issue ofofficers management right will not be addressed separately.71• Here the general corporations include the private corporations and thoseCCCs that were not created by special Acts. As was discussed above, some CCCs areunder the special Acts whereas the others are just under the general corporate laws.72 See CBCA. (R.S.C)., 1985, c-84, at s.99(1).Id.26meeting lies on the directors’ side. However, if the directors fail to do so or shouldthe shareholders feel it necessary, the shareholders may call the meeting themselves.Normally the items the directors need to report to the shareholders are financialstatements, auditor’s reports, elections of directors and reappointment of theincumbent auditor.74 The statute requires that fundamental matters of the companyshould be approved by the resolutions of the shareholders meetings.75 So actuallythe shareholders meeting is the controlling or balancing power to the directors’powers apart from any correcting powers of courts generated by litigation. In short,the interrelationship of the directors and the shareholders is one of a balance fromthe point of view of statutory law.However, the case law seems to grant to the directors more preferred right versusownership than the statute. In Automatic Self-Cleansing Filter Syndicate Co. Ltd. v.Cuninghame76 it was held: “the director’s power to manage the affairs of thecompany is complete. That is, a majority of shareholders, even if they pass aresolution at a general meeting, cannot dictate at the directors”. Also, in Gramophone& Typewriter Ltd. v. Stanley77,it was held:‘. See C.B.C.A., at s.129(5).. The fundamental changes which the statute brings are mainly amendments ofarticles, constraints on share transfers, rights and\or privileges attached to any classof shares, reduction of stated capital and amalgamation, etc.. See C.B.C.A., from s.167 to s. 185.76 [1906] 2 Ch. 34.. [1908] 2K. B. 89.27“The directors are not the agents of the shareholders.78 Once given the powerto manage the company, they can exercise the power according to their office.”So the case law has given the directors an unfettered management right with respectto the business affairs of the company.As to the relationship with the shareholders, although the directors may beappointed or removed by the shareholders, the shareholders generally cannotinterfere the management right of the directors when they are in office.79 InAshburton Oil at al. v. Alpha Minerals8°Barwick C.J. said:“directors who are minded to do something which in their honest view is for thebenefit of the company are not to be restrained because a majority shareholder orshareholders holding a majority of shares in the company do not want the directorsso to act...”And in the daily management of the company business affairs, directors are noteven legally allowed to ask for the approval of the shareholders regarding thecompany’s common business.8’ Probably it is the extent of confidentiality thatprevents the business affairs from being disseminated to those dispersed shareholdingpeople.78 The shareholders are not the owners of the company. Only the directors canbe seen as the agents of the company, although the shareholder may be empoweredto decide on the directors’ existence in the company. Some may see the removalpower of the shareholders over the directors as a kind of ultimate control over thedirectors.See Bruce Welling, Canadian Company Law, (Toronto: Butterworth Ltd,1986).See, 1971, 45 A. L. J. R. at 162.See C.B.C.A. at s. 110 (3). It provides that no managing director and nocommittee of directors has authority to submit to the shareholders any question ormatter requiring the approval of the shareholders.28Chapter IV. The Comparison and AnalysisA. The Comparison of LawsAfter seeing the legal context of the ownership control issue in a SOEC, CCC andthe private corporations, some characteristics are noted. Rather than analyzing thesimilarities, only the major differences in the legal context itself will be discussedhere.The management rights of directors of all the SOECs, the CCCs, and theCanadian private corporations are subject to some controffing powers from the abovelevel.82 In light of the relevant provisions of SOEC, the directors have to beinstructed by the appropriate institutions of the government. In the provisions of theCCCs, government approval occupies significant length. In Canadian privatecorporations, directors have to report to the shareholders at the shareholdersmeeting. In both a SOEC and a Canadian private corporation the managementrights of the directors are expressed in detail whereas Bill C-24 provides roughly thatthe directors are in charge of the daily management in the CCC.The government control rights in a SOEC are not as detailed and substantial asin a CCC. A director of a Canadian private corporation seem to enjoy almostcomplete83 management rights although the statutory law gives the shareholders82• The reason why it is called above level is that the controlling powers have thepower to appoint and remove directors.. They are only subject to the appointment and removal power of theshareholders.29some literally controlling power over various fundamental aspects of business.MSo, it may be observed that the extent of the tightness of government control overa SOEC falls somewhere between that of a CCC and shareholder to director in theCanadian private corporation.In light of the laws set up above, it appears that in SOEC, the right of enterprises,managers, employee assemblies, party committees and the responsible institutions areset forth separately and expressly. In light of the statutes and case laws of Canada,it is obvious only the rights of the directors and the shareholders are set forth in theCanadian private corporations, and in CCCs it is almost only the approval rights ofthe government that are set forth. Notably, all the enterprises, managers, employeeassemblies and party committees are existing in the same enterprise, and theirdecisive rights are related to the same object - namely, enterprise affairs. Therelations of their rights are not set forth very expressly whereas that of the rights ofthe shareholders and the directors in the Canadian private corporations are set forthvery clearly in case law decisions.What are the meanings of the legal context? And what are effects of the legalcontexts in practice? To know the answers to these questions, the implications andideas of the legal contexts need to be presented.The reason why I say the controlling power is “literally” is because, as we haveseen above, the case law gives the directors more preferential treatment versusshareholders.30B. Implications and Effects of the Different Legal ContextsTo develop the discussion of the different legal implications, several approacheshave to be used. Since the focus of this article is on the ownership control vs. themanagement right, the relationship of the two parts must be examined specifically.And to look into the ownership itself is a necessary step in order to see clearly howthe control comes and varies. Similarly, to look into some internal factors of themanagement such as the commitments, interests and liabilities of directors is alsoimportant in analyzing how directors will behave in relation to the owners. Inaddition, although the owners’ treatments of the enterprises should be a part ofdiscussion of the relationships between them, the writer feels it is meaningful todiscuss the treatments separately.So four approaches will be used in order to understand the reality and theimplications of the different legal contexts. They are: i) the relationship between thedirectors and the government in the government-related enterprises; ii) the ownershipcomposition in all the enterprises and corporations; iii) the owners’ treatments of theenterprises; iv) the interests, commitments and liabilities of the directors in theenterprises and corporations.311 Different Relationships between the Directors and the Government in SOECand the CCC.a. In the SOECChina’s legal regime authorizes the State Council to set up various Ministries todevelop the national economy85.The Ministries established the state enterprises inorder to carry out their mandates. The Chinese government, as the legitimaterepresentative of the state and the Chinese people, is empowered to exercise theownership of state-owned enterprises and therefore is entitled to have direct controlover these enterprises by the former Constitution. But the extent of this controlvaries.In the days before the Enterprise Law was promulgated, it was stipulated that acompetent authority87 must approve important business decisions of an enterprise85• See Zhonghua Renmin Gongheguo Guowuyuan Zuzhi Fa (The Organic Lawof the State Council in People’s Republic of China), in Zhonhua RenminGongheguo Xingzheng Fagui Xiuanbian, (the Selected Compilation of theAdministrative Regulations of the PRC), (Beijing: Law Publishing House, 1990).86• In the days before, the SOEC was called the State-Run enterprises. SeeChina’s Constitution 1988, supra note 20, at art. 16.Sometimes this expression will appear in English translations as “competentauthority” instead of the words “responsible institution”. The two expressions havesame meanings. Both refer to the above level administration of a SOEC. Normallythere are two competent authorities or responsible institutions to one SOEC. One,often according to the locality of the SOEC, is in charge of the administrative thingssuch as the appointment of the directors, collection of the taxes and investigation ofthe environment protection, etc. The other, generally belonging to a central Ministrysuch as the Electricity Ministry or the Mechanic Ministry, is in charge of the speciality32and long-term business planning; the competent authority decided sales and directedthe business operation of the enterprise in accordance with the state plans; thecompetent authority also had the power, in many instances, to appoint and removegeneral managers and other high-rank enterprise executives. Under article 63 ofthe Enterprise Regulations, an enterprise must implement the decision of thecompetent authority even if it disagreed with the decision. This demonstrates thatthe competent authority had control power over enterprises similar to that ofcontrolling shareholders.After excessive state control over enterprises was blamed for the reason to resultin the inefficiency of the SOECs, the legal regime some changes. At present, thereare only a few articles in the Enterprise Law concerning the controlling power of theresponsible institution.9°At the same time, the mandatory and guidance plans9’things such as the approval to the technology reforms and distribution of the stateplans.. See Enterprise Regulations, supra note 35, at art. 62.See supra, note 31, Decision on Economic Reform, at. p. 20. The decisionstated that:“For a long time in the past, the function of the government and enterprises wasnot separated and the enterprise became the affiliate of the administrativedepartments. Central and regional governments monopolized many businesses theyshould not have taken care of, and many matters that they should have taken careof have not been duly cared.”9o• See supra, at Chapter III.91 It is provided that the state enterprises must carry out the state mandatoryplans and fulfil the economic contracts lawfully made.See the Enterprise Law, at art. 35. Although the words “guidance plan” are notshown in the provisions, they are implied and included in the words “economic33have become more responsive to the enterprises own circumstances than before. Theenterprises may ask the state to modulate a planned task if there are no supplies orpurchase assurances for that task?2 And the enterprises have more autonomy indeciding their business beyond the tasks required in the state plan. This is thesituation in context.In reality, the above situation may be preferable to government control. Since thestipulation is very elastic, the extent to which the government administrations mayexert their power may be beyond legal control. The responsible governmentinstitution still has supervisory power over the SOECs?3 As the governmentadministrations stand at a more advantageous position compared with the SOECs,contracts”. According to Pei Hai, the productions under the guidance plans arenormally in the format of economic contracts; they are also a very important part ofthe state planning to the national economy.See Pei Hai, “Qiye bixu dui guojia fuze” (The enterprises must be accountable tothe state), collected in Yuan Baohua & Ni Zhengmao, Ouanmin Suovouzhi GongyeQiyefa Jianghua (the lectures to the State Enterprise Law), (Kunming: YunnanPeople’s Publishing House, 1988).So it is obvious the mandatory and guidance plans are the means of thegovernment to administer the SOECs. And also through these plans the governmentcan implement the national economic policies..See Enterprise Law, at art. 23.However, the state plans will still inevitably influence the utilizing and disposingright of SOEC. They may undermine the SOEC’s management right since themanagement right is composed of the possessing, utilizing and disposing rights.For example, the laws provide that the appointment and removal of to adirector need to be agreed by both the responsible institution and the Employee’sAssembly in a SOEC. However, in reality a responsible institution removed a directorof a SOEC despite the disagreement of the Employees’ Assembly.See Qian Rong, “Wei Qiye Yi You” (Worrying about enterprises), Fazhi Ribao,(Daily of Legal Gazette) of May 21, 1993.34they may have the potential to influence the SOEC where necessary.Moreover, the structure of China’s government administration makes thecontroffing system very complicated. Generally speaking, the national administrationinstitutions exist along two lines. The line of central government system consistsof the central Ministries and their affiliations in the localities. The line of localgovernment system consists of the provincial government and its affiliations handlingthe local affairs from different aspects such as industry, agriculture, tax and security,etc. Under this kind of mechanism, a state machinery enterprise in a local citynormally would be subject to all the orders of the local Party committee, the Ministryof Machinery of China which is located in Beijing, and the Machinery or IndustrialBureau of that city and that province.95According to the Constitution of China, the central government - the StateCouncil - is in charge of the provincial government.See the Constitution, supra note 20, at art. 110.According to the Organic Law of the State Council, the State Council is in chargeof the central Ministries. See the Organic Law, supra note 85, at art. 9&10.So the administrations at the immediate lower level of the State Council are thelocal governments and the central ministries.Take the situation of Shenyang(a city in China belonging to the Province ofLiaoning) Tractor Factory as an example. There are 7 directly controlling authoritiesabove the Factory: namely, the General Bureau of the Agricultural Machinery of theMechanic Industrial Ministry of China, the Economic Committee of LiaoningProvince, the Mechanic Industria Bureau of Liaoning Province, the AgriculturalMachinery Industrial Corporation of Liaoning Province, the First IndustrialDepartment of the Shenyang Communist Party Committee, the Economic Committeeof Shenyang and the Agricultural Machinery and Automobile Industrial Bureau ofShenyang. In addition, the departments of supply, financing, personnel and salary ofall the above authorities may directly issue certain requests to the Factory.All together, the Factory has to accept from more than 10 of the abovedepartments all their orders, directives and instructions. According to the statistics of35So within this kind of administration system, many government departments at allthe central, provincial and municipal levels struggle from time to time to ensure theirdecisions are well carried out in the SOECs. The problems with this kind of system,as perceived by some others, are five-fold: i) the enterprise directors have to usea lot of energy in dealing with all the meetings held by the government and all thedocuments the government requires the directors to read; ii) some commands fromdifferent government institutions are somewhat contradictory so that the SOECs mustbe made confused to know how to comply with these commands; iii) a lot of delaysmay result in that a lot of things need to be approved by a number of administrationsand officials; iv) the administrations often design excuses to exact the profits of theSOECs so that the SOECs are made very burdensome; v) the interference of theadministrations may make the directors of the SOECs look for excuses not toshoulder the due responsibilities.This kind of situation must make the SOECs feel confused. It also means thatthe Factory, from January to May of 1984, the number of all the instructivedocuments from all the above level departments was 63, and in the month of Maythe number of the meetings called by the above level departments that the managersof the Factory had to attend was 33. The contents of the documents and meetingswere often repetitive.For details, see Zhongguo Shehui Kexueyuan Gongye Jingji Yanjiusuo GongyeGuanli Yanjiushi (The Industrial Management Research Group of the Institute ofIndustrial Economy of the Social Science Institute of China), “Guanyu jiejue woguoguoying gongye qiye duotou Iingdao de tantao” (the discussion on how to solve theproblem of the multihead-leadership to the state-owned industrial enterprises of ourcountry), (1984), 3 Gongve Jingji Tizhi Gaige Yanjiu (Journal of Research on theReform of the Industrial Economic Structure), at P.388-402.. Id. at 390.36they have to waste a lot of time and energy dealing with the multiple controlsimposed on them. Thus the efficiency of the enterprises is inevitably undermined inthis system. This gives one of the rationales to reform.In a word, the relationship of the SOEC to the government remains uncertain.It still has the characteristics of the appendages of the government since the directorsare still appointed by the government. However, because it has some independentrights to manage the state assets and to hand over some profits and taxes, it may alsobe seen as agents of the principal (the state). So actually the relationship is a kindof mixture of appendages and trusts. This makes the relationship between the SOECand the government somewhat contradictory and uncertain. It also puts themanagement and the ownership control in an inconsistent situation.b. In the CCCApart from major activities such as transferring shares, borrowing money,declaring dividends, and some major business transactions which need to be approvedby the government, as was set forth above, there is more involvement by thegovernment with daily management of a CCC. It is illustrated by Raynwynd Garueauwords:“The government can not be satisfied with the powers of control accorded theshareholders by the companies acts. In addition to being a shareholder, the state is. See above, at Chapter ifi.37responsible for the common good of the community, which it must never forget...”And Patrice Garant concluded:“So the government, as sole (or the major) shareholder, has the duty to monitorclosely the development of corporations that share its own purpose, which is aboveall, to advance the economic development of the community...”in addition, another kind of circumstance may be noteworthy. There is asubstantial identity in senior management within the government departments orcommissions and the CCC.’