5th Judicial Interpretation of China’s Company Law

5th Judicial Interpretation

of China’s Company Law

On April 28, 2019, the Supreme People’s Court promulgated the Provisions on Several Issues concerning the Application of the Company Law of the People’s Republic of China (V)[1] which came into effect on April 29 2019. In China it is customary for the Supreme Court from time to time to share their views on how they interpret legislation as few cases are published in jurisprudence. It applies to all companies established in China, including both domestic and foreign-invested companies. While the interpretation is short with only 5 provisions, it has strengthened the protection of minority shareholders and demonstrated a clear intention to encourage the resolution of disputes between shareholders in ways that avoid dissolving the invested company.

  1. Connected Transactions (Article 1 & Article 2)

Article 1 is based on article 21 of Company Law which prohibits connected parties from prejudicing the interests of the company by abusing their connected relationship with it. Accordingly, a minority shareholder of a company who satisfies the conditions under Article 151 of China’s Company law is entitled to claim loss and damage against the company’s controlling shareholder, actual controller, director, supervisor or senior management for the benefit of the company, if a connected transaction has damaged the interests of the company and the company has failed to take legal action itself.  A qualified minority shareholder is, according to Article 151 of Company Law, any shareholder with more than 1 percent shares of the company for at least 180 consecutive days by itself or with others. Additionally, to loosen the shareholder’s burden of proof, it was stipulated that the liabilities cannot be waived by simply claiming that all necessary procedures for the transactions have been fulfilled (e.g. fulfilling obligation of information disclosure, etc.).

Furthermore, Article 2 of the 5th Judicial Interpretation provides that if under any circumstance which may render the connected transaction contract voidable or revocable, a qualified shareholder may sue to the court to invalidate or to revoke the contract pursuant to Article 151 of Company law if the company itself fails to take such action.

  1. Removal of Directors (Article 3)

The 5th Judicial Interpretation makes it clear that a director may be removed from the board by effective resolutions of the shareholders meeting or shareholders general meeting prior to the expiry of the director’s term of office. However, this mechanism still does not work in the situation of a deadlock within the company.

  1. Time limit 1 year for profit distribution (Article 4)

If resolutions to distribute profits to the shareholders have been passed by a shareholder’s meeting or general meeting, such profit distribution should be completed in accordance with the times stated in the resolutions, or in the absence of that, in accordance with the relevant provisions of the company’s Article of Association (“AoA”), but in any event it shall be within 1 year after the date of the resolutions.

  1. Resolution of shareholder’s disputes (Article 5)

Material disputes between shareholders of a limited liability company may lead to a termination of the shareholder’s participation agreement and, ultimately, dissolution of the company. That may in turn affect local community and economy, especially the smaller ones. The 5th Judicial Interpretation provides that the court which hears major disputes between shareholders should endeavor to mediate and support any agreements between them to resolve the disputes in the following events:

  • Redemption of some shareholder’s equity interests by the company;
  • Transfer of equity interests between the shareholders;
  • Transfer of equity interests to a third party;
  • Capital reduction of the company;
  • Split-up of the company;
  • Other ways that can resolve the shareholders’ disputes, resume the normal operation, and prevent dissolution of the company.

For any questions regarding China’s Company Law and its interpretations, please feel free to contact Wintertaling China Desk.

[1] Provisions of the Supreme People’s Court on Some Issues about the Application of the Compnay Law of the People’s Republic of China V, < http://lawv3.wkinfo.com.cn/document/show?aid=MTAxMDAxMzE1MjE%253D&collection=legislation&showType=0&lang=zh_CN >

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