Background

On August 25, 2017, the Supreme People’s Court of China (“SPC”) promulgated the Provisions on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (IV) (“Interpretation”), which became effective on September 1, 2017. It is relevant to all companies, irrespective of domestically or foreign invested.

What you must know:

  • Requirements on corporate resolutions by shareholders and the board of directors in China have been tightened;
  • Shareholder rights to inspect company documents in China have been strengthened;
  • Damage claims can also aim at the shareholder, his lawyer / accountant in case of commercial secrets disclosure; or at a director / senior manager violating document maintenance obligations;
  • Preemptive purchase rights during equity transfers have been clarified and may trigger updates to existing contracts and articles of association;
  • The litigation roles in liability claims against directors, senior managers, supervisors and third parties regarding companies in China have been clarified.

The Interpretation is notably less detailed compared to its April 2016 draft. The SPC finally did not adopt certain aspects legal practitioners had applauded.

Validity of corporate resolutions

Under the current law, a resolution by the board of directors or by the shareholders’ meeting can be challenged as invalid or revocable (by court) under certain preconditions. The Interpretation, for the first time, allows an alternative litigable claim that a resolution is “non-existent”.

According to the Interpretation, a company resolution is non-existent in case of:

Circumstance Litigation parties Suggested actions to increase compliance

adoption without convening a meeting, unless an exception applies 1

adoption at meeting without voting on it

quorum not met or present voting rights insufficient

vote at meeting not reaching statutory proportion, or the one specified in articles of association

Claimant:
  • shareholder
  • director
  • supervisor
  • possibly even a third party (e.g. creditor)
Defendant:
  • company
Additional party:
  • interested party involved in resolution
  • Articles of association should include rules allowing resolutions without meeting
  • establishment/revision of respective signing and stamping as well as corporate compliance process

1 Exception mentioned in the Interpretation: resolution directly adopted without a meeting pursuant to law or articles of association, and duly signed and stamped by all shareholders.

In contrast, a claim for invalidity of a resolution can occur in case of:

Circumstance Litigation parties Suggested actions to increase compliance
resolution in violation of the law Claimant:
  • shareholder
  • director
  • supervisor
  • possibly even a third party (e.g. creditor)
Defendant:
  • company
Additional party:
  • interested party involved in resolution
  • Careful check during preparation of resolution, including with legal advisor in case of doubt
  • Awareness that bona fide third parties remain protected despite invalidity

A claim to cancel a resolution can occur in case of:

Circumstance Litigation parties Suggested actions to increase compliance

procedures for convening / voting violate laws or articles of association (unless only minor defect)

resolution in violation of the articles of association

Claimant:
  • shareholder at time of lawsuit
Defendant:
  • company
Additional party:
  • interested party involved in resolution
  • Establishment/revision of respective corporate process to avoid this, e.g. in articles of association or management by-laws
  • Awareness that bona fide third parties remain protected despite cancellation

Shareholder inspection rights

As the owner of the company, the shareholder has a natural litigable inspection right, as stipulated already by the current law. It is not allowed to limit this inspection right in the articles of association or in other agreements between the shareholders.

The inspection right can be exercised even after the party has ceased to be a shareholder, if its rights and interests were damaged during time as shareholder. It is expressly allowed to involve a lawyer and an accountant during the inspection. But the statutory right to inspect the accounting books is excluded in the following cases:

  • if the shareholder owns or operates a substantially competing business (unless otherwise agreed)
  • if the shareholder intends to inform others and this would damage the company’s rights and interests
  • if the shareholder’s inspection practice in the last 3 years caused damage the company’s rights and interests

The Interpretation further allows claims for damages against the shareholder, his lawyer and/or accountant, in case of a - to be proven - disclosure of commercial secrets. Damages can also be claimed against a director or senior manager who violates document keeping obligations.

Profit distribution

The distribution of company profit is an autonomous matter left to the discretion of the shareholders. There is no statutory legal basis for a compulsory profit distribution. But in exceptional circumstances, a shareholder may have a litigable claim for dividends:

Circumstance Litigation parties

unimplemented, but effective resolution with detailed profit distribution plan

abuse of shareholder rights preventing profit distribution resulting in losses suffered by another shareholder

Claimant:
  • shareholder
Defendant:
  • company

Pre-emptive purchase right

The pre-emptive purchase right of shareholders of a limited liability company so far lacked more detailed rules. It becomes relevant when another shareholder wants to transfer equity. The Interpretation now stipulates:

Circumstance Litigation parties / Suggested actions

inheritance from a natural person shareholder prevails over the statutory preemptive right, unless expressly otherwise agreed

intended equity transfer to a third party requires notifications of other shareholders

  • refusal to exercise preemptive right means consent to the transfer
  • other shareholders can raise information right on transfer conditions
  • transferring shareholder can step back from transfer (unless otherwise agreed), but may face compensation claims
  • the time period for exercising the preemptive right must be at least 30 calendar days
Claimant:
  • heir / shareholder
Defendant:
  • transferring shareholder
Check whether existing joint venture contracts, shareholder agreements and/or articles of association should be amended or supplemented

The Interpretation further addresses cases of fraud or malicious collusion during equity transfers, where the time bar for a delayed raising of a preemptive right is set to be 1 year after the equity transfer was registered.

Liability claims against directors, senior managers, supervisors and third parties

Under various circumstances directors, senior managers, supervisors and third parties can face liability claims. The Interpretation clarifies the roles of different parties:

Circumstance Violating party Litigation parties
violation of laws, administrative regulations or articles of association leading to company losses
  • director
  • senior manager
Claimant:
  • company, represented by supervisor
Defendant:
  • director
  • senior manager
violation of laws, administrative regulations or articles of association leading to company losses
  • supervisor
Claimant:
  • company, represented by chairman or executive director
Defendant:
  • supervisor

violation of laws, administrative regulations or articles of association leading to company losses

Other company organs refuse to act

emergency case which would cause irreparable damage to the company interests

  • director
  • senior manager
  • supervisor
Claimant:
  • shareholder
Defendant:
  • director
  • senior manager
  • supervisor
Additional party:
  • company
infringement upon the legitimate company rights and interests leading to company losses
  • third party
Claimant:
  • company, represented by chairman or executive director
Defendant:
  • third party
infringement upon the legitimate company rights and interests leading to company losses
  • third party
Claimant:
  • shareholder
Defendant:
  • third party
Additional party:
  • company