°° Although they may be different in terms of the rolesthey play for government institutions or CCCs, they do not have different interestsin running the CCCs and serving the mandate of the government institutions.Moreover, since it is easy for CCCs to be the centre of attention, the government98 Raynwnd Garueau, “Les Entreprises d’Etat”, speech presented to the Societedes compatables en administration industrielle, Quebec, Jan.10, 1972, printed inPatrice Garant, “Crown Corporations: Instruments of Economic Intervention- LegalAspects” in Ivan Bernier & Andree Lajoie, Regulations of Crown Corporations andAdministrative Tribunals, (Toronto, Univ. of Toronto Press, 1986), at 42.Id.The government’s involvement in the daily affairs of the CCC was also perceivedby Friedmann. He held:”In practice, the controffing ministers have generally refrainedfrom interfering with the ordinary management of the enterprises with the fixing oftimetables for railways or the discontinuance of certain services, but they haverepeatedly intervened, for policy reasons, in matters not only overriding nationalinterest, but also in matters which would normally be considered to be within theprovince of commercial management...”See W.Friedmann, “Governmental (Public) Enterprises”, V. 13:13, in InternationalEncyclopedia of Comparative Law. (New York, Oceana Publications Inc., 1973), at54.See John Palmer, John Quinn & Ray Resends, “A Case Study of PublicEnterprise: Gray Coach Lines Ltd.”, collected in supra note 45, J. Roberts & S.Prichard(ed), Crown Corporations in Canada: The Calculus of Instrument Choice,at 373.38has to be careful to watch their actions.’°’ It grasps the CCCs firmly in its handbecause it does not want any trouble from them.And the firm control is reflected by the diversified administrations that can director affect the operation of the CCCs. These are Parliament, the Public AccountCommittees, the sectoral standing committees of Parliament, the Cabinet, theGovernor in Council, the Treasury Board, the Minister of Finance, various otherMinisters and the Auditor General, etc., all of which are shown clearly in thefollowing table.’°2Controller Branches Functions IIThe reason for the government’s close monitoring of the CCCs has beenperceived as follows:“Since as soon as there are problems, public opinion and the opposition bencheslose no time in demanding answers from the government...(so in practice) informalcontact between government as a shareholder and the CCCs is quite often.”See supra note 98, Patrice Garant, “Crown Corporations: Instruments of EconomicIntervention - Legal Aspects”, at 56-60.102• As to the content of the table, see Patrice Garant, supra note 98.39Parliamentary The Parliament, To create certain Crown corporations byenacting the constituent acts, asking thegovernment to answer some questions inHouse, discussing supplies or appropriationsto capitalize the crown corporations andreviewing the Auditor General’s report andthe public accounts of the Public AccountsCommittee.The Public To make recommendations on the creation,Accounts classification, financing, financial managementCommittee practices, auditing and annual reports of thecorporations, as well as the relationshipbetween the central agencies and thecorporations.The sectoral To take part in the debates when discussingstanding appropriations and when the acts arecommittees of amended.’°3the Parliament,Governmental The Cabinet, (or The Governor in Council or the Cabinet is inthe Governor in charge of all the affairs of the CCC that needCouncil,) to be approved.The Treasury The Treasury Board serves an importantBoard, function as financial controller of the CCC.The Minister of The Minister of Finance is normally calledFinance upon to hear the borrowing plan of the CCCand to approve it when necessary, especiallyin the case of long or medium-term loans.Other ministers The other ministers of the government play aof the decisive part in the control. They are thegovernment, main links between the Cabinet, the TreasuryBoard and the Crown corporations.103 Ibid.40Financial The Auditor The Auditor General assumes posterioriGeneral control of the accuracy and propriety ofPublic accounts; in other words, the financialmanagement of the public service whichcertainly includes the accounts of the CCCFrom the above diagram it is obvious that the Canadian government has a kindof systematic mechanism for controlling the CCCs. Without Parliament the CCCscould not be set up legally. After the government establishes the bodies of the CCCs,it approves how they operate. The way that the government deals with the CCCs hasto be tabled before Parliament. The most important aspects of the management ofthe CCCs - financial matters - must be approved by the Auditor General, who is apart of the Parliamentary system. Parliament’s decisive power over the legal aspectsof the CCCs, the government’s or the ministry’s decisive power over theadministrative aspects of the CCCs, and the Auditor General’s decisive power overthe financial aspects of the CCCs, demonstrate the large extent to which CCCs arecontrolled by various aspects of government. Most importantly, the government hasto be accountable to Parliament with regard to the affairs of the CCCs. This putsmore pressure on the government to control the CCCs more closely.All the above controllers are somewhat complicated and cumbersome for theCCCs. The latter have to submit to various kinds of information, documentsconcerning the annual report, development plans, budgets, by-law appointments anddismissal advices, even certain contracts to the various controllers. And before theycan go further, then the CCCs must wait for approval, which can only be obtained41after questioning, tabling, debating, etc.2. The Different Ownership Compositionsa. State Ownership Right vs. Enterprise Property Right: The Two DifferentOwners of the Same Property - The Ownership Structure in SOECChina has implemented public ownership since its establishment. It was formallyrecognized by China’s provisional constitution, the Common Program. It providedthat:“under the leadership of the public economy” state, collective, cooperative, andprivate capitalist should all play their roles to promote the development of theeconomy as a whole”.1°4The nature of a socialist country had to ensure the overall public ownership in China.The establishment of the PRC brought a nationalization policy concerning bothagricultural and industrial property’°5.Since 1956, in which year nationalization was1O4 See the Zhongguo Renmin Zhengzhi Xieshang Huiyi Gongtong Gangling (theCommon Program of the Chinese People’s Political Consultative Conference), at art.26. in Xianfa Ziliao Xuanbian, (the Selected Material concerning the Constitutions),(Beijing, Peking University Press, 1980), at p. 3.See J.Fairbank, The United States and China (Cambridge,Mass: HarvardUniv. Press, 1983). at. p. 362-63. It says:“Prior to 1949, there had been some expropriation and redistribution of land inareas under the control of the Red Army, but this was limited to areas under theircontrol. This campaign came to fruition after liberation when the new Chinesegovernment made the working class the leaders of the republic and quickly embarkedon a program to strengthen the nation, which was articulated in the “CommonProgram of the Chinese People’s Political Consultative Convention,” enacted in42completed, state ownership was constitutionally established1°6.According to theformer Constitution 1988,“The state-run economy is the sector of socialist economy under ownership by thewhole people; it is the leading force in the national economy. The state ensures theconsolidation and growth of the state-run economy.”°7Although some amendments to the Constitution were made on March 29, 1993, thesocialist public ownership remains unchanged. So, the state is still the sole owner ofChina’s overall property.The Enterprise Law provides that the property of the enterprise belongs to thestate and the enterprise only enjoys the rights to possess, utilize and dispose of it.’°8It is held in some civil law theories that the property right of the state-ownedenterprises is the major content of the state ownership and that no other enterprisesand institutions could be regarded as the subject of the state ownership’°9.Sincethe state has long been the sole owner of the state property, it is natural that all theSeptember 1949.”106• See the Constitution 1954 passed by the 1st Session of 1st NPC of the PRC,at art. 6., in Xianfa Ziliao Xuanbian, (the Selected Materials concerningConstitutions), supra note 104, at p. 150.107• See supra note 20, the Constitution, at art 7.‘°. See the Enterprise Law, at art 2.‘°. Tong Rou, Zhao Zongfu & Zheng Lichun, Minfa Gailun (Introduction to tjeCivil Law), (Beijing, People’s University Press, 1982), at p. 97-98.43state enterprise property belongs to the state.”° Currently both state ownershipand the enterprise property rights concern state assets, or what may be calledenterprise property. As the owner of the state assets, the government has the legalright to protect the assets from being damaged”. As the owner of the propertyright of the enterprises, the enterprises have the legal rights to lease and/or sell itsproperty upon approval by the State Council.”2This creates some contradictionsbetween the two owners.This situation where the state ownership cannot guarantee its full control andwhere managers do not have the whole and real management right to the enterprisecreates the inherent inconsistency of the issue of the ownership vs. control in theSOEC. This inevitably leads to inconsistent stipulations in the legal context.b. Advances and Sole Shareholder - Ownership Structure in CCCThere are two kinds of financial methods for creating a Canadian Crowncorporation: financing without share capital structure and financing with share capital110 There are even some enterprises being privatized in some localities.see supra noteS, Folsom & Minan, Law in the People’s Republic of China, at 859.However, at the current stage, although private property can be allowed in theindividual enterprises and the Shareholding enterprises, it is still not realistic toconsider the privatization of the SOEC.“. See the Enterprise Law, at art 56(4).112• See the Enterprise Law, at Art. 2944structure.Ownership Structure without Share Capital - The proportionsThe financing of a CCC without the share capital comes exclusively from the staterevenue. This is reflected in the work of Patrice Garant, which shows the variedmeans of financing corporations without share capital.”3No matter which formula is used, all the financing resources come fromFirstly, an act may provide for a capital endowment or credit or workingcapital, and it determines the amount. For example, see Canadian Film DevelopmentCorporation, R.S.C. 1970. C-8, s.18; Farm Credit Corporation, R.S.C. 1970 c. F-2, s.12.Secondly, an act may provide for the payment, for a certain period, of “advances”,the amounts of which are fixed annually. For example, see Centre de rechercheindustrielle, R.S.Q., c. C-8, s. 25;Thirdly, the law may authorize the government or the minister of finance to makediscretionary payments from the consolidated revenue fund. For example, see Societede development immobilier du Quebec, R.S.Q., c. S-il, s. 19.Fourthly, the act may provide for the payment of advances or loans at thediscretion of the minister of finance or of the government but may require that thegovernment determine interest rates, deadlines and other conditions. For example,see Canadian Commercial Corporation, R.S.C., c. C-6, s. 8; Canadian Wheat Board,R.S.C. 1970, c. C-12, s. 12;Fifthly, the act may state that the government may authorize the finance ministerto advance to the corporation any amount deemed necessary for its operation whileauthorizing the government to guarantee the payment in principal and interest of theloans of the corporation. For example, see St. Lawrence Seaway Authority, R.S.C.c. S-i, s. 28-29.A sixth formula would be the payment of annual grants authorized by the act forcertain purposes. For example, see Canagtrex, S.C. 1980-83, c. 152, s. 15; CBC,R.S.C., 1970, c. B-il, s. 45.See Patrice Grant, supra note 98, “Crown Corporations: Instruments of EconomicIntervention- Legal Aspects”, at p. 18.45government advances. So, without any doubt, the ownership of this kind of CCC isin the hands of the government.Ownership Structure with Share Capital - The Sole ShareholdingIn recent years we have come a long way from Friedmanu’s notion that the publiccorporations only have one kind of financial structure - namely, the appropriationfrom the Consolidated Revenues.114 Another financial structure of the CCC hasappeared on the scene. This is the share capital structure.Share capital corporations are normally created by a special act of Parliament.Generally speaking, the Parliament votes them initial capital and expressly authorizesthe government or the department to subscribe for shares.There is a tendency for the government to prefer the share capital structure. Itseems that the main reason for this is their desire to give the crown corporationsmore autonomy and to make them more similar to the general corporations. Whenthe government amended the Hydro-Quebec Act in 1981, Mr. Duhaime said:“... so that its capital structure will be the same as that of any large NorthAmerican corporation... It will be easier to compare the financial statements ofcorporations... Hydro becomes, in a sense, normal in comparison to similarcorporations” (translation)”5114 Friedmann thought that Crown corporations had no shares or shareholders.See Friedmann, W., The Public Corporation in Great Britain, at 164-165.“5.Debates on National Assembly of Quebec, October 10, 1978, p. 2934.46Bill c-153”6 addressed the issue of shares in the crown corporations. It providesthat, in respect of such Crown corporations, the Governor in Council has the rightsand powers of a sole shareholder pursuant to the Canadian Business CorporationsAct. Since the shares are more concentrated it becomes easier to exert control.117So it seems obvious that the government, as the sole shareholder, may easily controlthe directors of the CCCs.In the case of certain corporations, for example Air Canada, Petro-Canada, theExport Development Corporation and the Canadian Deposit Insurance Corporation,the legislation expressly states that the shares are not transferable”8.Moreover, atthe federal level, legislation states that no transfer of public property shall be madeto any person except on the direction of the Governor in Council or in accordancewith regulations119.These provisions are supposedly for keeping control of theCCC. The government always wants to keep an effective control shares in a CCC that116 See Canada, House of Commons, Bills c-153. (Ottawa, Minister of State<Finance>, 1983).117 See Alchian, “Some Economics of Property Rights”, (1965), 30 II Politico, at816; and Demsitz, “The Exchange and Enforcement of Property Rights”, (1964) 2Journal of Law and Economics, at 11.They argued:”...The concentration of Ownership in the hands of an individual orcontrol group creates a large personal stake in promoting efficient wealth maximizingbehaviour by the firm’s managers...”