Month: Abril 2016
The Application of the Company Law regarding the Corporate Resolution
On April 12, 2016, the Supreme People’s Court issued the Provisions of the Supreme People’s Court on Issues Relating to Application of Company Law of the People’s Republic of China (IV) (Draft for Public Comments) (“Provisions”).
The Provisions mainly focus on the following contents:
1. The validity of the board of shareholders' meeting resolution, or the board of directors’ meeting resolution (“Resolution”);
2. The protection of the shareholders’ right to know;
3. Shareholders’ right to request the profit distribution;
4. The preemptive rights when the shares are transferred;
5. Cases on direct litigation and shareholder representative litigation.
The Provisions include 36 clauses covering five parts mentioned above. Among others, twelve clauses relating to the Resolution will be discussed hereof, which shall be regarded as the core of the Corporate Governance.
1. Scope of the Plaintiff in a Declaratory Litigation regarding the Invalidation of the Resolution
The litigation regarding the invalidation of a Resolution (“Litigation”) belongs to a declaratory litigation. Theoretically, any party who has direct rights/interest over the Resolution could initiate such Litigation. However, the current applicable Company Law of the People’s Republic of China (“Company Law”) doesn’t make this point clear.
Subject to Article 1 of the Provisions, a shareholder, director or supervisor of a company, a senior executive, an employee or creditors of a company, who have the direct interest over the Resolution could initiate the Litigation based on the regulation in Article 22 of the Company Law.
However, considering that the Resolution is the internal decision of the company, in order for creditors to initiate such Litigation, we believe that Article 1 will apply to the creditor under one potential condition that the Resolution has already been executed as a company’s action which has affected the creditors’ interest.
2. Declaratory Litigation regarding Absence of a Resolution and Failure to Form a Valid Resolution
2.1 Absence of a Resolution
Subject to Article 4 thereof, where a plaintiff specified in Article 1 of the Provisions has the evidence to prove any of the following facts and requests the court to confirm the absence of the Resolution, such request shall be supported by the court:
a. The company fails to hold any board of shareholders' meeting, or board of directors’ meeting (“Meeting”) subject to the Company Law; and
b. The company has held a Meeting but does not arrange the vote for the Resolution.
2.2 Failure to Form a Valid Resolution
Subject to Article 5 thereof, where the company has held a Meeting, but the plaintiff specified in Article 1 of the Provisions has the evidence to prove any of the following facts and requests the court to confirm the failure to form a valid Resolution, such request shall be supported by the court:
a. Quorum or voting right held by shareholders fails to be in compliance with the articles of association of the company;
b. Affirmative votes for the Resolution fail to be in compliance with the Company Law or the articles of association of the company;
c. Certain signatures on the Resolution are forged and not recognized by the shareholders or directors whose signatures are forged;
d. Contents of the Resolution are beyond the authority of board of shareholders or board of directors.
For Fact c) mentioned above, there is another official opinion among the legislators that certain signatures on the Resolution are forged and not recognized by the shareholders or directors whose signatures are forged, and meanwhile, the number of affirmative votes after deducting the forged ones fails to be in compliance with Company Law or the articles of association of the company.
Theoretically, we believe that the latter opinion is more proper than the former one because the Resolution is an internal document related to Corporate Governance. Therefore, the judicial intervention regarding the Resolution shall be limited. After erasing the forged signatures, if the Resolution could still be passed, it shall be valid. Otherwise, it would ultimately appear as a punishment and as an excessive interference to the company´s autonomy.
3. Cause of Invalidation of the Resolution
Subject to Article 6 thereof, the Resolution shall be deemed invalid under any of the following circumstances:
a. Certain shareholders abuse their shareholders' rights to pass the Resolution, which causes damages to the company or other shareholders;
b. The Resolution allows the excessive distribution of profits of the company or major improper affiliated transactions, which causes damages to the creditors of the company; and
c. Other circumstances in which the contents of the Resolution violate compulsory provisions specified in Chinese laws and administrative regulations.
We believe that such regulation will better prevent the majority shareholder or the actual controlling party of the company from abusing their powers to control the company and cause damages to the minority shareholders or creditors of the company.
4. Cause of Revocation of the Resolution
Subject to Article 22 of the Company Law, where the “convening procedures” and “voting method” of the Meeting violate the provisions of Chinese laws and administrative regulations or the articles of association of the company, the shareholders may apply to the court for the revocation of the Resolution made during such Meeting. However, the definition of the “convening procedures” and “voting method” remains obscure.
Article 7 of the Provisions clarifies such ambiguous description of "convening procedures" and "voting methods" in Article 22 of the Company Law as follows:
a. A notice of the company’s Meeting;
b. Shareholding registration;
c. Determination of proposal and agenda of the Meeting;
d. Chairing, voting, counting, announcement of voting results;
e. Resolution formation, Meeting Minutes and the signing matter.
