Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (IV)

Fa Shi [2017] No.16

August 25, 2017

Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (IV), adopted at the 1702nd meeting of the Judicial Committee of the Supreme People's Court on December 5, 2016, are hereby promulgated for implementation as of September 1, 2017.

Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (IV)

For the purpose of ensuring the correct application of the Company Law of the People's Republic of China, in the light of judicial practices of the people's courts, provisions on issues concerning the application of the law to cases with respect to the effectiveness of corporate resolutions, shareholders' right to know, right to share profits, preemptive right, and shareholder representative litigation are given as follows:

Article 1 Where a shareholder, a director or a supervisor of a company files a lawsuit with the people's court, requesting it to rule that a resolution of the board of shareholders or the general meeting of shareholders, or the board of directors is null and void or non-existent, the people's court shall accept the lawsuit according to the law.

Article 2 The plaintiff who, pursuant to Paragraph 2 of Article 22 of the Company Law, requests the cancelation of a resolution of the board of shareholders or the general meeting of shareholders or the board of directors of a company, shall be a shareholder of such company at the time when the lawsuit is being filed.

Article 3 In the case of a lawsuit where the plaintiff seeks a ruling that a resolution of the board of shareholders or the general meeting of shareholders or the board of directors of a company shall be declared non-existent or null and void, or be canceled, such company shall be the defendant. Any other interested party involved in the resolution may be named as the third party.
Where a party qualified as the plaintiff requests, before the end of first-instance court debate, to join in the lawsuit specified in the preceding paragraph based on the same claim, it may be named as a co-plaintiff.

Article 4 A shareholder's claim to cancel a resolution of the board of shareholders or the general meeting of shareholders or the board of directors of a company shall be upheld by the people's court, provided that such claim satisfies requirements stipulated in Paragraph 2 of Article 22 of the Company law. However, if the procedure for calling the meeting or the voting method is barely subject to a few minor defects, the people's court shall not uphold the claim.

Article 5 Where a party concerned claims that a resolution of the board of shareholders or the general meeting of shareholders or the board of directors of a company shall be declared non-existent under any of the following circumstances, the people's court shall uphold such claim,
1. Where the resolution is adopted without convening a meeting, unless the resolution is directly adopted without convening a shareholder meeting or a general meeting of shareholders pursuant to Paragraph 2 of Article 37 of the Company Law or the company's articles of association, and duly signed and stamped by all shareholders;
2. Where the resolution is adopted at the meeting without voting on it;
3. Where the number of attendees showing up at the meeting or the voting rights held by present shareholders do (es) not comply with provisions of the Company Law or the company's articles of association;
4. Where the voting result for the resolution at the meeting does not reach the proportion stipulated by the Company Law or specified in the company's articles of association; or
5. Other circumstances resulting in the non-existence of the resolution.

Article 6 Where the people's court rules that a resolution of the board of shareholders or the general meeting of shareholders or the board of directors of a company is null and void or canceled, the civil legal relationship formed between the company and a bona fide counterpart according to such resolution shall not be affected.

Article 7 Where a shareholder of a company files a lawsuit to seek the inspection or photocopies of certain documents of such company pursuant to Article 33 or Article 97 of the Company Law or the company's articles of association, the people's court shall accept the lawsuit according to the law.
Where the company furnishes evidence that the plaintiff as mentioned in the preceding paragraph has ceased to be its shareholder at the time when the lawsuit is being filed, the people's court shall dismiss the lawsuit. However, there is an exception where the plaintiff is able to provide prima facie evidence proving that its legitimate rights and interests were damaged when it was a shareholder and thus seeks the inspection or photocopies of the company's certain documents generated during the period when it held the shares.

Article 8 Where a limited liability company provides evidence proving that its shareholder is involved in any of the following circumstances, the people's court shall rule that the shareholder has an "unjustified purpose" as prescribed in Paragraph 2 of Article 33 of the Company Law,
1. Where any business owned or operated by the shareholder is in substantial competition with the main business of the company, unless otherwise specified in the company's articles of association or agreed by all shareholders;
2. Where the intention of the shareholder to inspect the company's account books for the purpose of informing others of relevant particulars is likely to damage the legitimate rights and interests of the company;
3. Where the shareholder's practice of informing others of relevant information obtained by inspecting account books of the company in the last three years prior to the time when it requests to inspect relevant documents this time caused damage to the legitimate rights and interests of the company; or
4. Other circumstances where the shareholder has an unjustified purpose.