.For example, see Air Canada Act. R.S.C., 1970, c. A-il; Petro-Canada Actand Canada Deposit Insurance Corporation Act, R.S.C., 1970, c. C-3.See The Financial Administration Act, supra note 47, at s. 52.47involves shares owned by the others.c. In the Canadian Private CorporationsSince the shareholders buy shares to finance the corporation so that the corporateassets are formed, the study of the issue of ownership in the private company isinevitably involved with the relationship of the shareholders to the corporations.It should be clear that the ownership of the private corporations lies in thecorporation itself rather than the shareholders.12°Obviously the corporation itself,as a purely legal entity, as opposed to the shareholders who finance the corporation,cannot do anything itself. The corporate entity cannot exert its ownership right in away that interferes with the management right of the director.’2’However, since the shareholders buy shares to finance the company, they have theavail right - the right to the dividends of their shares, to the corporate assets and theyalso have some rights to the corporate affairs such as approving some fundamentalchanges to the corporation.’22This puts them in a position against the directors.120• See Frank & Taylor, Corporate Law for Canadian Business: A Case Book &The Canadian Business Corporations Act. (Vancouver: Butterworth PublishingGroup, 1980), at 2.121 Id.They held:”As a corporation can not act in its own person, it must act by agents.These agents, who are entrusted with the management of the corporation, are termeddirectors...”‘ See supra, at Chapter III, for relevant provisions.48They may appoint and/or remove the directors. The directors need to report certainissues such as fundamental changes to the shareholders meetings.But in reality the directors do not need to care too much about the opinions ofthe shareholders. Since the management team constituted by the directors and themanagers normally are professionals in managing business, it does not make sensefor them to report the detailed business management of the company to shareholdersand to get approval from the shareholders. This has also been recognized by the caselaw.’ The shareholders do not need to pay other duties except for buying theshares. So according to the inseparability of right and duty, the law does not offerthem more rights than obtaining interests of the shares when they want to interferewith the decisions of the directors concerning the running of the corporation.The ownership issue in the private corporations also experienced some changesas time went on. According to Mike Rosser, “In the nineteenth century the typicalfirm was both owned and managed by the same entrepreneur; maximising profit wasnaturally considered the main objective; today, however, the major part of industrialoutput is controlled by large public companies which are owned by shareholders andrun by salaried managers; only very broad policy guidelines are laid down atshareholder meetings and widely dispersed shareholding means that individualshareholders can have little to say in company decisions...lUflAlso see above, at Chapter III.‘. See Mike Rosser, Microeconomics: The Firm and the Market Economy,(London: MacMillian Education Ltd., 1988) at 115.49It is obvious that because of the dispersing tendency of the shareholding, it will alsobe difficult for the directors to get somewhat unified opinions from the shareholders.From the standpoints of the shareholders, since the shareholders meetings are notheld very often,’ they are only periodically able to give some sound relevantopinions on business issues. And they have to compare the cost of their monitoringthe management details with the changes of the interests they will get. If the cost tomonitor is too high, they would rather just sell the shares they hold to find some wayout than to suffer the unsatisfactory achievements of the corporations.In reality, the management team - the directors - is in a more advantageousposition than the shareholders, in terms of exerting the power to manage thecorporate affairs. And since the motives of the directors and that of the shareholdersare almost the same - that is, in terms of seeking the competitive return of the capital- there should be no fundamental contradictions or ideological differences betweenthem. As well, only very broad policies are laid out in the shareholders meeting thatbinds the directors’ actions.’ So it seems the directors can enjoy almost fullautonomy to run the company. There are hardly any contradictions or inconsistenciesin the private companies.‘. Normally once 15 or 18 months, See C.B.C.A, at s. 127.‘. See Mike Rosser, Micro Economics: The Firm and the Market Economics,supra note 124, at 115.503. Different Treatment of the SOEC and the CCCThis issue relates to the governments’ different attitudes to and usages of theenterprises and the corporations.a. Treatment to the SOEC1) Being Responsible for Its Own Profits and LossesAfter the Economic Reform in 1978127, the method of Retention of Profit’and that of Responsibility for Profits and Losses began to be implemented, andthe property rights of enterprises began to be separated from the state assets to someextent. After the enterprises pay their taxes to the state, they can have their own127 The economic reform was first initiated at the third Plenary Session of theEleventh Chinese Communist Party Central Committee in 1978. At that meeting, theCCP Committee called on the people to focus on economic development. Chineseleaders realized that “in order to achieve socialist modernization, the economicstructure must be reformed.”See the “Communique of the Third Plenary Session of the 11th ChineseCommunist Party Central Committee”, reprinted in People’s Daily, Dec.24, 1978.. The State Council, “Guanyu Guoying Qiye Shixing Lirun Liucheng DeGuiding” (The Regulations on the Implementation of Retention of Profits by State-Owned Enterprises), promulgated on July 13, 1979.See 1977-1986 Zhongyao Jingji Lifa Ziliao Xuanbian (The SelectedCompilation of Some Substantial Economic Regulations from 1977-1986), see supranote 26, at p.55.129 See supra note 85, Zhonghua Renmin Gongheguo Xingzheng FaguiXiuanbian, (the Selected Compilation of the Administrative Laws and Regulationsof the PRC), Beijing, Law Publishing House, 1990.51property. This is a big change. So the managers can say immediately that theirenterprises have some assets that belong to their own control.This change, therefore, was facilitated by the legal regime to some extent. The lawprovides that the state-owned enterprise legal person bear civil liability to the extentof the property the State has given it to operate and manage. And in regard to theproperty the legal person owns, the enterprise has the right to possess, utilize, profitfrom, and dispose of it’3°. This means that after the state-owned enterprises obtainthe status of a legal person, the property in the enterprise has been separated fromthe property of the state. The enterprise has thus gained or been granted theproperty that is subject to the managers’ independent management although theproperty belongs neither to the managers themselves nor to the enterprises. Thisreflects the state’s willingness to have the enterprise utilize the property to make aprofit as well as to shoulder the responsibility to increase the value of the state assets- the enterprise property.’31So it appears that the state wishes the SOECs to survive by themselves. Due tosome opinions that a SOEC may also have its own interests, such as the welfare of‘°. See supra note 33, China’s Civil Law, at art. 48.Even in the policies for implementing the shareholding system in the SOEC,it is advocated that the enterprises have to assure and increase the value of theirproperty.See the Trial Methods for the Shareholding Enterprises, at art. 1, in ZhongwaiGufenzhi Fagui Huibian, supra note 40.52the workers,’32we may how see the arrangement of the government reflects somenotion that a specific SOEC may also be taken as a vehicle to serve the interest ofthe employees working in it just like the private corporations.2) Internal Right Balancing in the SOECThere appears to be two kinds of power in the SOEC for balancing the managingrights of the directors. One is from the Communist Party Committee in the SOECand the other is from the employee assembly.a) Control from the PartyAs stated before, under the current social and economic system in the PRC, theCCP has always assumed and will doubtless continue to assume the leadership, whichis guaranteed by the Constitution.’33There are a lot of members in the CCP. The132• See Qi Ming, “Qiye de suoyou quan he jingying quan”, (the ownership rightand the management right to the enterprises), in Yuan Baohua & Ni Zhengmao (ed.)Quanmin suoyouzhi gongye giye fa jianghua, supra note 51, at 26.133• According to the size of every geographic area or entity, a given organizationsof the Party may be called either a “committee” or a “branch”. A “committee” is setup for a large entity or geographic area and a “branch” is established for smallerones, both of which are headed by a person called a “secretary”.See the Constitution of the Chinese Communist Party, supra note 22, at 198.And also see Henry R. Zheng, “Business Organization & Securities Laws of thePeople’s Republic of China”, collected in Ralph H. Folsom, Jonh H. Minan Law inthe People’s Republic of China, at supra note 5.53Party enforces its control over the country through all these affiliations and itsmembers. Nearly all the important positions of the institutions and enterprises arerequired to be held by Party members.Originally the leadership of the SOEC was in the Party committee’s hands.’In 1984, the Third Plenary Session of the Twelfth Chinese Communist Party CentralCommittee expressly mandated reform of the old system by re-establishing thegeneral manager responsibility system’35. This transfers the leadership of theenterprise from the Party committee to the general manager, thereby reducing therole of the Party committee in enterprises from a “leadership” to a “supervisory‘. In China, the leadership of the enterprises once was in the managers’ handsand once in that of the Party committees. There have been two differentmanagement systems that have been implemented since 1949 concerning therelationship between the Party committee and the general manager in the SOEC, oneof which is the “General manager responsibility system” and the other being the“general manager responsibility system under the leadership of the Party committee.”The former allows the general manager to have complete control overmanagement while the latter gives the decision making power to the Party committeewhile at the same time requesting the general manager to shoulder the responsibilityfor the implementation of the decisions.As to the Regulations regarding the “General manager responsibility system” andthe “general manager responsibility system under the leadership of the Partycommittee”,see Zhonhua Renmin Gongheguo Xingzheng Fagui Xiuanbian, (the SelectedCompilation of the Administrative Laws and Regulations of the PRC), (Beijing: LawPublishing House, 1991) at supra note 85.135 See supra note 31, the Party policy, “Decision on the Economic Reform”, atp. 21.After that the General Manager Responsibility System” was stipulated in theGeneral Manager Regulations.54function”.The “Enterprise Law” does not set forth in detail or concrete terms the CCP’s rolein an enterprise. Only one article out of the sixty-nine articles of the Enterprise Lawis devoted to defining the rights and obligations of the CCP. It provides that theCCP shall guarantee and supervise the enterprise’s implementation of both theState’s and the CCP’s principles and policies137. So the Enterprise Law alsorecognizes the Party committee’s supervisory role.Although it is good to transfer the leadership from the Party committee to themanagement of the enterprises, one may still wonder what the “supervisory function”means. As to the so called “supervisory function”, the vice director of the StatePlanning Committee has said:“the supervisory role of the Party committee under the newly reformed system issuch that before the general manager makes a decision, the Party committee shallactively propose suggestions and opinions... After the decision is made by the generalmanager, the Party committee shall ensure the implementation of the decision‘. See supra note 36, “General Manager Regulations”, at art.2, 6, &26.See the Enterprise Law, at. art 8.Kennith T.K. Wong and Zhonglan Huang think that it is possible that the lawdrafters decided not to deal with the issue of reduction in the CCP’s influencebecause it is so controversial.See Kenneth T.K. Wong & Zhonglan Huang, “A Critical Analysis of the Law ofthe People’s Republic of China on Industrial Enterprises owned by the WholePeople”, 7 Pacific Basin Law Journal at p. 180.‘.“Yuan Baohua shou zhongzubu, guojiajingwei he quanzong weituo jiuquanmin suoyouzhi gongye qiye sange tiaoli dajizhe wen” (Yuan Baohua upon therequest of the Department of Organization of the Party Central Committee, the StateEconomic Planning Committee and National General Worker’s Union of Chinaanswering the questions of reporters on the three Regulations governing the industrialenterprises under the ownership of the whole people).See, Economic Daily, Jan 16, 1987, at P. 3.55through various political and ideological assistance. Where the Party committeedisagrees with the general manager, it shall timely put forth its objections and wherenecessary, report to the competent department of the Party committee at a higherlevel’”This may give an impression that when the CCP committee in an enterpriseagreed with the manager’s decision, it would just act as the adjunct of themanagement, whereas when it disagreed with the manager’s decision it could onlyresort to the Party committee in the above level, thereby not bothering themanagement. However, the provision in the Enterprise Law demonstrates asomewhat different concept.It reveals that since the Enterprise law grants supervisory power to the CCP in theenterprises, in relation to the implementation of the CCP’s and the state’s policies,the managers still need to be subject not only to the Party’s policy, but also to theCCP’s committee officials’ discretion about whether the managers are on the righttrack.In addition, since almost all the managers of the SOECs are Party members,139they are subject to the instruction and investigation of the Party. All Party membersneed to take part in the organization of the Party Committee and to report theirpolitical ideas or ideological problem regularly°. And if the Committee or the139• Generally speaking, the government responsible institution will not appointa person who is not a CCP member to be in the position of enterprise director. Thisis the practical situation in China.140• This point is stipulated in the Party rules to the CCP members. See“Zhongguo Gongchandang Gongye Qiye Jiceng Zuzhi Gongzuo Zhanxmg Tiaoli” (TheProvisional Rules as to the Organizational Work of the Seed Organizations of China’sCommunist Party), collected in Quanmin suovouzhi gongye giye fa jianghua (The56branch does not like a member’s action or behaviour, it will accuse that member andencourage him to improve it’41.Anyway, the legal regime seems not to allow the Party committee to exercisecontrol over routine management activities. Under the “Four Basic Principles”42,one of which is adherence to the leadership of the Party, it is not realistic to think theParty can thoroughly abandon their influence in the SOECs, which is the mainstay ofChina’s economy. So the Party committee functions in the SOECs as a balance to thedirector’s management right.b) Balancing Power of the Employee AssemblyThe nature of China’s state-ownership and the supreme status of the working-class,which is guaranteed by the Constitution143,support the rationale of giving somecontrolling power to the workers. The organic mechanism is well set up by thelecture to the State-Owned Enterprise Law), supra note 51, at 308.141 Id.142• The “Four Basic Principles” are stipulated in China’s Constitution. They areheld to be the guiding principles of people’s work and life in China.It is provided that the People’s Republic of China is a socialist state underthe people’s democratic dictatorship led by the working class and based on theaffiance of workers and peasants.See supra note 20, China’s Constitution, at art. 1.57regulations.’It is also provided that the assembly must discuss and comment on almost everymatter of business management, and may supervise the performance of high-rankingofficers, propose awards or penalties, recommend candidates for the generalmanager, or nominate the general manager to be appointed by the competentauthority’45.These provisions demonstrate that the assembly’s scope of power isbroad, although mostly advisory.And most importantly, the assembly has decision making power over importantmatters that concern the employees’ welfare, such as plans for the use of theemployees’ welfare fund and for housing distribution’. If the general managerdisagrees with the assembly on these matters, he may request only that the assemblyreconsider its decisions, and he must follow the decision which the assemblyultimately reaches’47. So, the managers seem not to have the power to decideissues regarding workers’ welfare.