On April 12, the Supreme People’s Court (“SPC”) issued new draft provisions interpreting several issues on the application of Company Law (the “Draft Interpretations”), opening a period to gather public comments until May 13, 2016.
The Draft Interpretations, which will be the fourth of their kind, focus mainly on clarifying five topics, the most significant developments of which are as follows:
- Validity of resolutions of shareholders and board of directors meetings
In addition to the shareholders, directors and supervisors, the Draft Interpretations also entitle senior management, employees and creditors with any direct interest in the content of the resolutions of shareholders and board of directors meetings to request the court to confirm whether they are valid.
The Draft Interpretations further clarify two scenarios in which a resolution will be considered void: (i) where the shareholders abuse their rights and impair the interests of the company or other shareholders; and (ii) where the resolution provides for excessive distribution of profits, significant improper affiliated transactions or other arrangements damaging the interests of the company's creditors.
The Draft Interpretations also introduce the possibility of requesting the court not to implement the resolution by providing a guarantee, if the resolution will impede the restoration of the initial situation or will cause permanent damage.
- Shareholders’ right to know
Shareholders’ requests to review or copy the company’s documents cannot be rejected based on their capital contribution being defective, the company’s articles of association restricting the review or copy of these documents, or any agreements between shareholders that restrict this right.
- Shareholders’ right to claim distribution of profits
According to the Draft Interpretations, without a valid resolution on the detailed profit distribution plan, shareholders are not entitled to request before the court that the company distribute profits, except shareholders of limited liability companies who can provide evidence that other shareholders have abused their shareholders’ rights or that directors or senior management have committed fraud, resulting in the failure to distribute profits.
The court’s decision on profit distribution will also apply t o shareholders not participating in the lawsuit.
- Pre-emptive rights
Unless otherwise provided in the company’s articles of association, non -affected shareholders in a limited liability company do not have pre-emptive rights in case of (i) change of shareholders due to inheritance or legacy, or (ii) transfer of shares between current shareholders.
Moreover, unless otherwise provided in the company’s articles of association, shareholders of a limited liability company cannot exercise only partial pre-emptive rights, and the term to claim pre-emptive rights is 30 days.
Where the articles of association of a limited liability company excessively restrict share transfers by shareholders, making them essentially impossible, these clauses will be considered void at the shareholders’ request.
- Direct actions and lawsuits filed by shareholders’ representatives
The Draft Interpretations confirm shareholders’ right to file a derivative lawsuit on behalf of wholly-owned subsidiaries, i.e., litigation against subsidiary directors, supervisors, senior management or any third party causing harm to the subsidiary.
Although the Draft Interpretations cover significant aspects of daily trial experience, many questionable provisions still remain without guidance, and some new interpretations are likely to raise new issues because they broaden the scope of some rights and limitations beyond what is covered by the law, which may make them clash with others.
Date of issue: April 12, 2016. Deadline for public comments: May 13, 2016