China: PRC Supreme People's Court Clarifies Certain Aspects Of Shareholders' Rights

On 25 August 2017 the Supreme People's Court ("SPC") of the People's Republic of China ("PRC") promulgated the Provisions of the Supreme People's Court on Several Issues Relating to Application of the PRC Company Law (IV) ("Interpretation IV"). Interpretation IV has come into force on 1 September 2017.

Interpretation IV focuses on five aspects, i.e. (1) validity of resolutions; (2) shareholder's rights to review company documents; (3) distribution of profits; (4) pre-emptive rights of shareholders; (5) derivative actions. Interpretation IV aims at strengthening the protection of shareholders' right and on corporate governance. Please find below information on the key aspects.

1. Validity of Resolutions

Article 1 to Article 6 of Interpretation IV deal with the validity of resolutions of the shareholders' meeting (in limited liability companies), the shareholders' general meeting (in companies limited by shares) and the board of directors (collectively "Resolutions"). According to Article 22 of the PRC Company Law, a Resolution can, under certain circumstances, be invalid (due to breach of law by its content) or revocable (due to procedural defects or breach of the Articles of Association by its content). The Interpretation IV introduces a third validity defect of a Resolution, i.e. so-called "non-existence". Given the above, under PRC law a Resolution now may be invalidated under certain circumstances by claiming to be invalid, revocable or not existent.

According to Article 5 of the Interpretation IV, under any of the following four circumstances a Resolution may be declared by a People's Court as not existent:

  • if a Resolution is adopted without convening a meeting unless all shareholders unanimously agree to the Resolution in writing and all shareholders have duly signed and sealed the Resolution;
  • if a Resolution is adopted at a meeting without voting on it;
  • if the quorum of a meeting does not meet the requirements of the PRC Company Law or the Articles of Association of the company;
  • if the voting result at the meeting does not reach the proportion stipulated in the PRC Company Law or the Articles of Association of a company.
  1. Who is entitled to file a petition to the court to confirm that a Resolution has a validity defect?

    Article 1 of Interpretation IV stipulates that shareholders, directors and supervisors, etc. are entitled to initiate proceedings with the court to confirm that a Resolution is invalid or not existent.

    Article 2 of the Interpretation IV further states that a shareholder is entitled to file a petition to the court to revoke a Resolution, provided that such shareholder still is a shareholder at the time of filing such petition.

    However, it remains unclear whether any person other than shareholders, directors and supervisors can raise a claim to the court that a Resolution is invalid or not existent. The same applies to the question, whether directors and supervisors of a company can also file a petition to revoke a Resolution.
  2. Effect of Validity Defect on Bona Fide Third Parties

    According to Article 6 of Interpretation IV, the contractual relationship with a bona fide third party based on a Resolution will not be affected if such Resolution is revoked or declared to be invalid by the court. However, not existent Resolutions are not included in this article. Therefore, the legal effect of a not existent Resolution on a bona fide third party remains unclear.

2. Shareholders' Right to Review Company Documents

Article 7 to Article 12 of Interpretation IV deal with shareholders' rights to review company documents ("Shareholders' Right to Know"). Shareholders' Right to Know are already mentioned in the PRC Company Law (Article 33 and Article 97), which stipulate that a shareholder is entitled to review and copy certain company documents. According to the PRC Company Law, company documents refer to Articles of Association, shareholders' name list, company bond registers, shareholders' meeting minutes, board resolutions, resolutions of supervisors' meetings and financial accounting reports.

  1. Can Shareholders' Right to Know be waived by agreement?

    Article 9 of the Interpretation IV confirms that Shareholders' Right to Know are mandatory statutory rights stipulated in the PRC Company Law, and thus, cannot be deprived or waived by clauses in the Shareholders' Agreement or Articles of Association.
  2. Can the company refuse to provide documents to the shareholder?

    According to Article 9 of Interpretation IV, where a limited liability company has evidence to prove the occurrence of any of the following circumstances, the People's Court shall rule that the shareholder pursues the "improper purposes" as provided in paragraph 2 of Article 33 of the PRC Company Law and the company can refuse to provide the requested information:

    • The shareholder owns or operates for others a business that is substantially competitive with the major business of the company, unless otherwise provided or otherwise agreed with all shareholders;
    • The shareholder wants to inspect the accounting books of the company in order to inform third parties of the relevant information which may damage the legitimate interests of the company;
    • The shareholder, within the previous 3 years of requesting to inspect company's documents, through the means of inspecting the accounting books of the company, has informed third parties of the information in violation of the lawful interests of the company; or
    • The shareholder pursue other improper purposes.
  3. Responsibility of directors and senior managers on formulation and keeping of company documents

    According to Article 12 of Interpretation IV, in case directors or senior managers of a company fail to perform their duties to formulate and keep company documents and, thus, cause any losses to a shareholder, such shareholder is entitled to file a lawsuit against the relevant directors and senior managers for compensation.
  4. Can accounting vouchers and underlying records be accessed by the shareholders?