‘. The regulations provide that employee representatives are elected by andchosen from the employees and the assembly adopts resolution by a simple majority;two-thirds of the representatives constitute a quorum; the meetings of the assemblyare chaired by a panel consisting of workers, technical and managerial personnel, andexecutives and the assembly also may set up various special committees to study anddiscuss matters in specific areas on a regular and standing basis.See supra note 37, the Employee Representative Assembly Regulations, at art. 12,14, 18, 16, 21, 7, etc.‘s Id. at art. 7.And see the Enterprise Law, supra note 32, at art 47.“. See supra note 37, the Employees Representative Assembly Regulation, atart 7(3). and the Enterprise Law, at art. 52.See supra note 36, the General Manager Regulations, at art. 30.58This legal regime, without any doubt, is giving some power to the EmployeeAssembly, thus creating a new controlling strength over the managers’ autonomy. Themanagers thus have to care about how the workers will evaluate their decisions,especially those about reward and punishment. These will often be used to enhancethe incentive of the workers but are also sensitive to the workers. To raise the pointof democracy in the economic entity is characteristic of China. It is stipulated thatdemocratic management must be carried out in the SOEC1,although this seemsto conflict with the “General Manager Responsibility System.” Here a new saying,“democratic management” appears. That reminds one that the autonomy of theenterprises may not be said to be given to the managers. This will not only underminethe management of the enterprises but also ruin the rational of having the generalmanagers be responsible for the profits and losses. The political and legal regime inChina seems not to give a clear idea of extent to which the general managers shouldbe given their right. This may actually be seen as another means for the governmentto balance the autonomy of the managers.b. The Treatment of CCCs by the Canadian Government - Rendering Privileges1), The Origin of the PrivilegesThe immunities, privileges and prerogatives of the CCC originated from England,. It is provided that the Employee Representative Assembly is the basicinstrument to implement the democratic management in the SOEC. See theEnterprise Law, at art. 51.59wherein prior to the thirteenth century, the king or monarch could not be sued in anycourt whatsoever.’49To use the language of early commentators, the sovereign wasthe fountain of justice and of honour; the writs were commanded in his name, andthrough his Attorney-General he guards the public interest against violators.150 Soin exempting the sovereignty from legal liability it was thought that private interestswere being subjected to public needs and that this was desirable’51.2) The Status to Enjoy the PrivilegesAs to the crown corporations, when they made their appearance in the second halfof the 19th century, the court had to adjudicate and decide whether thesecorporations should be entitled to the benefit of the crown privileges or simply betreated as general corporations. In the case of Bank Voor Handel En Scheepvaartv. Administrator of Hungarian Property.’52 the court specifically considered theissue of the category of persons who could claim crown immunity, and came up withthe following list:a) the sovereign personally149 Street, H., Governmental Liability. A Comparative Study, (Cambridge [Eng.],University Press, 1953), at, 1; See also Linstead, S.G., The Law of Crown Privilegein Canada and Elsewhere, (1968)‘o Id.See Moses Aidrin Kimuli, Legal Aspects of Public or Crown Corporations inCanada, (Master’s Thesis collected in Univ. of British Columbia, 1980).152 [1954] A.C. 584.60b) servants and agents of the crown in their representative capacity.c) persons who are not crown servants or agents but who, for certain limitedpurposes are considered to be in ‘consimili casu’ with such servants or agents.153Things have become clearer since the effectiveness of the Financial AdministrativeAct (F.A.A). At the federal level, the F.A.A. defines both Schedule B and Ccorporations to be agents of the Crown.’54 The status of the Schedule Dcorporations, as well as some other government-related corporations not listed in anyof the schedules to the F.A.A, is somewhat indeterminate.’553) The Substantial ImmunitiesIn Canada, CCCs would not be bound by the federal statutes unless otherwiseprovided.’56 The Special Acts creating the CCCs sometimes expressly exclude thegeneral corporations acts, such as the C.B.C.A. and the respective provincialcorporations acts.’57 Also, Crown Corporations are generally exempt from incomeId. Lord Tucker, p. 627. See also Lord Asquith, p. 630.154• See supra note 47, the Financial Administration Act, at. s. 38.Concerning these corporations, the issue of whether they can or cannot enjoythe privileges “appears to rest largely on common law criteria of Crown or ministerialcontrol”See Elaine Kirsch, The Legal Environment ofFederal Crown Corporations (1979).156 See S.16 of the Federal Interpretation Act. R.S.C. 1970, c. 1-23.See, for example, the Petro-Canada Act, which states that:“27. The following provisions of Part W of the Canada Corporations Act are notincorporated with this Act, and this Act shall be construed accordingly.”61tax.’584). International Privileges and Procedural PrerogativesApart from the gradually diminished substantial liabilities privileges andimmunities enjoyed, the crown corporations do have some other privilegesinternationally and procedurally.From all these privileges, it is obvious that the CCCs are really treated by the lawsas special entities. They can hardly be treated together with general corporations.’59The Air Canada Act, when it first be pronounced, provided that:“21. The provisions of the Canada Corporations Act do not apply to this Act...”The new Canada Development Investment Corporation Bill provides:“Except where otherwise provided, the Canada Business Corporations Act doesnot apply hereto (s.9 - translation).”158• See s.149 (1) (d) Income Tax Act, R.S.C., 1970, c.1-5. But s.27 of the Income Tax Act removes from that exemption a number ofproprietary corporations, e.g., Air Canada, C.N.R. Co., and Cape BretonDevelopment Corporation, which are deemed to be private corporations.See the Crown Liability Act (R.S.C., 1970, c. C-38. at, s.3 <1>) which finallyestablished the liability of the crown for torts of its servants. Now for purposes oftortious liability, it does not matter whether a crown corporation is or is not a servantof the crown. If it is a servant of the crown, then the crown is vicariously liable forits torts.Also See Treitel, G.H., Crown Proceedings: Some Recent Developments.And complaints by contractors thus led to the passing of the Petition of Right Act.The liability of the crown in contract was firmly established in 1874 in Thomas v. Reg.[1874], L.R., 10 Q.R. 31.62In Friedmann’s words, “they place the crown as litigant in a highly privileged positionvis-a-vis the citizen.’6°c. Treatments of The Canadian Private Corporations - Balancing the ManagementRight with CourtsAny powers or rights need to be kept in a kind of balance. So the managing powerof the directors in the private corporations could not be made absolutely too. Sinceas we have shown above, Canadian case law does not favour shareholders interferingwith the management right of the directors, the question may be asked, who maycontrol or correct the directors when they really have some problems or meet withsome problems in running the business?The Canadian legal context gives us some answers to this question. It provides thata corporation, a shareholder, or a director may apply to a court to determine anycontroversy with respect to an election or appointment of a director or auditor of thecorporation’61. And the court may determine whether any other person is adissenting shareholder who should be joined as a party,’62 etc. In other words,160• Friedmann, W., “Legal Aspects of Incorporated Public Authorities”, 22 A.LJ.7 at p.7.161 See CBCA, at s. 139(1). It is obvious that even the shareholders ultimatecontrol - appointment or removal of the directors - is subject to court approval.Supposedly fairness is the consideration of the courts in this context.162 See CBCA, at s.184 ss.20.63“the governing statute gave the court powers to rectify defects, errors orirregularities in the conduct of the business of a company, and, accordingly, thatpower was exercised to set aside any purported acts of the directors.”163Provincial legal rules also have relevant stipulations. In British Columbia, it isprovided that the courts can call the shareholders meetings if necessary, may givedirections to the directors or directly intervene to approve some fundamental businessmatters of the company; and the directors decisions are subject to courts’ correctionsif wrong.’TMHere we can see the functions of the Canadian courts in the private companies.This actually is a kind of balancing power to the management right and also aposterior control to the private corporations. The reason why it is a posterior controlis that if there are no questions during the management, the courts are normally notinvolved. Court control happens only after a law suit or complaint is issued.Theoretically, therefore, this kind of court control will not result in any delay in thebusiness or any fetter in the decision-making of the management, whereas the controlin the SOEC or CCC will surely be due to all the approval required.Since the courts generally do not have any relationship with any party to the lawsuit, they are supposed to be neutral and fair to both. However, in the EnterpriseLaw of China, if any conflict arises between the enterprise and the responsible163 See Lazar Sarna & Hillel Neuer, Directors & Officers: A Canadian LegalManual, (Montreal: Jewel Publications Limited, 1993), at 1-30.164• See British Columbia Companies Act with Regulations. (Ont: Tax & BusinessLaw Publishers, 1992), at s. 166, s. 173, s. 150, and s. 146.The Act is hereinafter cited as B.C.C.A..64institution, the enterprise is allowed to complain to the above level of its responsibleinstitution.’65 Whether that above level institution can treat the two parts fairly issuspect since it itself is a kind of administration.So the C.B.C.A. spirit of courts’ involvement is both conducive to the quick-moving and autonomous characteristics of the corporations in a market economicmechanism and protective - at least theoretically - to everybody’s interests, such asthe directors, shareholder, corporations, employees or even the order of the market.4. Commitment, Interests and Liability of the DfrectorsDirectors can protect whomever they choose - organizations or externalconstituency - depending on their own needs and the pressures to which they aresubject’. So, it is clear that the management is decisive force in corporate affairs.Actually, the management is the most important resource in the corporationoperations. An examination of the commitments, liabilities as well as the interests ofthe directors under the respective legal regimes will help to clarify the implicationsof the management right issue.165 See the Enterprise Law, at art. 61.“. See Henry Mintzberg, Power In and Around Organizations, (EnglewoodCliffs: Prentice-Hall, 1983), p.69.65a. The Directors of the SOECIt is provided that the directors must work to satisfy the needs of both the planand the markets.’67 But the directors also need to make money to be responsiblefor their profit and losses.1 So the means of defining the satisfaction of both theplan and the market need may be a puzzle. The defining authority certainly lies inthe hands of the administration since the appraisal of the achievement of thedirectors lies in the hands of the responsible institution.’ So the legal regimerequires that the directors of the SOEC be committed to the responsible institutions.As to the interests of the directors, their appointment and removal are subject tothe responsible institutions of the government as well as the appraisal andrecommendation of the employment assembly (Zhigong Daibiao Dahui).’7°So theirmandate actually depends on the feelings of the two groups of people. Theresponsible institution may care about whether the enterprise can carry out themandatory plan and the guidance plan, and accept the supervision. The employeeassembly may care about employee welfare matters and the material interests withinthe government allowance.’7’So neither of the two groups of people to whom thedirectors are committed has much desire to require the directors to earn lots of profit167• See the Enterprise Law, at art 3.168 See the Enterprise Law, at art 2.169 See the Enterprise Law, at art. 49.170• See the Enterprise Law, at art. 36.Even if the enterprise earns more profit, the government has a ceiling for thebonus the enterprise directors may issue to the workers.66for the enterprises themselves.Bonuses and rewards to the directors also need to be decided by the responsibleinstitutions.172 So the enterprises’ directors have no direct links with the enterpriseprofits. Of course if the directors can make a profit they can be proud and arepraised by everybody. However, if making profit contradicts the intentions of theresponsible institutions and/or the employee assemblies, the directors will certainlyobserve the interests of the government and the workers.All the liabilities of the directors have little to do with the profitability or theefficiencies of the enterprises. The general losses to the enterprises lead toadministrative penalties.’73 Only when the state assets in the enterprises areseverely damaged may the directors incur some criminal punishment.’74So it is clear that the legal implication is to have the enterprise directors paycommitment both to the profit of the enterprises and to the plan or control of theresponsible institutions. The interest or liabilities also need to be decided by thegovernment responsible administrations. This reflects the policy implication that theSOECs should be able to survive by themselves although they should be controlledby the government and serve the state plan whenever necessary.172• See Enterprise Law, at art. 36.See the Enterprise Law, at art. 63.174 Id.67b. The Directors of the CCCsAs to the Crown corporations’ directors’ appointment, although the governmentin the Blue Paper stated that it is the government’s belief that Crown corporationswill operate at peak efficiency’75,it is clear that in most cases no standard orqualifications are set regarding the appointment of directors.176 We could alsoeasily perceive that this makes it more convenient for the government to choose thedirectors as it likes. Just as Stevens points out, “the criteria for appointment arefrequently more for political rather than for demonstrated managerial ability.’77And the Government Blue Paper on one hand demands that, although directorsof public corporations must execute their duties efficiently, they must also pay regardto broad policy objects; but on the other hand, it proceeds to say that the commonlaw duties apply to directors of public corporations?78An important object of utility to the management of government enterprises- thatis, one for which they are willing to trade owner wealth- is the maintenance of17s See Royal Commission on Govermnent Organization Report, 5 flOrganization of the Government of Canada. (Government Blue Paper), Ottawa,Canada: Queen’s Printer, 1963, at 27.176• See for example, s. 8(1) Petro Canada Act; s. 6(1) Teleglobe Canada Act; s.3 Agricultural Stabilization Act.J.T. Stevens, The Business of Government (Toronto: McGraw-Hill Ryerson,1978), at 121.178 See the Government Blue Paper, supra note 175, p. 27 & 27-28.68political support for the enterprise.179 Baldwin said:“...Public managers trade profits for political support because they are constrainedto do so by their politician-supervisors...”°And according to Nisdanen,’8’the most important goals of the public managersarea). Pay Power and Prestigeb). Ease of Managementc). Security of tenureOf all the factors, even the first was said to have nothing to do withprofitability.182 From the citations above, we have seen that the commitment andinterests of the directors of CCCs depend on the government, or the Partysurvival.’83 The liabilities of the directors of the private corporations also apply toSee Peltzman, “Pricing in Public & Private Enterprises: Electric Utilities in theUnited States” (1971), 14 Journal of Law and Economics, at 111.See J.R. Baldwin, The Regulatory Agency and the Public Corporation: TheCanadian Air Transport Industry, (Cambridge: Mass., Ballinger Publication Co.,1975).181• See WA. Nisdanen, Bureaucracy and Representative Government, (Chicago:Aldine-Atherton, 1971), at 397.‘. See C.N. Parkinson, Parkinson’s Law & Other Studies in Administration(Boston: Houghton Mifflin Co., 1975)183• Canada is a country with multi-party elections. The party that wins theelection will constitute the government although it may face opposition from minorityparties.69the directors of the government corporations.’ This point can be seen in the nextsection.c. The Directors in the Canadian Private CorporationsThe Canadian general corporate law makes provisions regarding the commitmentand liabilities of the directors of the private corporations.185 It is provided thatdirectors shall act for the best interest of the corporations’ and shall disclose therelationships or conflict of their personal interests with corporate business.’87 Thisreflects that the directors are to be committed to the interests of the corporation butnot necessarily the interests of other individuals or groups. According to Faylor,“...the directors must work for the best interest of the company, they may have theinterests of the members, present and future, in mind, whereas on the other hand,the interests of employees, consumers of the company, products or national interestsare legally irrelevant...”As to liabilities, the legal context gives very detailed stipulations. For example, itis provided that directors of a corporation who vote for or consent to a resolution‘. See supra note 175, the Government Blue Paper at, 27-28.185• Some special acts and official reports governing the CCC also subject thedirectors of the CCC to the general corporate laws.‘. See supra note 164, B.C.C.A., at s. 142.187 See s.144 & s.147 of BCCA.‘. See Frank R. Faylor, Corporation Law for Canadian Business. A Case Book& the CBCA, (Vancouver: Butterworth Publishing Group, 1980), at 194.70authorizing the issue of a share under section 25, for a consideration other thanmoney, are jointly and severally liable to the corporation to make good any amountby which the consideration received is less than the fair equivalent of the money thatthe corporation would have received if the share had been issued for money on thedate of the resolution.’89 So it is clear that the directors who commit wrongs arepecuniarily liable to compensate the corporation. This must make the directors veiycautious in making decisions so that the efficiency of decision-making is improved andassured to some extent. Similar provisions can also be found elsewhere.’9°More importantly, it has been observed that “...rather than acting solely in astewardship role of protecting the shareholders interests, the management alsoconsiders interests of its The interests of the directors are one of themajor factors contributing to the philosophy of the directors’ actions.There are several different managerial theories of the firm that are based on the189 See CBCA, at s. 113 (1).190 For example, Directors of a corporation who vote for or consent to aresolution authorizing<a>. a purchase, redemption or other acquisition of shares contrary to section 32,33, or 34, or<e>. a payment of an indemnity contrary to section 119,are joint and severally liable to restore to the corporation any amounts so distributedor paid and not otherwise recovered by the corporation.See CBCA, at 8. 113, (2).See Gordon, R. A., Business Leadership in the Large Corporation, (Berkeley:Univ. of California Press, 1961), at 305.71observation of the general corporations1.A common assumption of themanagerial theories is that the managers who run these shareholder-ownedcompanies will try to pursue their own personal objectives, such as a high salary,security, or prestige, subject to certain constraints’. Although these objectivescannot actually be quantified, they are certainly in close relation with the firm’srevenue and/or its growth rate.According to the theory of Baumol, the main constraint imposed on managers isthat they must ensure that their firm makes at least a given minimum level of profitto secure their positions’94.If the profit achievement is not good their positions willbe at stake. Mike Rosser gives two reasons for this.’95192• The main managerial theories of the firm are Baumol’s sales revenuemaximisation theory, Williamson’s managerial utility maximisation theory, andMarris’s growth maximisation theory.For reference, see respectively, WJ. Baumol, “Business Behaviour, Value andGrowth” (New York: MacMillian, 1959), O.E. Williamson, ‘The Economics ofDiscretionary Behaviour”(Chicago: Markham, 1967) and R.L Marris, “The EconomicTheory of Managerial Capitalism” (London: MacMillian 1964).See supra note 124, Mike Rosser, Microeconomics: The Firm and the MarketEconomy, at 116.194 See W.J. Baumol, “Business Behaviour. Value and Growth” (New York:MacMillian, 1959).Firstly, shareholders may vote to replace the management team if they are notsatisfied with the profit that the firm earns for them. Secondly, low profits will tendto depress the price at which a firm’s shares are traded. If the firm is actuallycapable of making a higher profit this will mean that its shares are undervalued.Another firm that recognises this undervaluation may seize the opportunity of buyingthe shares up at a bargain price and if there is a complete take-over then the originalmanagement team may be removed.See supra note 124, Mike Rosser, Microeconomics: The Firm and the MarketEconomy, at 117.72The pursuit of personal objectives as well as the threat of being replaced wouldlead managers to try their best to maximize the profit of the firms. This totally fitswith the objectives of the shareholders. This obviously will benefit the consistency ofthe relationship of ownership right and management right.So, all the commitments, liabilities and interests are for pushing the directors ofthe private corporations to be more responsible for their management duty. Thus thespirit in the legal context can be said to serve well the function of making thecompanies more efficient at making profit.73Chapter V. The Reasons for the DifferenceIA. The Different Economic and Social Milieus Contribute to the Different LegalImplications and Effects.1. The Changing Economic Regime in China Makes the Role of the SOEC AMixture of Government Instrument and Self-Survivora. The Changing Economic Regime - From the Planned Economy to Plan/MarketEconomyChina began to implement the planned economy shortly after the establishmentof the People’s Republic of China in 1949. The first 5-Year plan was adopted in 1953.The situation of the beginning of planned economy perceived by Nicholas R. Lardyshowed as:“Provincial planning commissions were formally established in 1954 in mostregions, and evidence of their active role became available in the late fall of 1955.”...“In August, provincial five-year plans were first promulgated. Equally important, atthis time planning offices at the county level were beginning to play an increasing rolein mobilizing and planning the use of local economic resources. By 1955, over 1,400counties, about two-thirds of the total, had established their own planningcommission.”The planned economy system was implemented almost as the exclusive economic. See Nicholas R. Lardy, (ed). Chinese Economic Planning. (New York: M.E.Sharp. Inc., 1977), at p. viii.74mode from 1956 to 1982 and the dominant mode from 1982 to 19931, in whichyear it was finally substituted by the market economy1.Under the former planned economy, before the Economic Reform, all thepersonnel, financing, assets, supplies, productions and sales were planned andcentrally managed by the state, and the centralized and unified management of state-run enterprises by the state executive units from the central government to variouslocal ones was emphasized’. Therefore the production tasks and the prices of theproducts were also fixed by the government. Under such a system, the enterprises donot need to care about the pressure of competition. On the other hand, even if they197• In 1982, the 12th CCP National Congress proposed that the planned economywas the mainstay and market economy the supplement.See Beijing Central Television Program, Oct.12, 1992, reprinted in FBIS DailyReport Supplement China, Oct.13, 1992. at. p. 30.It was stipulated in the 1982 constitution that ‘The state practises plannedeconomy on the basis of socialist public ownership. It ensures the proportionate andcoordinated growth of the national economy through overall balancing by economicplanning and the supplementary role of regulation by the market.”See China’s Constitution 1982, at art. 15.198• See, at supra note 20, Article 8 of the Constitution 1988, which stipulated useof the planned economy nationally, was changed in the 1993 Amendment to providefor the adoption of the market economy.See the text of the Amendment to the Constitution printed in Fazhi Ribao (Dailyof China’s Legal System) of March 30, 1993.‘. This situation was reflected by Alexander Eckstein as:“Policy makers may, for instance, decide to increase steel production by 10 percentwithin a year regardless of cost and price considerations. They may then implementthis decision by allocating specific numbers of additional workers, certain quantitiesof materials, fuels, and other inputs to the steel industry.”See Alexander Eckstein, China’s Economic Revolution, (New York: CambridgeUniversity Press, 1977), at p. 110.For more information, also see Wang Liming & Liu Zhaonian, “On the PropertyRights System of the State Enterprises in China”, 52 Law and ContemporaryProblems, at p. 19.75worked hard, they could neither get more profit from the purchaser - the government- nor obtain higher salaries?°° So, both the incentives and the efficiency were verylow.As the market economy is expected to provide a useful supplementary role to theplanned economy, thereby encouraging the enterprises to be more productive andenabling them to supply goods and services of higher quality,2°1it was ushered inby the CCP and the government in 1982.202 Since then, it has drawn more andmore attention from the CCP and the government and eventually was added intoChina’s newly enacted Constitution of 1993.203Here we can see that, although the characteristic of socialism seems to be2oo This point was perceived by Christopher Howe as:“...Chinese plans are set mainly in physical terms. Does this leave any role for prices,profits, or variations in personal income?”Further more, he perceived:”In so far as the economy is controlled by bureaucraticand political action, the penalties for disobedience are criticism, demotion, andpenalties specified in written regulations.”See Christopher Howe, China’s Economy: A Basic Guide, (London: Elek BooksLtd. 1978), at p. 62.201• It is obviously only the goods and services of higher quality that can have thepotential to compete in the market.2O2 This point was perceived and recognized finally by both the government andthe CCP.See the Work Report of the 12th National Representative Conference of CCPheld on September 1, 1982, at chapter 2, reprinted in Renmin Ribao (People’s Daily)of September 1, 1982 and the Work Report of the Central Government at the 1stSession of the 6th NPC held on June 6, 1983, at Section 2, reprinted in RenminRibao (People’s Daily) of June 6, 1983. Also see Kenneth & Zhonglan Huang,“A Critical Analysis of the Law of the PRC on Industrial Enterprises Owned by theWhole People”, 7 Pacific Basin Law Journal, at p 180.2o3 See Renmin Ribao (People’s Daily) of April, 1993.76planning whereas that of capitalism seems to be market2°4,the country with theplanned economy may also employ the market as a tool to set up an environment ofcompetition?°5Obviously, this will be more beneficial to China’s future economythan the former planned system which nurtured inefficiency.After market functioning was allowed as a supplementary role and because theenterprises have been responsible for their own profit and losses, the enterprisesinevitably have begun to be more concerned about profit and efficiency. So the effectof ushering in the market mechanism has been reached. Although the marketmechanism is principally set up, however, some questions remain unsettled. The statestill retains the control of the prices of many products and commodities2°6.Withthe government’s confirmation of the market economy the market has become moreprosperous, and has begun to draw more and more attention from the entrepreneurs,dealers, as well as the public purchasers. The market participants will surely take2o4 This idea is held by many people.See Peter Van Ness, Market Reforms- hI -Socialist Societies. (US: LynneRienner Publishers, Inc. 1989) at p.6.205 Id. at. p.3.Peter Van Ness suggests that the purpose of employing the market as aninstrument of reform in a command economy is to force competition.206• It is stipulated, “when market-adjusted commodity prices undergo sharp risesor falls, the commodity price departments may set a max mum and minimum reserveprice fro fixed commodities for a certain period of time and may implement a pricerise application system...”See supra note 41, the Regulation for Price Controls, at art. 11.77advantage of it2°7. To prevent a messy situation from occurring and to retain moreor less control, the government shows their strength in monitoring the price and themarket activities.2°8This may be justifiable. However, it surely may lead to some delays in furtherremoving the price restriction and making the market really reflect the requirementsof demand and supply. In one word, the market economy mechanism is so nascentthat it is hard to say to what extent the government should exert its influence inmaking the market function well.China is a country with a long history of the public ownership. It had a rigidsystem and habitual mechanism that fit with the planned economy, which functionsaccording to the plan and due ratio2°9. So, although China has perceived thesocialist production as a kind of commodity production which has to be inevitably207• Some market participants may take advantage of the opening up of pricing,in order to earn more profit. For example, 108 low-voltage electrical goodsenterprises in March 1987 issued a ‘joint letter to consumers”, in which theyannounced price rises for 269 products; in November, nine enterprises in Beijing,Chongqing, Shenyang and five other cities called a meeting and decided jointly toraise the price of a certain kind of refractory material they produce.See Beijing Review. Feb.8-14, 1988 at p. 24.208• In the Regulations for Price Administration, there are still some commoditieswhose prices are under the fixed ceilings. See at supra note 41, the Regulations ingeneral.209• See Ma Hong, “Woguo shehuizhuyi jingji shi youjihua de shangpin jingji” (Themanner of our Country’s socialist economy is a planned one), 1981. 7 Jingji Yanjiu(Economic Research).78regulated by the value principle210,it will stifi take more time to change the wholesystem from a planned task oriented to the market oriented. So, China will have tostay in a state of mixture of the planned and market economy for quite a long periodof time.21’Moreover, the current regulations governing the market are insufficient. There arenot enough unified and effective laws governing the activities of the marketparticipants and so the functional competition cannot be ensured.212 Althoughthere is a Provisional Stipulation concerning the competition213,it is far from theextent and detail necessary to reach the due effect and is somewhat outdated. Andthe market participants may find it difficult to know what they should do and what210• Value principle here means that whether the commodity could be sold outdepends on its real value, which is determined mainly by the commodity’s quality andthe buyers’ need for it in the market.211 This point is also reflected in Harry Harding, ‘The Problematic Future ofChina’s Economic Reforms”, collected in, Joint Economic Committee of Congress ofthe United States, China’s Economic Dilemmas in the 1990s: The Problems ofReforms. Modernization & Interdependence (Washington: U.S. Government PrintingOffice, 1991), at 82.212• See Sun Youhai, “Jianli shehuizhuyi ihangpin jingji xin zhixu de falusikao”(The Legal Consideration to the Establishment of the New Order for theSocialist Commodity Economy), (1989) 1 Zhongguo Faxue (China Law Journal), at25.213 The Provisional Stipulations on Starting and Protecting the SocialistCompetition. (hereinafter cited as the Stipulations on Competition), adopted by theState Council on October 17, 1980.See supra note 85, Zhonghua Renmin Gongheguo Xingzheng Fagui Xiuanbian,(the Selected Compilation of the Administrative Laws and Regulations of the PRC).79not to do.In a word, since the economic mode in China at the moment is still a nascentstage of market economy, the state still has to use some administrative means toallocate the materials and the productions. As the General Secretary Jiang Zeminsaid:“As the economic and legal regulatory instruments are not mature, someadministrative management is necessary...”214This kind of situation will still make the government exert some influence on theeconomy.This has influenced the SOECs a lot. There are still mandatory plans, althoughthey may be modified somewhat215.The SOECs are still required to complete someplanned tasks. This certainly will make it difficult for them to modulate their productstructure as a whole according to the market demand. The state supplies for theplanned task and the fixed price by which the state will purchase the productsrequired by the mandatory plan may appear to make it difficult for the SOEC tocalculate the cost and do the accounting. And the SOECs may feel difficult to get thereal meanings of the prices in the market. So it is obvious that the more intervention,the more difficult it is for an effective market economy mechanism to be set up. Thiscan lead to a vicious