Article 9 Where the articles of association of a company or any agreements concluded between shareholders virtually deprive shareholders of their rights to inspect or photocopy the company's documents pursuant to Article 33 or Article 97 of the Company Law, and the company refuses a shareholder's request to inspect or photocopy documents on that ground, the people's court shall not uphold such refusal.

Article 10 In hearing a case where a shareholder of a company requests to inspect or photocopy certain documents of the company, the people's court shall specify in the ruling when and where to inspect or photocopy certain documents of the company as well as the list of specific documents to be inspected or photocopied, if it upholds the plaintiff's claim.
Where a shareholder of a company requests to inspect the company's documents by presenting a legally effective judgment issued by the people's court, the inspection may take place in the presence of such shareholder under the assistance of the practitioners of relevant agencies who are obligated to maintain the confidentiality of relevant documents under the law or the code of practice, such as accountants or lawyers.

Article 11 Where a company claims compensation for damage against its shareholder as such damage to its legitimate rights and interests is attributed to the shareholder's disclosure of its commercial secrets after the shareholder has exercised the right to know, the people's court shall uphold the company's claim.
Where a company claims compensation for damage against an accountant or a lawyer as such damage to its legitimate rights and interests is attributed to the disclosure of its commercial secrets by the accountant or the lawyer who assisted a shareholder of the company in inspecting its documents as stipulated in Article 10 herein, the people's court shall uphold the company's claim.

Article 12 Where a director, a senior executive, etc. of a company fails to fulfill his or her duties according to the law, and thus leads to the failure of the company to prepare or keep relevant documents as required by Article 33 and Article 97 of the Company Law, which brings damage to shareholders, the people's court shall uphold the claim legally made by shareholders of the company to compensation against the director or senior executive held liable for bearing the compensation liabilities.

Article 13 Where a shareholder of a company requests the distribution of the company's profits, the company shall be the defendant.
Where another shareholder requests, before the end of first-instance court debate, the distribution of profits based on the same profit distribution plan and to join in the lawsuit initiated by the plaintiff, it shall be named as a co-plaintiff.

Article 14 Where a shareholder of a company requesting the distribution of its profits provides an effective resolution that is adopted at the shareholders' meeting or the general meeting of shareholders and specifies the distribution plan in detail, but the company refuses to distribute profits and the defense it cites to prove its inability to carry out the resolution is not justified, the people's court shall make a ruling that the company shall distribute its profits in accordance with the specific distribution plan specified in the resolution.

Article 15 Where a shareholder of a company requests the distribution of its profits but fails to provide the resolution adopted at the shareholder meeting or the general meeting of shareholders in respect of the detailed profit distribution plan, the people's court shall dismiss its claim, unless the failure to distribute the company's profits is attributed to any shareholder's abuse of shareholder rights and results in losses suffered by other shareholders.

Article 16 Where a natural person shareholder of a limited liability company is changed due to the inheritance relationship but another shareholder claims the preemptive right to the inherited equities in accordance with Paragraph 3 of Article 71 of the Company Law, the people's court shall not uphold such claim, unless otherwise specified in the company's articles of association or agreed by all shareholders.

Article 17 A shareholder of a limited liability company that intends to transfer its equities to a party who is not a shareholder of the company shall notify other shareholders of the equity transfer in writing or by any other reasonable means possible to confirm receipt of their consent. Where a majority of the other shareholders disagree with the proposed transfer but refuse to purchase the equities in question, the people's court shall rule that these shareholders are deemed as having consented to the transfer.
Where other shareholders agree with the equity transfer and claim that the shareholder proposing the transfer of its equities shall notify them of the equal conditions for the equity transfer in writing or by any other reasonable means possible to confirm receipt, the people's court shall uphold such shareholders' claim.
Where other shareholders agree with the equity transfer and claim their preemptive rights to purchase the equities in question under equal conditions, the people's court shall uphold such shareholders' claim, unless the shareholder proposing the transfer of its equities gives up the transfer in the end pursuant to Article 20 herein.

Article 18 To determine whether the "equal conditions" as mentioned in Paragraph 3 of Article 71 of the Company Law and in these Provisions are satisfied, the people's court shall take a number of factors into consideration, including the quantity of equities to be transferred, the equity transfer price, the payment method, and the time limit for payment.

Article 19 Where a shareholder of a limited liability company claims the preemptive right to the equities in question, such shareholder shall make the purchase claim within the time limit as specified in the company's articles of association for exercising the preemptive right, upon receipt of the above-said notification. Where the time limit for exercising the preemptive right is not specified or expressly identified in the company's articles of association, the period identified in the notification shall prevail; if such period identified in the notification is shorter than 30 days or the time limit for exercising the preemptive right is not identified in such notification either, the actual period for exercising the preemptive right shall be 30 days.

