The Supreme People’s Court of PRC issued the most update judicial interpretation of the the Corporate Law on 28th April, 2019 and would implement these new rules the very next day. This new interpretation will have huge impact on the business environment of China. It is necessary for all businessmen to understand it.
There are six articles in this interpretation and now let’s have a close look what changes it brings to us.
1. Rights of The Minor Shareholders
According to this interpretation, when the major shareholders or other senior management conduct affiliate transactions which can impair the interest of the company. Their liabilities cannot be waived by claiming the transaction was decided through due process. The company can sue the major shareholder, actual controller, director,supervisor or senior management for liquidity of damage caused by the affiliated transactions. If the company does not institute the proceeding, the qualified minor shareholders are entitled to do so.In case the company does not lodge lawsuit though the affiliated transactions may be invalid or revocable, qualified minor shareholders has the right to litigate.
2. Severance of Directors
Article 3 of the new judicial interpretation regulates that the company can dismiss the director (of the company board) before his/her term is due, for no reason. However, the director can lodge a lawsuit against the company for compensation caused by the severance. The court should review the full picture and decide how much to award the director. The court should consider all kinds of factors like the laws, rules, company chart or agreement between the director and the company, the remaining term and payment received as the director,etc.BTW, such rule cannot be applied to the employee representative director.
3. Distribution of Profits
The company is obliged to distribute the profits according to the resolution of the shareholder’s meeting. If the resolution does not state exactly when the profits should be distributed,the timing can be decided by the chart of the company. The profit must be distributed within one year since the date the resolution is made.
When the court hears case involving the serious disagreements between the shareholder of limited liability companies, it should emphasize resolve the issue through mediation. The court should guide the litigants to settle the case by the following methods which include(1) share re-purchase by the company;(2) share transfer to other shareholders;(3) share transfer to other persons;(4) capital reduction;
5. Subdivide the Company;
6. Other means; that can eliminate the disagreements, resume normal operations and avoid the dissolve of the company;
As we can see , this new judicial interpretation tries to better protect the interests of minor shareholders and ensure the stable operation of companies at the same time. There may be more litigation cases against major shareholders in future so any management should be aware of it.
Richard Zhang (张捷） is a lawyer from PW&Partners Law Firm and has been practicing since 2007.Richard has represented clients from all over the world in litigation and arbitration cases.He is specialized in business and criminal lawsuits. Richard is also very active in environmental protection and has a lot of experiences in environmental law.His working languages are English, Mandarin and Cantonese.To contact him, you can call 188 0200 7880 or write to richard@guangzhoulaw.net
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