Such clarification will definitely provide a clear guidance for the company to improve the rules of procedure in order to facilitate the Meeting and make it more efficient.
5. Preservation of Conduct regarding Prohibiting the Implementation of the Resolution
Subject to Article 10 of the Provisions, where the implementation of the Resolution cannot resume the original status, or will cause irreparable damages to the legitimate rights and interests of involved parties or interested parties, the implementation of the relevant Resolution may be prohibited for the implementation as applied by the plaintiff.
In order to take measures on the preservation of conduct as specified in the paragraph mentioned above, the court may order the plaintiff to provide corresponding guarantee as applied by the company or ex officio. The implementation of the Resolution shall be prohibited if the plaintiff has provided such guarantee.
After investigation, where the court holds that the plaintiff's claim is filed in order to maliciously intervene with or defer the implementation of the Resolution, the claim shall be rejected.
This clause clearly shows the clear tendency to protect the benefit of the minority shareholders of the company and other relevant third parties, in particular, the creditors’ legitimate interest.
Comments:
Overall, the Provisions, to a large extent, clarify the judicial application of the principles and rules regarding corporate Resolution(s) specified in the Company Law, providing necessary legal basis for the corresponding judicial assessment.
However, there still remain unclear issues in the Provisions. Some definitions are still ambiguous. For instance, regarding Article 6 of the Provisions (Part 3 hereof), what is the standard of “excessive distribution of profits” and “major improper affiliated transactions”? Which circumstances would cause hazard to the creditors of the company?
It is suggested that the legislator shall further clarify those queries. On one hand, it will be easier for the shareholders or creditors to balance the cost to initiate the corresponding litigation. On the other hand, it will prevent the shareholders or creditors from obstructing the execution of the corresponding Resolution through lawsuit abuse.
1 Article 22 (1) of the Company Law: A resolution passed by the board of shareholders or a shareholders' meeting or the board of directors which violates the provisions of laws and administrative regulations shall be void.
Analyses on Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Property Law of the PRC (I)
The Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Property Law of the PRC (I) (the “Interpretation”) was promulgated on February 22, 2016, and came into effect on March 1, 2016.
1. Registration of Immovable Property and Confirmation of the Ownership of Property Rights
1.1 The Filing of Immovable Property Disputes
After the Property Law came into force on October 1 2007, many judges held the opinion that the records in the immovable register (the “Register”) is the only basis to determine the ownership of immovable property. Therefore, if disputes arise due to the legally registered immovable property, parties concerned shall firstly apply for cancellation or alteration registration. Subject to the PRC Administrative Law, the registration of immovable property is an administrative act. As a result, parties concerned shall firstly request to cancel or alter the controversial registration through the administrative remedy, which makes the legal measure inefficient.
In order to improve this situation, the Interpretation formulates that the civil actions brought by the parties concerned for disputes due to the ownership of immoveable property right, or due to the basis of registration of immovable property such as sale, donation or mortgage, shall be accepted by the court in accordance with the law, except that the parties concerned have applied for the administrative proceedings to solve all the aforesaid civil disputes and the court has heard the disputes together.
1.2 The Confirmation of the Ownership of the Controversial Property Rights
Subject to Article 2 of the Interpretation, if the parties concerned have the evidence to prove that the Register does not match the real status and they are the true owners of these immovable property, such requests for confirmation of their property rights shall be supported.
This provision has clearly clarified the principle to determine the ownership of the immovable property. Namely, when dealing with such confirmation of property rights, the judges shall investigate and consider the substantial element instead of prima facie evidence.
1.3 The Legal Effect of Prior Notice Registration
Comparing to the Property Law, Article 4 of the Interpretation further formulates the protection measures for creditors regarding the prior notice registration.
Among others, the key measure is that without the consent of the applicant of prior notice registration, the transfer of immovable property or the establishment of other property rights such as construction land use right, easement or mortgage, shall be regarded as invalid.
2. The Judicial Protection of the Preemptive Right of the Co-owner by Shares
2.1 The Exception of Exercising the Preemptive Right
Subject to Article 9 and Article 13 of the Interpretation, if one co-owner by shares intends to transfer his shares, the other co-owner(s) could not exercise the preemptive right to purchase those shares under the following circumstances, unless it is otherwise agreed by the co-owners by shares:
a. Changes of holders of co-owned shares due to inheritance, bequests, etc.;
b. Transfer of co-owned shares between the co-owners by shares instead of the transfer to the external party.
2.2 The Protection of the Preemptive Right
In order to better protect the preemptive right, Article 11 of the Interpretation clearly stipulates the specific period for exercising the preemptive right.
The period for exercising preemptive right to purchase the shares shall comply with the agreement between co-owners by shares; in the absence of such agreement or if the agreement is not explicit, it shall be determined according to the following rules:
a. If the period for exercising such right is stated in the notice of the assignor to the other co-owners by shares with equal conditions, such period shall prevail;
b. If the period for exercising such right is not stated in the notice, or the period stated is less than 15 days after the notice is served, 15 days shall apply;
c. If the assignor fails to issue a notice, it shall be 15 days as of when the other co-owners by shares know or should know the same conditions finally determined; and
d. If the assignor fails to issue a notice, and cannot confirm whether the other co-owners by shares know or should know the same conditions finally determined, it shall apply to six months after the date of transfer of ownership of co-owned shares.
2.3 Definition of “Equal Conditions”
Subject to Property Law, a co-owner by shares may transfer its share over the jointly owned immovable or movable property to external parties, and the other co-owners by shares shall have the pre-emptive right to purchase those shares under equal conditions. However, there is no provision thereof stipulating explicitly the definition of equal conditions in the Property Law.
According to Article 10 of the Interpretation, the term of "equal conditions" shall be determined upon comprehensive consideration of factors such as transfer price, payment method and duration of the co-owned shares.
Meanwhile, Article 12 (2) also formulates that if the other co-owners request substantive changes such as decrease of transfer price, increase of the burden of the assignor, such request shall not be supported by the court.
2.4 The Principle of Proportionality under the Concurrence of Preemptive Right
According to Article 14 of the Interpretation, if two or more co-owners by shares requesting to exercise their preemptive rights to purchase the shares fail to reach an agreement after the negotiation but continue to request to exercise their preemptive rights based on their respective proportion of shares for the share transfer, such request shall be supported by the court.
3. Bona Fide Purchase
3.1 The Identification of Bona Fide Purchaser
Subject to Article 15 of the Interpretation, when being assigned immovable property or moveable property, if the assignee does not know that the assignor has no right to dispose of such property or is in gross negligence, the assignee shall be regarded as the bona fide purchaser.
Therefore, the application precondition of bona fide depends on whether the assignor has the authorized disposition right, no matter the transfer contract is valid or not.
3.2 How to Identify the Assignee does not Constitute Bona Fide
a. For Immovable Property
According to Article 16 of the Interpretation, any of the following circumstances shall be deemed that the assignee of an immovable property knows that the assignor has no authorized disposition right:
a) There is the valid dissidence registration in the Register;
b) It fails to obtain the consent from the right holder of prior notice registration within the valid period of such registration;
c) Relevant matters have been recorded in the Register that judicial institutions or administrative institutions have ruled or decided to seize or restrict immoveable property in other forms in accordance with the law;
d) The assignee knows the subject of rights recorded in the Register is wrong; and
e) The assignee knows that other parties have enjoyed immovable property right in accordance with the law.
If the real holder of prior notice registration has the evidence to prove that the assignee of the immovable property should know that the assignor has no authorized disposition right, the assignee shall be regarded as guilty of gross negligence.
b. For Movable Property
Subject to Article 17 of the Interpretation, when the assignee receives a moveable property, if the object, place or timing of the transaction is not in conformity with the transaction practice, the assignee shall be regarded as guilty of gross negligence.
c. Reasonable Price
If the transaction price of immovable or movable property is not reasonable, the assignee shall not constitute bona fide.
Subject to Article 19 of the Interpretation, the “reasonable price” shall be justified based on factors such as the nature and amount of the subject matter transferred and payment method with reference to the market price and transaction practice at the transaction place at the time of transfer.
3.3 The Timing to Identify Bona Fide
According to Article 18 of the Interpretation, “the timing to identify bona fide” refers to the time when the transfer of immovable property right is registered in public registry or the moveable property is delivered.
3.4 The Exception of the Application of Bona Fide
Subject to Article 21 of the Interpretation, under any circumstance as follows, the people's courts shall not support the assignee's claim for obtaining the property ownership based on bona fide:
a. The transfer contract is regarded as invalid due to the breach of Article 52 of the Contract Law; and
b. The transfer contract is cancelled due to statutory circumstances such as fraud, coercion or taking advantage of others' difficulties by the assignee.
This provision embodies the value that stipulation would never protect illegal transactions.
Comments:
In order to specify the general provisions of the Property Law and make it clear for the legal practice, the Interpretation formulates 22 articles in total. And these articles cover certain important issues established in the Property Law, including the registration of immovable property, co-ownership by shares and bona fide purchase, etc. Therefore, the Interpretation will provide a more specific guidance for the civil practice of the court for property right related disputes.
[1] In any one of the following situations, a contract shall be identified as invalid:
(1) one party concludes the contract through the use of fraudulent or coercive methods, causing detriment to the interests of the State;
(2) the contract involves a malicious conspiracy which is detrimental to the interests of the State, a collective or a third party;
(3) illegal intentions are concealed beneath an appearance of legality;
(4) there is detriment to social and public interests; or
(5) the mandatory provisions of laws and administrative regulations are violated.