Article 20 Where a shareholder of a limited liability company that proposes to transfer its equities changes their mind after other shareholders claim their preemptive rights to the equities in question, but these shareholders still insist on their preemptive rights, the people's court shall not uphold such insistence, unless otherwise specified in the company's articles of association or agreed by all shareholders. Where the claim made by other shareholders for compensation for their losses against such shareholder who was meant to transfer its equities is justified, the people's court shall uphold such claim.

Article 21 Where a shareholder of a limited liability company that proposes to transfer its equities to a party that is not a shareholder of the company fails to seek opinions from other shareholders on such equity transfer, or damages other shareholders' preemptive rights by means of fraud, malicious collusion or otherwise, and other shareholders thus claim for their preemptive rights to the equities in question under equal conditions, the people's court shall uphold such claim, except where other shareholders fail to claim their preemptive rights within 30 days from the time they know or should know of the equal conditions to exercise their preemptive rights, or claim their preemptive rights after the equity change registration has been made for over a year.
Where other shareholders as mentioned in the preceding paragraph simply request to decide upon the effectiveness of the equity transfer contract and the equity transfer but fail to claim their preemptive rights under the equal conditions at the same time, the people's court shall dismiss such request, except where other shareholders claim for damage as the failure to exercise their preemptive rights is attributed to other reasons other than personal reasons.
Where the equity assignee who is not a shareholder of the company fails to realize the contract purpose in the end as a result of the preemptive rights exercised by other shareholders, it may request the shareholder that intends to transfer its equities to bear the corresponding civil labilities according to the law.

Article 22 Where the equities of a limited liability company are transferred through auction to any other party that is not a shareholder of the company, the application of provisions on "notification in writing", "notification" and "equal conditions" as prescribed in Paragraphs 2 and 3 of Article 71 or Article 72 of the Company Law shall be subject to relevant laws and judicial interpretations.
Where the state-owned equities of a limited liability company are transferred at a legally-established property right exchange, provisions on "notification in writing", "notification" and "equal conditions" as prescribed in Paragraphs 2 and 3 of Article 71 or Article 72 of the Company Law shall apply based on the trading rules of the said property right exchange.

Article 23 Where the board of supervisors, or a supervisor of a limited liability company with no board of supervisors initiates a lawsuit against a director or a senior executive of the company pursuant to Paragraph 1 of Article 151 of the Company Law, the company shall be named as the plaintiff, and the chairman of the board of supervisors, or the supervisor if the limited liability company has no board of supervisors, shall appear in court on behalf of the company in accordance with the law.
Where the board of directors, or the executive director of a limited liability company with no board of directors initiates a lawsuit against a supervisor of the company in accordance with Paragraph 1 of Article 151 of the Company Law, or initiates a lawsuit against any other party in accordance with Paragraph 3 of Article 151 of the Company Law, the company shall be named as the plaintiff, and the chairman of the board of directors or the executive director shall appear in court on behalf of the company in accordance with the law.

Article 24 Where a shareholder that satisfies the requirements prescribed in Paragraph 1 of Article 151 of the Company Law directly initiates a lawsuit against a director, a supervisor or a senior executive of the company or any other party in accordance with Paragraphs 2 and 3 of Article 151 of the Company Law, the company shall be named as the third party before the court.
Where another shareholder that satisfies the requirements prescribed in Paragraph 1 of Article 151 of the Company Law requests, before the end of first-instance court debate, to join in the lawsuit based on the same claim, such shareholder shall be named as co-plaintiff.

Article 25 With regard to a lawsuit directly initiated by a shareholder of a company in accordance with Paragraphs 2 and 3 of Article 151 of the Company Law, the interests obtained from the winning of the lawsuit shall be owned by the company. Where the shareholder requests the defendant to directly bear civil responsibilities towards itself, the people's court shall not uphold such claim.

Article 26 Where a shareholder of a company directly initiates a lawsuit in accordance with Paragraphs 2 and 3 of Article 151 of the Company Law and its claim is wholly or partially upheld by the people's court, the company shall bear the reasonable expenses paid by the shareholder and incurred from its engagement in the litigation.

Article 27 These Provisions shall take effect as of September 1, 2017.
These Provisions shall apply to any case for which the final judgment is pending at the time these Provisions enter into force, but shall not apply to any case for which the final judgment has been made before the effectiveness of these Provisions or where the re-trial is subject to the trial supervision procedures.