September 2025
Serials Research Part Seven on the New Systems under the New Company Law: Analysis of the System for Strengthening the Protection of Shareholders' Rights (Mainland China)
The new Company Law introduces several important revisions and improvements regarding the protection of shareholders' rights. It not only expands the scope of shareholders' right to information and adds new scenarios applicable to shareholders' repurchase request rights, but also explicitly allows shareholders to initiate dual derivative lawsuits and establishes the principle of capital reduction in proportion, aiming to strengthen the protection of shareholders' rights and interests. This article provides a brief introduction and analysis of these new systems.
I. Expanding the Scope of the Shareholders' Right to Information
According to Articles 57 and 110 of the new Company Law, shareholders of a limited liability company, in addition to the existing rights under the original Company Law to review and copy the company's articles of association, minutes of shareholders' meetings, resolutions of the board of directors, resolutions of the board of supervisors, and financial and accounting reports, now have the newly added right to review the register of shareholders and accounting vouchers (accounting vouchers are for review only, not for copying). Shareholders of a joint stock limited company who meet specific conditions (i.e., shareholders who separately or aggregately hold 3% or more of the company’s shares for 180 consecutive days or more) now have the newly added right to review the company's accounting books and accounting vouchers. Furthermore, both types of shareholders above have the right to review and copy relevant materials of the company's wholly-owned subsidiaries. By exercising their right to information, shareholders, especially minority shareholders, can fully understand the company's operational and financial status, check for the existence of related-party transactions, abuse of shareholder rights, and other actions that may harm their rights and interests, thereby more effectively safeguarding their legitimate rights and interests.
II. New Scenario for the Shareholders' Repurchase Request Right in Limited Liability Companies
Article 89 of the new Company Law adds a new repurchase scenario to the original three (i.e., the company has not distributed profits for five consecutive years; the company merges, splits up, or transfers its main property; causes for dissolution as prescribed in the company's articles of association occur): "where any controlling shareholder of the company abuses its shareholder's right and seriously damages the interests of the company or other shareholders". It is worth noting that exercising this right no longer requires the shareholder to have voted against the relevant shareholders' meeting resolution, further enhancing the operability of the repurchase request right.
III. Introduction of the Dual Derivative Litigation System
According to Article 189 of the new Company Law, eligible shareholders (shareholders of a limited liability company, or shareholders of a joint stock limited company who separately or aggregately hold 1% or more of the total shares of the company for 180 consecutive days or more) are allowed to initiate derivative lawsuits regarding acts of directors, supervisors, or senior executives of a wholly-owned subsidiary of the company that cause losses to that wholly-owned subsidiary, i.e., dual derivative litigation. This system will help safeguard the legitimate rights and interests of the wholly-owned subsidiary, the parent company, and the shareholders of the parent company. However, it should be noted that this article currently only applies to wholly-owned subsidiaries of the company and does not yet extend to wholly-owned grandchild companies or non-wholly-owned but actually controlled companies; the latter cannot yet apply the dual derivative litigation system.
IV. Establishing the Principle of Capital Reduction in Proportion, with Non-Proportional Capital Reduction as the Exception
According to Article 224 of the new Company Law, when a company reduces its registered capital, it shall reduce the amount of capital contribution or shares in proportion to the capital contribution or shares held by the shareholders, meaning capital reduction should, in principle, be proportional. Unless otherwise prescribed by law, if a limited liability company intends to conduct a non-proportional capital reduction, it must be agreed upon by all shareholders; a joint stock limited company must prescribe this in its articles of association. This rule further clarifies the capital reduction procedure, protecting shareholders' legitimate rights and interests in capital changes.
Through the aforementioned multiple system innovations and improvements, the new Company Law significantly strengthens the protection of shareholders' rights. Its more detailed and operational arrangements regarding the right to information, the repurchase request right, derivative litigation, and capital reduction principle not only respond to practical disputes and needs but also provide a clearer legal basis for the comprehensive protection of shareholders' rights and interests.
I. Expanding the Scope of the Shareholders' Right to Information
According to Articles 57 and 110 of the new Company Law, shareholders of a limited liability company, in addition to the existing rights under the original Company Law to review and copy the company's articles of association, minutes of shareholders' meetings, resolutions of the board of directors, resolutions of the board of supervisors, and financial and accounting reports, now have the newly added right to review the register of shareholders and accounting vouchers (accounting vouchers are for review only, not for copying). Shareholders of a joint stock limited company who meet specific conditions (i.e., shareholders who separately or aggregately hold 3% or more of the company’s shares for 180 consecutive days or more) now have the newly added right to review the company's accounting books and accounting vouchers. Furthermore, both types of shareholders above have the right to review and copy relevant materials of the company's wholly-owned subsidiaries. By exercising their right to information, shareholders, especially minority shareholders, can fully understand the company's operational and financial status, check for the existence of related-party transactions, abuse of shareholder rights, and other actions that may harm their rights and interests, thereby more effectively safeguarding their legitimate rights and interests.
II. New Scenario for the Shareholders' Repurchase Request Right in Limited Liability Companies
Article 89 of the new Company Law adds a new repurchase scenario to the original three (i.e., the company has not distributed profits for five consecutive years; the company merges, splits up, or transfers its main property; causes for dissolution as prescribed in the company's articles of association occur): "where any controlling shareholder of the company abuses its shareholder's right and seriously damages the interests of the company or other shareholders". It is worth noting that exercising this right no longer requires the shareholder to have voted against the relevant shareholders' meeting resolution, further enhancing the operability of the repurchase request right.
III. Introduction of the Dual Derivative Litigation System
According to Article 189 of the new Company Law, eligible shareholders (shareholders of a limited liability company, or shareholders of a joint stock limited company who separately or aggregately hold 1% or more of the total shares of the company for 180 consecutive days or more) are allowed to initiate derivative lawsuits regarding acts of directors, supervisors, or senior executives of a wholly-owned subsidiary of the company that cause losses to that wholly-owned subsidiary, i.e., dual derivative litigation. This system will help safeguard the legitimate rights and interests of the wholly-owned subsidiary, the parent company, and the shareholders of the parent company. However, it should be noted that this article currently only applies to wholly-owned subsidiaries of the company and does not yet extend to wholly-owned grandchild companies or non-wholly-owned but actually controlled companies; the latter cannot yet apply the dual derivative litigation system.
IV. Establishing the Principle of Capital Reduction in Proportion, with Non-Proportional Capital Reduction as the Exception
According to Article 224 of the new Company Law, when a company reduces its registered capital, it shall reduce the amount of capital contribution or shares in proportion to the capital contribution or shares held by the shareholders, meaning capital reduction should, in principle, be proportional. Unless otherwise prescribed by law, if a limited liability company intends to conduct a non-proportional capital reduction, it must be agreed upon by all shareholders; a joint stock limited company must prescribe this in its articles of association. This rule further clarifies the capital reduction procedure, protecting shareholders' legitimate rights and interests in capital changes.
Through the aforementioned multiple system innovations and improvements, the new Company Law significantly strengthens the protection of shareholders' rights. Its more detailed and operational arrangements regarding the right to information, the repurchase request right, derivative litigation, and capital reduction principle not only respond to practical disputes and needs but also provide a clearer legal basis for the comprehensive protection of shareholders' rights and interests.
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