circle.214• See Fazhi Ribao, (Legal Gazette Daily) of June 2, 1993.It is still provided under the Enterprise Law that the SOEC must meetmandatory plan quotas and perform lawful economic contracts.See the Enterprise Law, at Art. 35.80b. The New Stage of the SOEC - From the Appendage of the Government to theMixture of the Appendages and the Self-SurvivorJust as the SOECs have experienced transition from a plan economy to aplan/market economy, they have also experienced two different stages concerningtheir property right. Under the two different stages, the role and the mandate of theSOECs have been changing as well.Before the Chinese Economic Reform of 1979, the property rights of the SOECswere essentially planned and administered by the administrations of the government.It was required by the laws at the time that the competent authority must arrange forraw material supplies and marketing of enterprises. The competent authority mustalso shoulder responsibility if its decision proved inappropriate, resulting in economicloss to enterprises216.So it is clear that at that time, the enterprises just followed with the commandsof the government administration. They were just appendages of the government. Themajor shortcomings of this kind of property right system were described by somescholars in the following terms:217“...Lack of independent property made the enterprises compete to get the stateinvestment while nobody would care about the gains and losses of the investmentcapital...The sole state ownership rights made the govèmmeñt assume the responsibility216 See supra note 35, the Enterprise Regulations, at art. 65.217• See Wang Liming & Liu Zhaoman, at. p. 20.,81for profits and losses of the SOECs, thus neither pressure for bankruptcy norincentives for gains existed...”So it is obvious the enterprises themselves had no independent property rights forthemselves at that time. They did not have the reponsibffity or incentive to run theenterprises well. This led to habitual inefficiency and the psychology of reliance onthe government. The requirement by the state that the SOEC be responsible for theirown profits and losses is part of its the intention of reducing its subsidizing practicesand the heavy burden brought by those SOECs, along with many of the losses wementioned above.218When the CCP and the government decided to make the SOEC responsible fortheir own profits and losses, and therefore more concerned with their efficiency, thekey issue they perceived was the invigoration of the enterprises, the core of which isto expand the autonomy of the enterprises219. The excessive control overenterprises was blamed for inefficiency of state-owned enterpflses°. It has already218• The number of SOECs recording losses has been getting bigger in the lastcouple of years. In 1988, of the 38,480 SOECs included in an investigation by theMinister of Finance, 4,287 enterprises recorded losses rather than profits. In 1989,only 38,030 SOECs were left of the said 38,480 SOEC, whereas the number ofenterprises that recorded losses increased to 6,212 This was a 44.9% increment overthe year. See The State Statistics Bureau, Zhongguo Tongji Zhaiyao, (A StatisticalSurvey of China), (Beijing: China Statistical Publishers, 1990), at 69.219• Central Committee of the Chinese Communist Party, “Decision of the ChineseCommunist Party Central Committee on Reform of the Economic Structure”,adopted by the Third Plenary Session of the 12th Chinese Communist Party CentralCommittee on Oct. 20, 1984, reprinted in Chinese in 10 Xinhua Monthly, (1984), atp. 21.220• Id. at p. 20. The decision states that:”For a long time in the past, the functionof the government and enterprises was not separated and the enterprise became theaffiliate of the administrative departments. Central and regional governments82become a basic Party policy to ensure that the government be appropriatelyseparated from enterprises and that enterprises enjoy sufficient businessautonomy221.It seems the SOEC is allowed some autonomy to run things themselves. Butunfortunately, the current Enterprise law does not allow this to the full extent. Thelegal context was enacted carefully, with a subtle balance between the increasedpower of the enterprise managers and the controlling power of the responsibleinstitutions, and the balancing power of the Party committee and the employmentassembly. So now the SOEC are at the stage of a mixture of government appendagesand self-survivors. This legal regime is just the reflection of the current stage?monopolized many businesses they should not have taken care of,, and many mattersthat they should have taken care of have not been duly cared.”221 Id.222• Since the policy and legal concepts are not yet sufficiently clear, it is difficultfor the practices of the SOECs to be streamlinecLAccording to an investigation made by the China National Workers Assemblyinto 855 SOECs in 40 cities, although the SOECs enjoy some autonomy with respectto capital utilization, asset management, and production and personnel, autonomywith respect to importing and exporting, keeping shares of the earned foreigncurrency, making salary and bonus standards, and establishing joint ventures withother entities, is still far from the SOECs’ reach.See Zhonghua Quanguo Zonggonghui (China’s National Worker’s Assembly),“Guanyu qiyefa guanche luoshi de diaocha baogao” (the Investigation reportconcerning the effect of carrying out and implementing the Enterprise Law), Oct.1990 Fazhi Yuekan (Law Monthly), at p.38.832. The Different Needs of the Canadian Government Give the Laws of the CCCsand the Private Corporations Two Different Implicationsa. Making Use of the CCC as Policy Instruments for Special PurposesAlthough as we know, the CCC is a kind of independent legal entity separatedfrom the government, it is substantially appended to the government. From the legalpoint of view, the government is either the sole or dominant shareholder of a Crowncorporation, or the owner of its total assets, or the trustee of it. From the politicalpoint of view, no Crown corporations would be generated without certain needs asreflected in government policies.A typical statement of government expectations of the CCC was expressed by theMinister of Finance, Edgar Benson, at the time Bill C-219 was introduced:“Able and experienced entrepreneurs will direct the corporation’s operations toareas of critical importance in economic development - to high technology industiy,to resource utilization, to northern-oriented companies and to industries whereCanada has a special competitive advantage?”The legislation often describes the Crown corporations’ objects in very general,even surprisingly ambitious terms. For example, in Quebec, the object of the Societegenerale de financement (SGF) is to“stimulate and promote the formation and development of industrialundertakings... so as to broaden the basis of its [i.e.,Quebec’s] economic structure,accelerate the growth thereof and contribute tO full employment” as well as “toinduce the people of Quebec to participate in the development of such undertakings223 See Bill C-219.84by investing a part of their savings therein”.It is clear from the above example that such a broad interpretation of a CrownCorporation’s objectives simply leaves more room for the government to direct thecompany as freely as possible for the policy needs.The Canadian government has been playing a very important role in the economicsector. Apart from indirect intervention exerted by government instruments such asregulation, tax, subsidies, loans, grants, procurement policies and the like, which mayoften be used to achieve some policy purposes, the government has borrowed sincemore than a hundred years ago the very tool used by the private economicentities to directly fulfil its economic and/or non-economic objectives. This is thecorporation.From the very beginning, the CCCs were created for special purposes of thegovernment. The first corporations, mainly in the fields of transportation andcommunications (CN, the CBC, Air Canada) were established between the two WorldWars, but it was not until the Second World War that this form of intervention firstoccurred on a large scale in order to support Canada’s war effort?26 According toJ.Kennedy, “Twenty-eight such Crown corporations were incorporated for war224 c.S-17, s.4 of the Act.225 In particular, from the year of 1841. This is the year Lord Sydenham, asGovernor of the United Provinces, established a Board of Works as a separate legalentity to construct a canal system.See Moses Aidrin Kimuli, the Legal Aspects of the Public Corporations in Canada,(Unpublished Master’s Thesis, Univ. of British Cólümbia, 1980), at p. ii.226 Id. at 2.85purposes...”227An example may be given from the Canadian Development Corporation (CDC)to see the special usages of the CCC? In 1980, the government decided to usethe CDC, a Crown corporation in which the government has 48% of its shares, toreinforce a farm machinery company, Massey-Ferguson, when it was going to facebankruptcy.However, the expectation of the private shareholders to the company was rathersimple. They only cared about the dynamic of the capital accumulation. In StephenBrooks’s word, “in a sense this merely demonstrates that the dynamic of capitalaccumulation, as it unfolds in a firm which relies on private investors for some partof its capital requirements, resists the imposition Of politically-determined goals thatreduce the competitive return on invested capital...”The different standpoints of the public shareholder and the private shareholderin CDC would naturally put them in conflict with one another. At last themanagement in the CDC decided not to obey the government decision to getinvolved in Massey-Ferguson.The government would certainly not feel comfortable seeing its interests in theCDC being ignored to such an extent. CDC’s rejection of the Massey-Ferguson227• N. Kennedy, History of the Dep ñint Of Munitions and Supply, Vol.I, p.286.228• As to the details of the story, see Stephen Brooks, Who’s in Charge, (Canada:the Institute for Research on Public Policy, 1987).229 Id. at 65.86investment proposal led to a reassessment by the government of the corporation’srole and its relationship to public policy. The Minister of Finance considered that,“the CDC had become too isolated from its principal shareholder, and sought toincrease the government’s influence through new appointments to the board ofdirectors°.”As a result of the government’s consideration, it established the CanadaDevelopment Investment Corporation to eventually divest its interest in theCDC’. So it is clear that if the government-related corporations do not obey thedecisions of the government, the reason for their existence will be lost.The functions of the CCCs can be described as follows:2- to shoulder certain risky projects in which the private firms are unwilling to getinvolved- to redress the inadequacy and inaccessibility of competition policy and theshortcoming of direct regulation- to develop the rural areas- to keep a good balance of the industry structure- to develop projects like the nuclear reactor or the transcontinental airline, etc.- to obtain real market information and production information which is difficult toobtain from the private firms°. Id. From a personal interview given by Stephen Brooks to a CDC official onFebruary 21, 1984.. For details, see also Stephen Brooks, ‘The State as Entrepreneur: From CDCto CDIC”, (Winter, 1983), Canadian Public Administration, p. 525-543.232 Id.87- to offer some kind of relief and stabilizationSince the CCCs are used for special purposes, the stipulated government controlsover them are also very substantial?331 Canada, where the Constitutionallocates federal and provincial legislative jiowñ in economic matters5, theSpecial Acts by which the CCCs were incorporated and the Bills passed later onabout the CCCs as Bill c-153, and Bill c-24 outline the nature of government controlover aspects of appointment of directors, approval to the corporation by-laws,budgets and development plans, the power to issue directives, the requirement of thesubmission of the annual report, and the approval Of certain categories of contractswith a CCC. Through such controls over detailed matters of the CCCs, thegovernment grasps the CCCs firmly in its hand. It is necessary for them to do so sincethe CCCs shoulder the particular mandates and should not be operated too freely.And since one special Act only deals with a specffic CCC, it normally stipulatesthe matters of that company as detailed as possible, certainly including its relationshipwith the government7.So we can see the speciality of the control over the CCCs.. As we set forth above.. See the Canadian Constitution Act of 1867.. See supra note 98, Patrice Garant, “Crown Corporations: Instruments ofEconomic Intervention -Legal Aspects”, at p. 6.. See supra, at Chapter III.. For example, the Teleglobe Canada Act states that the corporation shallcomply with any direction given to it by the Governor-in-Council or Minister withrespect to the exercise of its power.See Teleglobe Canada Act, R.S.C., 1970, c. C-li, at s. 3(9).88If the CCCs were in great number, and if they were the major corporate form, itwould be impossible to legislate the special acts one by one.Although some may argue in favour of giving the CCCs more autonomy, itdoes not seem to make much sense for the CCCs to have autonomy to compete withthe private firms in order to make big money in the market.So far it seems we can say the relationship stipulated in the legal context of CCCs,between ownership and control, is consistent. Owhership totally belongs to the state.Control is totally in the hands of the government The government directs the CCCdirectors (actually the directors and the officials of the competent ministries are oftenidentical) to fulfil their specific mandate in accoiEdañce with the purpose for whichthey were established.The use of crown corporations in Canada has greatly increased, expanding tonearly all the social fields. These include communications, culture and recreation,financing, insurance and business services, transportation systems and facilities,etc?39 However, the number of CCCs in each field is very small. According to a. Some authors think that “a reduction of controls would favour a morestandard application of corporate law, which might increase the efficiency of thesecorporations.”See supra note 98, Patrice Garant, “Crown Corpörátions: Instruments of EconomicIntervention- Legal Aspects”, at 18.. Id.According to a statistical table reproduced by Garant, the appearing of the CCCin various fields is shown as communications, culture and recreation, financing,insurance and business services, transportation systems and facilities, etc.89statistics shown by Prichard°, there are three Crown corporations in the field ofcommunications, two in the field of culture and recreation field, eight in the area offinancing, insurance and business services, and twenty two in the transportation andfacilities field. In percentage terms, crown corporations constitute 2.5 percent of thecorporations with which the government is directly involved in the field ofcommunications, 1.7 percent of those in the culture and recreation field, 6.7 percentof those involved in financing, insurance, and business services, and 18.5 percent ofthose in the transportation and facilities field. So we can see the CCCs only appearas secondary role compared with the private firms in the national economy.b. Utilizing the Private Corporations to Develop the Economy and Vitalize theMarket EconomyWithout any doubt, Canada is a member in the big family of the capitalistcountries. Although the market economy is the major economic mode used in thewestern countries, mainly of which are the capitalist countries, western economictheory does not present a unified viewpoint on this question”. However, a numberof assumptions are agreed as being characteristics of the market economy: thedecision-making authority in the hands of market participants; the self-interested240• See, at supra note 45, J. Robert & S. Prichard, Crown Corporations inCanada. Studies in Law and Economics.. See William A. Byrd, The Market Mechanism and Economic Reforms inChina, (New York, M.E. Sharp. Inc., 1991), at p.20.90motivation of market participants to maximize their profits; decentralization ofinformation; and prices that are adjusted appropriately in response to the changes indemand and supply conditions, as the only information needed to make production,purchases and sales decisions, etc242.If a competitive function could be realized in a type of economic mechanism, thismechanism is supposed to be undoubtedly a good arrangement. It is held by somethat since the free market economy will efficiently allocate an economy’s resources,it is the “best” solution to the economic problem of resource allocation243.According to the notion of capitalism, market-economy mechanisms like theCanadian one would be characterized by the prevailing and dominant economicactivities made by the private enterprises?Accordingly, the most widespread mode of enterprise in Canada is the privatecorporation. This mode occupies a significant position in the Canadian economy. Ithas long been a kind of prevailing vehicle for carrying out the economic activities inCanada. This can be revealed by the statistics. In 1988 the number of the Canadiancorporations was 591,034, whereas there were only 297 government corporations. In1987, the whole family of Canadian corporations numbered 606,562, only 248 of242 Id.. See supra note 124, Mike Rosser, Microeconomics: The Firm and the MarketEconomy, at p. 7.. It is held that one of the characteristics is that there are large areas ofeconomic activity which are open to private venture capital.See Andrew Shonfield, Modern Capitalism- the Changing Balance of Public &Private Power, (London: Oxford University Press, 1965), at 1.91which were government corporations?5 The assets portion of Canadiancorporations, compared as a whole to the CCCs, was 753,618 million to 34,344million. And all of the ten largest firms in 1985 in Canada, measured by sales,were privately owned.247Inside the private corporations both the owner - the shareholder - and themanager would seek the same objective - namely, the biggest profit and the least risk.This consistency of purpose benefits the consistency of the ownership/control issueof the company.As was set forth above, the legal regime makes shareholders hardly to interferein the decisions made by the management professionals, and normally only withrespect to broad policies announced in the shareholders meetings. So it is easy toagree that the relationship between the ownership and control in the private firmsis consistent. The management at least theoretically, and legally, enjoys the autonomyof the corporation to a large extent.The consistent decision-making mechanism can make the private corporationsrespond to the fluctuation of the market more rapidly and modulate the productsvery quickly. This is very important since Canada has a dominant role in the market. See Canada Corporations Financial Statistics (61-207) 1986-87, at Table 1A.. Id.. They are General Motors of Canada, Canadian Pacific Ltd., Ford Motor Co.of Canada, Bell Canada Enterprises, George Weston Ltd., Imperial Oil Ltd., AlcanAluminum Ltd., Chrysler Canada Ltd., Shell Canada Ltd., and Gulf Canada Ltd.. Thetotal sales of the ten companies was almost $100 billion. The data was taken from“The Financial Post 500” in David Stager, the Economic Analysis & Canadian Policy,(Toronto: Butterworth, 1973), at p. 481.92economy. The factors of the market function well and normally. On one hand,according to the requirement of the balance of demand and supply, all the privatecompanies need to be operated in accordance with that requirement reflected by theprice, which can serve as an accurate lever for modulating the functional competitiveenvironment. On the other hand, the activities of the autonomous privatecorporations can stimulate the consummation of the market mechanism too. Thesuccess of the private business will not only benefit the national revenue but also dogood to large number of peoples.Summarily, capitalism- the real market economy - determines the Canadiancorporations composition mode. With the requirement of demand and supply onlythe private firms can have the autonomy to react to it vividly and consciously. Theircompetition and the positive reaction to the market can also stimulate and developthe consummation of the market. We can say it is also because of the marketmechanism that the Canadian government has to set up the CCCs - that is, in orderto meet with some policy purposes that the large number of private corporationscannot serve.B. Compromise of Ideology and Practical NeedsLaw is a matter having the characteristics of both ideology and reality. Althoughit must also be the reflection of the ideology of the ruling class and\or the lawmakers, it must be beneficial to the practical needs of the ruling class. In the words93of Corbett:“.. When in power, the political leaders regardless of ideology respond similarly tostimuli... Although distinctive party ideology may be one of the factors to be includedin the calculus, their forces and events vitiate its impact...”This story can also be discovered in the legal implications of both China and Canada.1) The Compromise of the Ideology of Socialism and the Utilization of theMarket System to Stimulate the Efficiency of the SOECThe purpose of managing the SOECs is to satisfy the needs of society by followingthe requirements of both the plan and the market?49 Actually this is a kind ofcommunist ideology since it is spoken from the perspective of the society, namely thepeople, the public. Since the rationale for it is the public interest, it will certainly notbe possible for the enterprises to compete in the market merely to earn profit forthemselves.As set forth above, the implementation of the mandatory and guidance plans isthe means by which the government exerts its influence on the SOECs. TheEnterprise Law requires that the SOECs follow the government plans even thoughthe plans may be modulated according to the requirements of the SOECs under thecurrently advocated market economy. Nevertheless the SOECs still have to produce. See D. Corbett, Politics and Airlines, (Toronto: Allen and Unwin, 1965)See Enterprise Law, at art. 3.94goods for the needs of the society rather than concentrate on profitability.The inefficiency of the former planned economy and the governmentadministrative method to manage the SOECs were perceived by the CCP and thegovernment at about the time of the Economic Reform. The former economic andmanagement regime resulted in a lack of profitability for many enterprises, whichtherefore had to be subsidized by the government. Under that economic system,nobody was responsible for the good running of the SOECs. Since the state absorbedall the profits and losses, no good quality standards could be observed. Nobody wouldbenefit from efficiency and suffer from any inefficiency. The state economy was in aslug situation.The practical needs of increasing the SOEC’s productivity demanded that the CCPand the government render more effective means to solve practical problems. So boththe market economic mechanism and, correspondingly, the idea of giving moreautonomy to the management were ushered in. Actually these two things began tobe utilized in capitalist countries. Under the current China, whose political power isin the hands of CCP, these two matters are contradictory with communist or socialistideology. Although the two methods have already been implemented, the argumentsabout whether they are good for the socialist China are continuing. Due to the factthat China’s supreme leader’s ideology is very pragmatist°, the rigid communist25o China’s supreme leader, Mr. Deng Xiaoping, ever said that no matter a catwas white or black, it would be a good cat only if it can catch mise. Although heinsists the dominance of the Communist Party, he advocates market economy and theshareholding system too. Party dominance can make the current leaders still be at theleading position. Market economy and shareholding system can make china’s95ideology can move towards the compromise of the communist ideology and the usefulmethods used in capitalist countries.China’s situation at the moment reflects the above compromise. The SOECs cankeep some profits after handing over certain amounts of tax to the government.Therefore the SOECs and their employees can have their own material interests ifthey work hard. At the moment rather than working inefficiently under the slogan“Wei Renmin Fuwu” (Serve the Interest of the People), the workers can realize theirprivate material interests to a certain extent. This is surely effective incentives forthem to work harder than before. However, there are still ceilings for the distributionof material interests or bonuses to the workers in the SOECs. Although at presentthe “general manager responsibility system”’ is being used so that the Partycommittees can not give orders to the business. The Four Basic Principles, one ofwhich is to adhere to the Party leadership, are still stipulated in the Constitution. Atthe same time the views of the conservatives in the CCP have always been strong.economy better. So it is obvious he is very pragmatist.251 The “general manager responsibility system” is the one being used. As regardsthe management of the enterprises, this system places the Party committee in theenterprises in a secondary role compared with the directors. It was utilized for anumber of years following the establishment of the PRC, until 1956, in which yearthis system was criticized as undermining the Party’s leadership and thus replacedby the “general manager responsibility system under the leadership of the Partycommittee”. This system was the prevailing form of business management in thePRC until 1984, at which time it was replaced by the “general manager responsibilitysystem”.See Wang Mingkui, “Lun changzhang fuzezhi” (Discussion on general managerresponsibility system), 1 Shehui KeXue Zhanxian (Social Science Front), at p. 22-23.96They exert their influence from time to time?2Under the current compromisory situation in China, almost all the managementrights are conferred on the enterprise directors, except for some necessaryinterference like the government mandatory and guidance plans. The practical needfor efficiency and the market requirement requires that certain people be responsiblefor the management of the enterprises. However, to comply with some ideologicalrequirements, such as the “Four Basic Principles”, the Party leadership has to occupya certain status in the enterprise. Thus, the Party leadership is stipulated as havinga supervisory role. To comply with the ideological public ownership, the key of whichis that the people are the real masters of the state and the state assets, the role ofthe Employment Assembly is emphasized in the Enterprise Law3. This mayundermine the full realization of the General Managers’ Responsibility System.So, at the current stage, China’s development still has to be subject to a kind ofmixture of planned and market economy, state ownership and enterprise ownership,and government control over enterprise autonomy.252• In the end of 1992, three years after the “Movement of the Tian An MenSquare”, Mr. Deng Xiaoping advocated to further the economic reform in China andsaid that the people who would not like to reform would be driven out of leaders’positions. Obviously he was pointing at the conservatives. Later on, some conservativehigh leaders countered that the words of just one person should not be made thathigh value.It is evident they were countering the opinion of Deng Xiaoping that the needs forfurther economic reform and continuous opening to outside world are urgent.. See supra, at Chapter III.972). The Compromise of the Capitalist Ideology to the Practical Needs of theCanadian GovernmentThe ideology concerning the relationship of the private and public corporationsin a capitalist economy is reflected by the sayings of the Canadian government. TheirPresident of the Treasury Board, Mr. Sinclair stated:“We are determined to get the federal government out of ordinary business andcommercial operations and hand them over to private enterprises where theybelong...”254In a later news release, the government declared:“Canada is distinctively different from other countries for reasons of history,geography and economics and it has been necessary at times to provide governmentservices at uneconomic prices in the national interest... Nevertheless, the growth ofthe government sector in Canada and the high proportion of Crown corporations withthe federal government has to be reserved...Some Crown corporations need thediscipline of the marketplace...Selling some Crown corporations will help us achievea leaner and less expensive government...”255So obviously the philosophy of economic development is to develop the privatesector.256This has also been reflected by the ratio of the public corporations vs. the private254• See Toronto Star, June, 1979.255 See “Crown Corporations for Sale”, Treasury Board News Release. September28, 1978, at 2.256 See D. Cohen, “A Transactional Analysis of Commercial Relations”, (1992)1 UBC Law Review. In this article he held:“In a market economy, it reflects an implicit political decision to decentralizeeconomic power to private firms and individuals who assume responsibility for theproduction and distribution of goods and services in society”...”Whereas in westerncorporation the cravings for the competitive capital return is the overwhelmingpurpose to run a corporation.”98ones we set forth above. The fact that the private corporations play a superior roleto the public corporations in the national economy is consistent with that ideology.Although the private companies occupy, as we set forth above statistically, adominant position in the national economy and prevail in Canada, they are not apanacea for the whole problem. Their nature - privately owned - decides their weakpoints. Due to the fact that their major business concern is to get the biggest capitalreturn and to avoid even the least risk, some risky, while necessary projects cannotdraw their attention. Due to the fact that most private companies are not big, theydo not have enough power to shoulder some big projects. Because some directors ofthe private companies are not honest enough, the government cannot believe theirinformation when considering whether to give them certain projects instead of settingup Crown corporations. All these factors contribute to the rationales for creating anumber of CCCs to carry out policy purposes. In contrast, the government is able tofinance a CCC and expand its size according to the requirements of certain projects.The government’s consistent and constant support to the CCC is inevitable assurancethat satisfactory results will be achieved.Furthermore, the circumstances of Canada are also a reason to create CCCs. Itis well known that Canada is a large country with sparse population. It is also acountry with large backwoods areas in the north. It is difficult for private corporationsto invest in public utilities in those areas. In addition, somebody holds the fact thatCanada borders with a very aggressive country, the United States, also requires theCanadian government to do something to meet the big challenge of the large99American firms. Both the geographical and circumstantial reasons contribute to therationales to create CCCs too.Although the utilization of the CCC is beyond this ideology, the rationale forcreating them is also to have them work as policy instruments. In Chandler’s words,“The pragmatic argument holds that the creation of public enterprise can betraced to particular situations rather than the workings of any politicalphilosophy...”257And it was declared by Tupper that most Canadian political parties haveestablished government businesses despite their espoused belief in private enterpriseand individual initiation.258As discussed above, the CCCs enjoy privileges, immunities and prerogatives. Andonly the real government corporations can enjoy such special treatment. This isnecessary in fulfilling their mandates - carrying out the policy purposes. Although thismay cause unfairness when the government corporations act, and inevitably competewith the general corporations, in their activities, the laws agree with the treatment.And to make full use of this kind of entity, it is provided that almost all the activitiesof CCCs need to be approved by the government. Both the special treatment of theCCCs and the firm control over them reflect that they are utilized as specialinstruments to solve special problems. Therefore it is obvious that the rationale of257• See Marsha A. Chandler, “The Politics of Public Enterprise”, collected inJ.Robert & S. Prichard, Crown Corporations in Canada: The Instrument Choice,supra note 45.258• See Allan Tupper, The Nation’s Business: Canadian Concepts of PublicEnterprise (Kingston: unpublished Ph.D. Thesis, Queen’s Univ., 1977), at 6.100their existing is practical rather than ideological.In a word, although the leading ideology is to develop the private firms andprivate property, some of the needs of the country cannot be satisfied by the privatefirms but can only be served by the utilization of the government instrument - theccc?59259• This point is also made in some of the literature. It is precisely what thecommentator said in “Public Ownership of Public Utilities: Have Stock-HoldersOutlived Their Useful Economic Lives?, V.43, 4, 1982 Ohio State Law Journal, at821:“State regulation of privately owned utilities inadequately protects the public’sinterests... Some form of public ownership is the only viable solution.”101Chapter VI. ConclusionA. The Summaries for the Comparisons1. The Management Right vs. Control from the Above LevelBoth in SOECs and in Canadian private corporations the management rights ofthe directors are given in detail, expressly, whereas in the CCCs it is providedgenerally that the directors are in charge of the daily management.The management rights of directors of all the SOECs, the CCCs and the Canadianprivate corporations are subject to some controlling powers coming from the abovelevel?60 In the SOECs, the directors have to be instructed by the responsibleinstitutions of the government. Of the laws of the CCCs, the government approvalis stipulated in significant length. In the Canadian private corporations, the directorshave to report to the shareholders at the shareholders meeting.As to the extent of the government control