Provisions (V) of the Supreme People’s Court relating to the application of the Company Law of the PRC
The Supreme People’s Court on April 22, 2019 issued Provisions (V) relating the application of the Company Law (“the New Provisions”) to guarantee the correct interpretation and proper application of the Company Law promulgated in 2006 and last modified in 2018.
The New Provisions, formed by 6 articles, concern in particular the following main topics.
1. Protection of the share of shareholders
As we know, some majority shareholders or company management may force the company to enter into affiliated transactions that may damage the interests of the company and negatively impact the minority of shareholders or creditors.
The Company Law already prohibits such actions and regulates ensuing responsibility (art. 21 of the PRC Company Law) but the New Provisions have specified new aspects stating that, in case of these violations, the interested party will not be exempted from liability even if a legitimate procedure has been implemented to approve the transaction, such as the approval of the shareholders or of the board of directors.
Furthermore, the New Provisions provide that the any shareholder of a limited liability company or shareholders of a joint stock company who have held, individually or in aggregate, 1% or more of the shares of the company for more than 180 consecutive days , may act in their own name upon verification of the conditions settled out in Section 1 of Article 151 of the PRC Company Law, i.e.:
1) any related party transaction infringes the company’s interests and the company did not initiate a lawsuit; or
2) the contract for the party-related transaction is deemed to be invalid or rescindable and the company has no started a lawsuit against the counterparty of such contract1.
2. Dismissal of Directors
Since the directors are appointed by the shareholder, the general opinion in the legal practice is that the shareholder can also remove the directors at any time and without reason. Article 3 of the New Provisions now confirms such interpretation. A company has the right to remove a director before the expiry of his mandate, through effective decisions taken by the shareholders meeting.
However, the removal without cause might give rise to the right of the director to claim an indemnity to be paid by the company.
Art. 3 provides that “Where a director who is dismissed by a valid resolution of the board of shareholders or the general meeting of shareholders before expiry of his/her term of office claims that the dismissal is not legally effective, the people’s court shall not uphold such claim. If, after being dismissed, a director files a lawsuit due to a dispute over indemnity with the company, the people’s court shall, according to laws, administrative regulations, the articles of association of the company or the contract, determine whether the company shall give indemnity and the reasonable amount of indemnity by taking into account the factors such as the reasons for dismissal, the rest of his/her term of office and his/her remuneration”.
3. Provisions about distribution of profits
The New Provisions provide new rules for the distribution of profits and establish a maximum term of one year to execute such decisions.
Article 4 states that: “After a resolution on distribution of profits is made by the board of shareholders or the general meeting of shareholders, the company shall complete the profit distribution within the period specified in the resolution. If no period is specified in the resolution, the Provisions of the articles of association shall apply. If no period is specified in either the resolution or the articles of association or the period specified therein exceeds one year, the company shall, within one year from the date when the resolution is made, complete the profit distribution.
If the period for completion of profit distribution as specified in the resolution exceeds that specified in the articles of association, the shareholders may apply to the people’s court for revoking the Provisions on such period in the resolution according to the Provisions of Paragraph 2 of Article 22 of the Company Law”.
The Provisions also regulate in a more detailed manner decisions for the distribution of profits and the power of the people’s courts to revoke such such decisions.
4. Alternative ways of resolving disputes between shareholders
The Provisions provide also new ways of resolving disputes.
Article. 5 in fact provides that: “In hearing a case involving major disputes between shareholders of a limited liability company, the people’s court shall attach importance to mediation. If the parties agree to settle their disputes in any of the following ways not violating the mandatory provisions of laws or administrative regulations, the people’s court shall uphold such agreement.
(1) buy-back of the shares of some shareholders by the company;
(2) transfer of the shares of some shareholders to other shareholders;
(3) transfer of the shares of some shareholders to others;
(4) reduction in capital of the company;
(5) division of the company; or
(6) any other way that can resolve the disputes, resume the normal operation of the company and avoid dissolution of the company”.
5. Entry into force
According to the art. 6, the Provisions shall come into force on April 29, 2019 and apply to any case that has not been finalized yet after the effectiveness of them but shall not apply to any case that has been finalized before the effectiveness date or is subject to retrial under the trial supervision procedures.
In case of discrepancy between any juridical interpretation previously promulgated by the Supreme People’s Court and the New Provisions, the New Provisions shall prevail.
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Art. 1 provides that “for an affiliated transaction harming the interests of a company, if the plaintiff company claims that the controlling shareholder, the actual controller, directors, supervisors or senior executives shall compensate for the losses caused thereby in accordance with the Provisions of Article 21 of the Company Law, but the defendant defends only on the grounds that it has performed the procedures as prescribed by laws, administrative regulations or the articles of association of the company, including information disclosure, the consent of the board of shareholders or of the general meeting of shareholders, etc. for the transaction, the people’s court shall not uphold such defence. If the company does not file a lawsuit, any shareholder meeting the requirements specified in Paragraph 1 of Article 151 of the Company Law may initiate legal proceedings with the people’s court in accordance with the Provisions of Paragraph 2 or 3 of Article 151 of the Company Law”. Article 2 provides that: “Where an affiliated transaction contract falls under any of the circumstances of invalidation or revocability, and the company does not take legal actions against the contract counterparty, any shareholder meeting the requirements specified in Paragraph 1 of Article 151 of the Company Law may lodge a lawsuit with the people’s court in accordance with the Provisions of Paragraph 2 or 3 of Article 151 of the Company Law”.
