August 2017
Solicitation of Opinions for Company Law Interpretation (IV) of the Supreme People's Court(Mainland China)
James Cheng
On April 24, 2016, the Supreme People's Court prepared the Solicitation of Opinions for Provisions on Addressing Issues of the Applicability of the Company Law of the People's Republic of China (IV) (the "Solicitation"). The Solicitation seeks to clarify application of law issues in corporate governance and protection of shareholders' rights and interests, and comments from the public are being solicited. The Solicitation is addressed five types of cases as summarized below:
1. Cases involving the effectiveness of resolutions adopted in shareholders' meetings and board meetings
In contrast to the requirement that only a shareholder may be a plaintiff in initiating an action to set aside resolutions adopted in a shareholders' meeting or board meeting, Article 1 of the Solicitation specifically provides that senior managerial officers, employees, and creditors who have a direct stake in resolutions are also entitled to bring an action to seek a declaratory judgment in accordance with Article 22, Paragraph 1 of the Company Law.
Article 4 and Article 5 of the Solicitation provide for the circumstances where no resolution exists or where the shareholders' meeting or board meeting do not arrive at a valid resolution; Article 6 and Article 7 provide for grounds for invalidating and setting aside resolutions adopted in shareholders' meetings or board meetings respectively. If the original state cannot be restored, or if the lawful rights and interests of an interested party will be irreparably harmed, once a resolution adopted in a shareholders' meeting or board meeting is carried out, Article 10 of the Solicitation provides a basis for petitioning to enjoin the implementation of relevant resolutions.
2. Cases involving the protection of shareholders' right to know
Article 33 and Article 97 of the Company Law respectively provides shareholders of limited companies and companies limited by shares with the right to know through reviewing and copying documents and materials of the companies. The Solicitation further provides that a company may not refuse a shareholder's request to review the company's documents pursuant to the above provision for reasons such as "defects in the shareholder's capital contribution," "restrictions under the company's articles of incorporation" or "restrictions under the shareholdersÕ agreement."
3. Cases involving requests to distribute profits
Under the Solicitation, in requesting a company to distribute profits, a shareholder shall name the company as a defendant; shareholder(s) who refuse to distribute profits may be joined as third parties. It is also specifically stipulated that whether the shareholders can produce a valid resolution adopted in a shareholders' meeting regarding a substantive distribution arrangement shall serve as a major deciding factor for a court to rule whether the company shall pay dividends to the shareholders within a certain period.
4. Cases involving the preemptive right
The Solicitation states that in the absence of any provision in the company's articles of incorporation, the other shareholders of a limited company in principle cannot assert the preemptive right in case of (1) any transfer due to inheritance or bestowal, (2) mutual transfer between shareholders, or (3) subscription to only part of the shares. The Solicitation also contains specific provisions concerning the contents of the written notice to be issued by a transferring shareholder and the period for the exercise of the preemptive right.
5. Cases involving direct litigation or shareholders' representative action
The Solicitation specifically provides that a shareholdersÕ representative action initiated in accordance with Article 151, Paragraphs 2 and 3 of the Company Law cannot demand the defendant to assume civil liabilities directly. However, to reduce the costs and burdens in bringing a representative action, shareholders may, after prevailing in the action, request, reasonable attorneys' fees and the investigation, assessment and notarization costs. In addition, after initiating the action, the shareholders may also agree to have the company to continue the action on their behalf.
The expiration date for submission of comments to the Solicitation was May 13, 2016.
On April 24, 2016, the Supreme People's Court prepared the Solicitation of Opinions for Provisions on Addressing Issues of the Applicability of the Company Law of the People's Republic of China (IV) (the "Solicitation"). The Solicitation seeks to clarify application of law issues in corporate governance and protection of shareholders' rights and interests, and comments from the public are being solicited. The Solicitation is addressed five types of cases as summarized below:
1. Cases involving the effectiveness of resolutions adopted in shareholders' meetings and board meetings
In contrast to the requirement that only a shareholder may be a plaintiff in initiating an action to set aside resolutions adopted in a shareholders' meeting or board meeting, Article 1 of the Solicitation specifically provides that senior managerial officers, employees, and creditors who have a direct stake in resolutions are also entitled to bring an action to seek a declaratory judgment in accordance with Article 22, Paragraph 1 of the Company Law.
Article 4 and Article 5 of the Solicitation provide for the circumstances where no resolution exists or where the shareholders' meeting or board meeting do not arrive at a valid resolution; Article 6 and Article 7 provide for grounds for invalidating and setting aside resolutions adopted in shareholders' meetings or board meetings respectively. If the original state cannot be restored, or if the lawful rights and interests of an interested party will be irreparably harmed, once a resolution adopted in a shareholders' meeting or board meeting is carried out, Article 10 of the Solicitation provides a basis for petitioning to enjoin the implementation of relevant resolutions.
2. Cases involving the protection of shareholders' right to know
Article 33 and Article 97 of the Company Law respectively provides shareholders of limited companies and companies limited by shares with the right to know through reviewing and copying documents and materials of the companies. The Solicitation further provides that a company may not refuse a shareholder's request to review the company's documents pursuant to the above provision for reasons such as "defects in the shareholder's capital contribution," "restrictions under the company's articles of incorporation" or "restrictions under the shareholdersÕ agreement."
3. Cases involving requests to distribute profits
Under the Solicitation, in requesting a company to distribute profits, a shareholder shall name the company as a defendant; shareholder(s) who refuse to distribute profits may be joined as third parties. It is also specifically stipulated that whether the shareholders can produce a valid resolution adopted in a shareholders' meeting regarding a substantive distribution arrangement shall serve as a major deciding factor for a court to rule whether the company shall pay dividends to the shareholders within a certain period.
4. Cases involving the preemptive right
The Solicitation states that in the absence of any provision in the company's articles of incorporation, the other shareholders of a limited company in principle cannot assert the preemptive right in case of (1) any transfer due to inheritance or bestowal, (2) mutual transfer between shareholders, or (3) subscription to only part of the shares. The Solicitation also contains specific provisions concerning the contents of the written notice to be issued by a transferring shareholder and the period for the exercise of the preemptive right.
5. Cases involving direct litigation or shareholders' representative action
The Solicitation specifically provides that a shareholdersÕ representative action initiated in accordance with Article 151, Paragraphs 2 and 3 of the Company Law cannot demand the defendant to assume civil liabilities directly. However, to reduce the costs and burdens in bringing a representative action, shareholders may, after prevailing in the action, request, reasonable attorneys' fees and the investigation, assessment and notarization costs. In addition, after initiating the action, the shareholders may also agree to have the company to continue the action on their behalf.
The expiration date for submission of comments to the Solicitation was May 13, 2016.
