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LEGAL: Company Law Clarifications of Certain Applications (Part I)
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Company Law
Clarifications of certain applications
China Supreme Court issues forth the Interpretation
By Manuel Torres (Managing Partner of Garrigues China), Lucy Luo (Principal Associate) & Caroline Xu (Corporate Associate)

BT 201801 Legal 02      经最高人民法院审判委员会通过,最高人民法院于2017年8月25日通过法释[2017]16号文公布了《关于适用〈中华人民共和国公司法〉若干问题的规定(四)》(以下简称“《司法解释四》”)。《司法解释四》自2017年9月1日起施行,《司法解释四》主要阐述了董事会决议以及股东会、股东大会决议的有效性,股东法定知情权,股东利润分配权等相关事宜。






On August 25th, 2017, China’s Supreme People’s Court (the “SPC”) issued Provisions on Certain Issues Concerning the Application of the Company Law of the People’s Republic of China (IV) (“Interpretation IV”), which came into effect on September 1st, 2017. The release of Interpretation IV is aiming to unify the application of laws and provide guidance on litigated disputes in relation to the validity of corporate resolutions, shareholder’s information rights, dividend rights, right of first refusal and shareholders’ derivative lawsuits. This article intends to provide a brief summary about the guidance adopted in the above areas and the corresponding implications on related parties.

BT 201801 Legal 03I. Validity of Corporate Resolutions

Prior to the promulgation of Interpretation IV, the Company Law of the People’s Republic of China (“Company Law”) offers two remedial means to challenge the validity of corporate resolutions under certain circumstances, i.e. rescinding the resolution within sixty days’ time limit and nullifying the resolution. Interpretation IV grants the third remedy by enabling shareholders, directors or supervisors (and other applicable persons) of a company to challenge the establishment of the shareholders’ resolution or board resolution under circumstances listed as follows:

i. Where the resolution is adopted without convening a meeting, unless the resolution is passed pursuant to Section 2 of Article 37 of Company Law or according to the articles of association of the company the decision could be directly made without convening a shareholders’ meeting or shareholders’ general meeting and the shareholders’ resolution is signed and sealed by all shareholders;

ii. Where the resolved matter has not been voted by the meeting;

iii. Where the minimum quorum of attendees or the shareholder voting rights represented at the meeting required by the Company Law or the articles of association of the company has not been met;

iv. Where the requisite voting proportion of the resolution stipulated by the Company Law or the articles of association of the company has not been met; or
v. Other circumstances resulting in the non-establishment of the resolution.

Interpretation IV further clarifies the participants in proceedings in relation to the application for nullification, non-establishment or rescission of resolutions:-

BT 201801 Legal 07Interpretation IV is of the view that a minor defect in the procedures for convening the meeting or voting method without substantial impact on the resolution shall not cause the rescission of the resolution, but the definition of “minor defect” and “substantive impact” are not illustrated by the SPC, which may be further interpreted by the court on a case by case basis.

Interpretation IV also establishes a principle that the civil legal relationship between the company and a bona fide counterparty based on the resolution shall not be affected even though such a resolution is ruled as null and void or revoked by the court.

II. Information Rights of Shareholders

On the basis of Company Law, Interpretation IV reinforces the information rights of shareholders in the following aspects:

- Shareholders’ information right shall not be deprived by the articles of association, agreements between shareholders etc..

- The eligible plaintiff claiming for shareholders’ information rights shall be (i) shareholders at the time of initiating or (ii) the person has prima facie evidence that his legal rights and interests are damaged during the shareholding period.

- The people's court shall specify in its judgment the time, place and the documents list of particular documentation for the inspection or copy if it upholds the plaintiff’s claim. Interpretation IV admits the shareholders’ right to engage third party professionals to assist with the review of information.

- Directors, senior executives, etc. who fail to perform their duties to produce or keep relevant documents and materials in accordance with Articles 33 and 97 of the Company Law which causes losses to shareholders, shall bear civil liabilities.

- Where a limited liability company has evidence to prove any of the following circumstances, it may reject the shareholders’ request to access the company’s account books under the reason of “improper purpose”:

i. The shareholder has self-owned business or operates the business in substantial competition with the main business of the company, unless otherwise specified in the company's articles of association or agreed by all shareholders;

ii. Inspection of the company's account books is for the purpose of informing others of relevant information, which may damage the legitimate interests of the company;

iii. The shareholder damaged the legitimate interest of the company by informing others of relevant information they obtained through inspection of the company’s account books over the last three years; and

iv. The shareholder has other improper purpose.

BT 201801 Legal 05Corresponding parties shall further review the shareholders agreement, articles of association and other corporate governance rules and documents to regulate whether a shareholder having self-owned business or operating the business in substantial competition with the main business of the company is allowed to inspect the account book of the company and to establish a proper management system to clarify the responsibilities for corporate document production and maintenance.

III. Dividend Rights

BT 201801 Legal 06Interpretation IV sets up the principle that the people’s court will rule in favor of shareholders when (i) the shareholders’ request of profits distribution is supported by an effective resolution made by a shareholders' meeting or a shareholders' general meeting that carries the specific distribution plan; and (ii) defense of the failure to enforce the profit distribution resolution is not established.

In normal circumstance, the people’s court will dismiss shareholders’ claim of profit distribution if the shareholders fail to submit the resolution made by the shareholders' meeting or the shareholders' general meeting that specifies the specific distribution plan. But Interpretation IV expressively points out that the failure to distribute the profits attributable to any abuse of shareholders' rights and results in losses to other shareholders shall be treated as an exemption to the above normal circumstance.

Interpretation IV neither enumerates the scenarios of which the defense of the failure to enforce the profit distribution resolution is regarded as being established nor defines the meaning of “abuse of shareholders’ right”, but on SPC’s press conference it indicates that if the distribution of dividend is rejected and (i) abnormal high remuneration is paid to shareholder or personnel nominated by shareholder; (ii) goods or services are purchased not for the operation of the company but for the shareholder’s personal consumption or use; or (iii) the profit is concealed or appropriated, it shall be regarded as “abuse of shareholders’ right”.

Generally, dividend distribution is an autonomous matter left to the decision of the shareholders at their own discretion. Interpretation IV intends to optimize the judicial remedy to the shareholders’ dividend rights when the shareholders abuse their rights not to distribute the dividend and cause damages to other shareholders.

(Continue in PART 2 of February 2018 edition)

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