in a SOEC, it is not as detailed andsubstantial as in a CCC. The directors of the Canadian private corporations seem toenjoy almost a complete management right, although the statute gives theshareholders some literally controlling power over some fundamental matters. So, it260• By “above level” I mean the level which includes the power to appoint andremove directors. This is the level of power that the government in Canada enjoyswith respect to the CCCs and the government in China enjoys with respect to theSOECs. This is also the level of power that shareholders in Canada enjoy withrespect to the directors of private corporations.102may be seen that the extent of the tightness of government control over the SOECis somewhere between that of government control over the CCC and that of theshareholders’ control over the directors in the Canadian private corporation.2. The OwnershipSo the legal implications of the SOEC is that the state enjoys the ownership of theassets and the SOECs enjoy partial rights to the assets such as possessing, utilizingand disposing of them. So, as regards any particular asset, such as a piece ofmachinery, both the state and the SOEC have some rights to it. The state owns themachinery whereas the SOEC is entitled to use it. The SOECs do not have the availright to the property whereas the state has. The government responsible institutionsalso have rights and responsibilities to protect the assets in the SOECs from beingdamaged, whereas the enterprises have the right to dispose of the assets. Thisconstitute a kind of inconsistency.In some kinds of CCCs, no matter what formula of capital structure is used, allor the major financing resources come from government advances. This describesthat kind of CCCs without a share capital structure. Without any doubt, theownership of this kind of CCC is in the hands of the government. But even theCCCs with a share capital structure are in the hands of the government.Initially, Canadian private firms were owned and managed by the sameentrepreneur or group of people. As time went on, the ownership and control were103separated. Recently, there is a trend that the shareholder rights are becoming toodispersed to influence the management control of the company. The ownership of theprivate corporations lies in the corporation itself rather than with the shareholders.This will enhance the autonomy of the directors because, obviously, the corporationitself - as a purely legal entity - cannot do anything to interfere with the management.3. The Government Treatment of the EntitiesThe way the Chinese government treats the SOECs is to have them be responsiblefor their own profits and losses and to balance the director’s power by Partycommittee and the employment assembly. The way the Canadian government treatsthe CCCs is to grant them some privileges and to enhance their role as special policyinstruments. The way the Canadian government treats the private corporations is tohave the courts become involved if necessary.Insofar as the state prefers the SOECs to be responsible for their own profits andlosses, it can be inferred that the state intends for the SOECs to survive and developby themselves, in spite of the fact that they are sometimes required to complete thegovernment plans. This also reflects that the government wants to imposes twoconflicting preferences on the SOEC simultaneously.The Enterprise law grants supervisory power to the CCP in the enterprises overthe implementation of the CCP’s and the state’s policies, and some power to theEmployee Assembly, thus creating a balancing strength over the managers’ autonomy.104This reflects the government’s intentions to get its somewhat conflicted policypreferences well enforced in the SOECs.The CCCs which are defined as the Crown servant and/or agents can enjoy quitea few privileges, immunities and prerogatives both substantially and procedurally.From all these privileges, it is obvious that the CCCs are really treated by the law asspecial things. They can hardly be treated together with the general corporations.Canadian courts function as a kind of balancing power to the management rightin and also a posterior control to the private corporations. The reason why it is aposterior control is that if there are no questions during the management, there arenormally no court actions involved. Court control happens only after a law suit orcomplaint is issued.This will be both conducive to the quick-moving and autonomous characteristicsof the corporations in a market economic mechanism and protective at leasttheoretically, to everybody’s interests like the directors, shareholder, corporations,employees and even the order of the market.4. The Commitments, Interests and Liabilities of the DirectorsSo it’s clear that the legal implication is to have the directors of the SOECs paycommitment both to the profit of the enterprises and to the plan, or to control of theresponsible institutions. Their interests and liabilities also need to be decided by thegovernment responsible administrations. This reflects the policy implication that the105SOECs should be able to survive by themselves whereas they should be controlledby the government and also serve the state plan whenever necessary.The commitment and interests of the directors of the CCC depends on thegovernment, or the ruling party’s survival?’ This will make the directors be moreresponsive to the government’s policy purposes, and therefore more useful to thegovernment.All the interests, commitments and the liabilities of the directors of the Canadianprivate corporations are in favour of pushing the directors of the private corporationsto be more responsible for their management duties. Since both the shareholders andthe directors have an interest in the profitability of the company, the spirit in thelegal context can be said to serve well the function of making the companies moreefficient and profitable.5. The Legal Implications for the Ownership/Control IssueThe relationship of the SOEC and the government is still uncertain. It still has thecharacteristics of the appendages of the government because the directors are stillappointed by the government. However, because it has some independent rights tomanage the state assets and to hand over some profits and taxes, it may also be seen‘. Canada is a country with multi-parties election and ruling. The party who winsthe election will organize the government.106as an agent of the principal, which is the state. So actually the relationship is a kindof mixture of appendages and trusts. This makes the relationship between the SOECand the government somewhat contradictory and uncertain. This makes managementand ownership control inconsistent.This constitutes an internal contradiction. On the one hand, the state asks theSOEC to compete in the market and to be responsible for its profit and losses, evenbankruptcy2,while on the other hand it asks them to produce some goodsaccording to the mandate and/or guidance plan. This surely puts the SOECs in aninconsistent situation. The dilemma posed by the government policies, whether topromote the enterprise autonomy or promote the government control, obviouslyhinders the ability of the SOEC to turn smoothly into the proposed market economicmechanism - the proposed functional environment full of competition.Canadian corporations are in two different situations with respect to theownership/control issue. The ownership of both the CCCs with the formulas forappropriation and the CCCs with the symbolic government sole shareholder belongto the government. And the control right is also solely in the government’s hand.This constitutes the consistency in the CCCs. They are utilized by the government forsome special policy purposes. Regardless of the efficiency of the CCCs, since theyonly occupy a small number of the whole family of Canadian corporations, they wouldnot affect the activities of the other entities as well as the formal running of the262• The Bankruptcy Law began to be effective 4 months after the Enterprise Lawwas promulgated in April, 1988.107market economy system.In the private companies, although the shareholders may have some controllingrights stipulated in law, it is hard for them to intervene extensively in the decisionsof the directors. The management rights of the directors are almost complete andconsistent with the business affairs of the company. This enables the privatecorporations to respond to market demands rapidly. So actually they are the mainvehicle for the Canadian economy.From the different usages of the Canadian corporations, the ownership andcontrol of the CCC should be almost completely in the hands of the government, andthat of the private corporations should be concentrated in a kind of quick-moving andconsistent decision maker- the directors of the companies.Although the different arrangements in the two countries are decided both by thedifferent economic\social situation and the compromising of the ideology and reality,it has to be concluded that the policies reflected by the legal spirit of the corporationlaws concerning the arrangements of the usages of the CCCs and the privatecorporations are more reasonable than that of China so far.B. The Reassessment to the SOECIt seems the SOECs could have some autonomy to do business themselves. Butunfortunately, the current Enterprise law does not provide them with full autonomy.The legal context was enacted carefully, with a subtle balance between the increased108power of the enterprise managers and the controlling power of the responsibleinstitutions and the balancing power of the Party committee and the employmentassembly. So now the SOECs are at the stage of mixture of government appendagesand self-survivor.It is not a reasonable ownership structure in the SOEC. The assets in the SOECare at stake if the enterprise faces bankruptcy. In this case the SOEC may berequired to return certain assets to its creditors, and the state ownership of theseassets will be undermined. Thus, the state as the owner of the enterprise propertymay not feel comfortable if the assets are totally beyond its control?63The internal structure in the SOEC will divert the director’s energy in running thematters of the enterprises. The reports to the Party committee and the employmentassembly required in the laws oblige the directors to care about what the other twogroups of people will say when they decide about certain business actions. It will notonly take time to get their agreement but also make the managers care about otherfactors when they are exerting their duties.The directors’ commitments to the two groups of people diminishes theirmotivation to earn the biggest profit for the enterprises. Since management is thespirit of the enterprises, workers’ behaviour is closely related to managerial initiatives.The directors need to be connected with the interests of the profitability of the SOECAs to its ownership right, the state still has the right to supervise theenterprise director’s actions, and it has the right to decide the mandate of and thereward to the directors. This would likely cause the directors to pay close attentionto the feelings of the government.109rather than the feelings of the government administration and the workers.C. Potential Suggestions for SOECLearning from the above, China could make some improvements to theenterprises.1. Consummate the Market Economic MechanismAccording to some western economics theory, some prerequisites are necessaryfor establishing a formal market competition mechanism. They are the decision-making authority in the hands of market participants, their self-interested motivationto maximize their profits, decentralization of information, and prices that are adjustedappropriately in response to the changes in demand and supply conditions as the onlyinformation needed to make production, purchases and sales decisions, etc.If we take these prerequisites to see whether China’s market mechanism can serveas a good tool for stimulating the development of the economy, we can see China stillhas a long way to go to fulfil them. Due to the characteristics of China, some peoplethink the extent of the success of China’s economy depends on the size of the marketu”. See supra note 241, William A. Byrd, the Market Mechanism and EconomicReforms in China, at p. 20.110economy that could possibly be permitted?65 Regarding China’s practicalsituation, it is necessary to improve its market mechanism, including loosening theprice control administration and loosening the planned material supplies, etc. So, lotsof effort still needs to be made in this respect, in order to consummate China’smarket mechanism.2. Enact the Standard Company Law to Govern the Shareholding System and thePrivate Firms and Have Them ExpandChina should set up a standard Chinese Corporate law as soon as possible. Afterthat, China should divide into two parts the SOEC, which at present occupy thedominant role in the national economy. One part, which I call Schedule 1 enterprises,serving functions similar to the CCC, will be in charge of the key sectors of thenation, such as utilities, power industry, transportation, bank and postal services, etc.The other, which I call Schedule 2 enterprises, serving the same function as theCanadian private corporations, mainly deals with the common commodities inmarkets.The Schedule 1 enterprises would actually be the real SOECs. The Schedule 2enterprises should be given the name of companies that involve other shareholdingsbesides of the government. They will be subject to the standard company code.. See, at supra note 137, Kenneth T.K. Wong & Zhonglan Huang, “A CriticalAnalysis of the Law of the People’s Republic of China on Industrial EnterprisesOwned by the Whole People”.111Except for the necessary government controls, such as registration and taxation, etc.,they are free from any instruction or control. They compete to survive in the marketeconomy. The main part of the national revenue has to be contributed by theirtaxation since they would occupy a major part of the national production, trade andsupplies.Although the government may have shares in a big number of companies, it hasto comply with the standard company code which may clearly stipulate the rights andduties of both the shareholders and the company. Thus, the companies may trulyoperate independently. They may assume their rights and bear their duties under theprotection of the company code. They will undoubtedly be responsible for thefrprofits and losses. So the initiative of the said companies can be elevated. If so, thefunction of competition offered by the market economy can be realized more.And to avoid the potential intrusion of the state shareholder, it must be stipulatedin the Company Law that the company must serve the produce-for-profit purposeand the interest of the shareholders as a whole.3. Administer the Real SOECs Serving the Policy Purposes and Public InterestsSpeciallyThe Schedule I enterprises which I name as the real SOEC will serve the policypurposes and public interest in the future in China. Although China’s SOECs at112present may be subject to the government’s request to serve the likely functions,they would not like to do that any more if no monetary incentive under the futuremarket mechanism. Thus the Schedule I enterprises may be created to serve thepublic interests or some policy purposes. Some special treatments just like that overthe CCC may be offered if necessary.Since the SOEC are prevalent at the moment, it is not necessary to involve theconcepts of immunities and privileges. However, the SOEC is possibly due in thefuture to enjoy some privileges while fulfilling the public interest and policy purposes.Certainly, these privileges should not be excessive or uncontrollable.Even as regards the real SOEC, which would serve as the government policypurposes, the control should be legalized and streamlined. In China, themanagement system has long been an administrative one just like that of the formerSoviet Union from which China learnt about its economic system in 195Os7.It hasa powerful and cumbersome management system in which a lot of things are left tothe discretion of government officials. There should be a legal and formal channel toregulate the officials behaviour, even when they exert their mandate of the state. Thisis important both to protect the public interest and to make the administration dulyand effective.. A lot of local governments in China often ask the enterprises to contributemoney or technicians to serve in certain projects, such as building bridges or fixingroads, without receiving any profit.. See Ma Hong, “Woguo shehuizhuyi jingji shi youjihua de shangpin jingji” (TheManner of Our Country’s Socialist Economy is a Planned Commodity One), (1981)7 Jingji Yanjiu (Economic Research).113A similar situation also exists in Canada. According to Professor Grant, theresurely is a “complex web of multiple bureaucratic approvals attempting to makeCrown corporations accountable to everyone in sight...”. This kind of approval,without any doubt, would delay and render a detriment to the management andrunning of the CCC.So how to simplify and make the control system more effective both in China andCanada is a question that requires the efforts not only of scholars but also of thepoliticians. 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