Ask any restructuring professional about the greatest challenge in restructuring and reorganising a business group with operations in the People’s Republic of China (PRC), and he/she is likely to say that it is virtually impossible to take over control of the PRC operating subsidiaries without the co-operation of the existing PRC legal representatives.
Every business in the PRC is required to have a legal representative, who is the main principal with the legal power to represent the PRC company in accordance with the law or articles of association of the company. The legal representative is appointed to act on the company’s behalf and has full access to the company, cash, and capital. A legal representative’s acts are binding on the company even if he/she is acting beyond his/her authorised scope.
Often, foreign owners or administrators are held ransom by these PRC legal representatives and are forced to negotiate a settlement with the legal representatives in return for their co-operation to hand control back to the owners.
However, the recent judgement of the Supreme People’s Court of the People’s Republic of China (SPC) in Sino-Environment Technology Group Limited v Thumb Env-Tech Group (Fujian) Co. Ltd (the Fujian Thumb case), may signal a change in the judicial attitude towards the previous impasse. In that judgement, the court recognised that a properly passed shareholder resolution of a PRC company is sufficient to change the legal representative of that company.
Summary of the Fujian Thumb Case
Thumb Env-Tech Group (Fujian) Co. Ltd (Fujian Thumb) was a wholly owned PRC operating subsidiary of Sino-Environment Technology Group Limited (Sino), a Singapore company.
On 30 June 2008, state approval was granted for Fujian Thumb to increase its registered capital from RMB 130 million to RMB 380 million. Fujian Thumb completed the registration of the change of the registered capital.
On 4 June 2010, Sino was placed into judicial management. On 20 January 2011 and 30 March 2012, the Sino judicial managers passed written shareholder resolutions to change the legal representative and directors of Fujian Thumb. The then PRC management of Fujian Thumb refused to recognise the changes.
On 27 April 2012, Fujian Thumb filed a lawsuit in the PRC to demand that Sino pay RMB 45 million for the increase in capital. In response, the Sino judicial managers filed a PRC lawsuit against Fujian Thumb on 16 May 2012 to confirm the validity of the resolution for the removal and appointment of directors and a legal representative of Fujian Thumb.
On 18 December 2012, the legal representative of Fujian Thumb was surreptitiously changed to another party by the then management of Fujian Thumb, without the authorisation of the Sino judicial managers. Sino challenged this action by filing a further PRC lawsuit requesting the cancellation of the said change.
In its judgement, the SPC recognised that the filing of the 27 April 2012 lawsuit was not the true intention of Fujian Thumb, since the Sino judicial managers had at the time of filing already passed a resolution for the change of the Fujian Thumb legal representative. The SPC expressly recognised that a properly passed shareholder resolution of a PRC company is sufficient to change the legal representative of that company, and proceeded to dismiss the 27 April 2012 lawsuit.
What can foreign shareholders expect?
Under the PRC legal system, the PRC’s written laws are the only sources of law that can be directly applied by courts in rendering decisions. Precedent case authorities, such as the Fujian Thumb case, are normally for general reference only and are not binding on other PRC courts in similar cases. That said, the pronouncement by the SPC is nevertheless of great significance, as it signals that the PRC courts are moving away from a strict interpretation of the PRC’s written laws, and are prepared to take a more pragmatic and commercialminded approach. If so, this can only augur well for doing business in the PRC, as well as restructuring and reorganising PRC business operations, and make the PRC more conducive for multi-national corporations. It nevertheless remains to be seen whether the provincial and local courts in the PRC will adopt a similar approach to the SPC’s.