Provisions of the Supreme People’s Court on the Application of the Company Law of the People’s Republic of China (5) (Mainland China)

Jolene Chen

On April 28, 2018, the Supreme People’s Court promulgated the Provisions on the Application of the Company Law the People’s Republic of China (5) (the “Provisions”), which will go into effect on April 29, 2019.  The contents of the Provisions are briefly introduced below:

1. Articles 1 and 2 of the Provisions stipulate performance of statutory procedures does not release one from being held liable for damages in related party transactions, and if a company has not yet filed suit against the other party over an invalid or revocable related transaction contract, the shareholders may bring a shareholder derivative suit.

Article 1 of the Provisions refines the principle-based provisions under Article 21 of the Company Law on damage to a company’s interests caused by its directors, supervisors or senior managers through relationships by specifically stipulating that those persons engaging in such related party transactions shall not be released from their liabilities on the ground of having performed the statutory procedures.  The Provisions set out particular rules against such commonly-asserted defenses to better protect a company’s interests.  In addition, with respect the invalidation and revocation of the contract for such related party transaction, a company usually does not file a suit on its own to invalidate/revoke the contract despite the unfairness or damage to the company since it is often controlled by individual(s) involved in the transaction.  Article 2 of the Provisions therefore gives shareholders the right to bring a shareholder derivative suit to declare the invalidity or revocation of the related party transaction contract.

2. The Provisions clarify the system for removal of directors.

Since current Company Law jurisprudence and judicial practice treat the relationship between a company and its directors as a retainer agreement, under Article 410 of the Contract Law, both parties may terminate the agreement at any time, Article 3 of the Provisions allow directors to be removed before the expiration of his/her term by way of a valid resolution of the shareholders’ meeting or the general shareholders’ meeting.  In addition, for compensation to the removed director, since it is not entirely equivalent to remuneration or damages under the agreement, the Provisions state that the judicial institution shall consider multiple factors based on the law, the company’s articles of incorporation as well as the contractual provisions to determine if any compensation shall be paid and the reasonable amount.  This article provides guidance to courts in exercising discretion in such cases.

3. The Provisions separately stipulate the time limit for a company’s distribution of profits.

Article 4 of the Provisions requires a company to complete the distribution of profits within one year after the day the resolution to distribute profits is adopted.  This article ensures that the shareholders can timely obtain the profits whose distribution has been resolved.

4. The Provisions provide a settlement mechanism for cases of major differences among the shareholders of a limited company.

The Provisions provide that in case of major differences among a company’s shareholders, the parties may negotiate and agree to resolve such differences through measures such as a buyback or capital reduction, and the people’s court should support such a decision as long as it does not violate any compulsory provision under the law or administrative regulations.  This article provides guidance on how a company may resume normal operations in the event of a stalemate.  However, since the current Company Law still has conditions and procedural requirements for implementing a buyback or share transfer, they shall still be complied with when such measures are put into effect.