    Accounting vouchers and underlying records are not included in the company documents that are open to the shareholders according to the PRC Company Law. The draft of Interpretation IV for public opinion stipulated that such documents can be accessed by the shareholders of a limited liability company. The formally promulgated Interpretation IV no longer contains such stipulations. Thus, in practice, whether accounting vouchers and underlying records are open to the shareholders is still disputable.

3. Distribution of Profit

Article 13 to Article 15 of Interpretation IV deal with distribution of profit. According to Article 14 and Article 15 of Interpretation IV, a shareholder who files a lawsuit for distributing profit shall bear the burden of proof and submit the resolution of the shareholders' meeting containing the profit distribution plan to the court. Otherwise, the court will not uphold the shareholder's claim unless other shareholders abuse their rights to cease distributing profit and cause damages to that shareholder.

4. Pre-emptive Rights of Shareholder

Article 16 to Article 22 of Interpretation IV deal with share transfers, especially the pre-emptive right of shareholder during a share transfer.

  1. Definition of "same conditions" of the pre-emptive right

    According to the PRC Company Law, if a shareholder of a limited liability company intends to transfer its shares to a third party, the other shareholders have a pre-emptive right under the same conditions. Article 18 of the Interpretation IV stipulates that the term "same conditions" in the PRC Company Law shall take reference to the conditions of quantity, price, payment method and payment term, etc. of the share transfer.
  2. Term to exercise the pre-emptive right

    The PRC Company Law does not contain stipulations as to the term during which a pre-emptive right can be exercised. According to Article 19 of Interpretation IV, after receiving the notice of share transfer, shareholders who wish to exercise their pre-emptive right shall do so within the term as stipulated in the Articles of Association of the company first. If the Articles of Association do not contain such term or the stipulation of the term is not clear, then the term shall be subject to the stipulation in the notice. If the term stipulated in the notice is shorter than 30 days or is not clear, the term to exercise the preemptive right shall be 30 days after receipt of the notice.
  3. Revocation of share transfer intention after other shareholders have exercised the pre-emptive right

    A frequent question in legal practice is whether the transferor is still entitled to revoke his intention of share transfer after other shareholders exercised their pre-emptive right. Article 20 of Interpretation IV now confirms that unless otherwise agreed by all shareholders or stipulated in the Articles of Association, the transferor can still decide not to transfer the shares after other shareholders have exercised their pre-emptive right. However, in such case, the transferor shall compensate any reasonable losses of the other shareholders, if required by them.

5. Derivative Actions

Article 23 to Article 26 of Interpretation IV deal with the derivative actions. Derivative actions aim at protecting the right of minority shareholders. They are originally stipulated in Article 151 of the PRC Company Law. The concept is that minority shareholders under certain circumstances are entitled to require the board of directors (or executive director) or the board of supervisors (or supervisor) to initiate a lawsuit against a director or senior manager who violated his/her duty and caused damages to the company, or may even initiate such lawsuit directly on his/her own behalf to protect the interest of the company if the board of directors (or executive director) or the board of supervisors (or supervisor) refuses his/her request.

Article 23 to Article 26 of Interpretation IV focus on the legal procedures for derivative actions and their consequences to both the company and the minority shareholders, if the minority shareholders initiate a lawsuit directly on his/her own behalf. If a minority shareholder initiates a lawsuit directly on their own behalf, the benefits resulting from winning the lawsuit will belong to the company, and not to the minority shareholder. However, in that case, reasonable costs of the lawsuit shall be undertaken by the company.

In China, the SPC is entitled to supplement statutory regulations through formal interpretations. Often, stipulations contained in laws and regulations are vague or incomplete so that the interpretations of the SPC considerably help to interpret the law and to avoid disputes. This also applies for Interpretation IV. A number of frequent questions referring to shareholders' rights and corporate governance issues have now been clarified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions