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.
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.