Source: http://lcbackerblog.blogspot.com/2016/06/american-bar-association-ccomments-on.html
Timestamp: 2019-04-25 21:41:58+00:00

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On April 12, 2016, the Supreme People's Court circulated its Provisions of the Supreme People's Court on Certain Issues Concerning the Application of the "Company Law of the People's Republic of China" (IV) (Draft for Comments) (最高人民法院关于适用〈中华人民共和国公司法〉 若干问题的规定(四)》(征求意见稿) 向社会公开征求意见的公告) . Shan Gao and I have already shared some of my thoughts on Part I of the Draft Provisions (一、关于公司股东会或者股东大会、董事会决议效力案件) (here).
The structure of Chinese private corporations are a little different than their US counterparts (e.g., here). In addition to the shareholders and board of directors, Chinese private corporations also have a board of supervisors with some significant power. In addition, corporations are obliged, in unspecified ways, to consult their organized staff and to be sensitive to the work of the embedded Communist Party. Lastly the designated company representative may incur liability. The nature of liability for what U.S. lawyers would understand as direct and derivative actions, and the scope of the right to assert either, are somewhat different than in the US. The structure for interpretation of Company Law provisions are also a little different from the legislative-judicial relationship in the U.S. The Supreme People's Court interpretations serve as guidelines for applying the statutes, sort of but not quite like not precedent, but with a similar disciplining objective (e.g., here). In this case one is presented with with "provisions (" 规定") which are roughly similar to court rules but in this case of a substantive nature. Thus, the object of these provisions is to provide guidance to courts and litigants about the application of provisions of the Chinese Company Law. They represent an effort to augment and interpret the provisions of the Company law in important ways and are thus an important step forward in moving China towards a more mature and coherent rule of law system.
Under the leadership Yee Wah Chin, the International Law Section of the American Bar Association organized a group to consider these Provisions and to deliver comments to the Supreme People's Court. That group consisted of Maritza T. Adonis, Larry Catá Backer, Paul Edelberg, Virginia Harper-Ho, and Emilia Liu, with helpful input from a task force of the ABA Section of Business Law Corporate Laws Committee.
The Comments prepared by the Section of International Law of the American Bar Association follow, along with the cover letter transmitting the Comments.
The views stated in this submission are presented on behalf of the Section of International Law. They have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and therefore should not be construed as representing the policy of the American Bar Association.
The Section of International Law (“Section”) of the American Bar Association (“ABA”) submits these comments1 on the “Provisions of the Supreme People’s Court on Certain Issues Concerning the Application of the ‘Company Law of the People's Republic of China’ (IV) (Draft for Comments)” (the “Draft Provisions”).2 The Section offers these comments in the hope that they will assist the Supreme People’s Court (“SPC”) in refining the Draft Provisions. The comments reflect the expertise and experience of the Section’s members with company law around the world. The Section is available to provide additional comments, or to participate in consultations, as the SPC may deem appropriate.
The Section welcomes these interpretive provisions for the better administration of the Company Law of the People’s Republic of China (the “Company Law”). As a general matter, the Section suggests that the Draft Provisions avoid duplicating or potentially undermining the Company Law or the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”), and urges that the SPC ensure that the Draft Provisions will be interpreted in a way that does not create such ambiguity or conflict.
The Section suggests that Article 1 may benefit from clarification that it applies only to actions in which the listed classes of plaintiffs have a direct interest in the contents of the resolutions, and not to derivative actions under Article 151 of the Company Law. The Section also offers several specific suggestions for clarification of aspects of Article 1. The Draft Provisions establish in Article 2 the contemporaneous ownership rule, which may benefit from several suggested revisions. The Section agrees that, under the circumstances specified in Article 3 of the Draft Provisions, the company should be added as a defendant, and suggests a few revisions to clarify some aspects. Similarly, the Section agrees that a distinction ought to be made between invalid resolutions (treated in Article 5 of the Draft Provisions) and resolutions that have not been adopted (treated in Article 4 of the Draft Provisions). The Section suggests that the functional taint standard should be adopted in Article 5. The Section notes that the grounds for invalidity set forth in Article 6 do not add to or reduce the grounds set out in the Company Law, especially those in Articles 22 and 146-150 of the Company Law. The Section offers some suggestions as to Article 8 regarding ex post consents to resolutions and suggests the adoption of the first alternative Article 9 as to the direct affirmation of the effectiveness of resolutions. As a provision for establishing standards for granting temporary relief in such circumstances, the Section is concerned about the use of the word “prohibited” (禁止) in Article 10 without limit, and the apparent overbreadth of other parts of that Article. The Section also suggests some clarifications in Articles 11 and 12.
The Section encourages the SPC to clarify how the provisions of Part II of the Draft Provisions on inspection rights apply to supervisors. The Section welcomes the clarification provided in Article 15 regarding a shareholder’s right under Article 33 of the Company Law to request the People’s Court to enforce the inspection rights of shareholders, but is concerned that the condition for obtaining such a judgment is unclear. The Section offers some suggested clarifications to Article 16 regarding inspection of original vouchers. The Section agrees with Article 18’s imposition of personal civil liability on company directors and senior officers of the company if they fail to adequately maintain the company’s documents and records, and offers some suggestions.
The Section welcomes the SPC’s clarification in Article 22 that, as a default rule, the statutory right of first refusal should not apply to transfers on account of a shareholder’s death. As to Article 23, the Section notes that, if the shareholders wish to restrict transfers on death, it is incumbent on them to include any rights of first refusal in the articles of association. The Section agrees that, as a default rule, there should not be any statutory right of first refusal on transfers between shareholders (Article 23) or on partial transfers (Article 24), and suggests a clarification as to the application of Article 71 of the Company Law to transfers upon death and partial transfers. The Section offers several suggestions to clarify Article 25 regarding the content of written orders or the period for exercise of preemptive rights. Article 29 adopts an important principle of transferability, but would benefit from clarification as to the meaning of “excessive” restrictions, and revisions to avoid potential conflict with Articles 71 and 141 of the Company Law. The Section suggests that the SPC consider the non-exclusive list of permissible restrictions that is applied by the U.S. State of Delaware as a guide when determining the presence of “excessive” restrictions.
The Section agrees with the general objectives of Article 31 in clarifying the scope of Article 151 of the Company Law. The Section suggests that Article 33 be expanded to provide guidance as to when the company may seek to replace a shareholder as plaintiff, without the shareholder’s consent or before the case has been tried.
The Section’s comments are organized according to the 4 parts of the Draft Provisions on which the Section offers comments: (I) validity of resolutions by shareholder/board of director meetings; (II) shareholder right to be informed; (IV) preemptive rights; and (V) derivative lawsuits.
The Section agrees with the general objective of Article 1 of the Draft Provisions — to provide a basic standard for courts to determine whether an action for confirmation of the validity of a resolution should be accepted in accordance with the law. Article 1 appears to apply only to actions in which the listed classes of plaintiffs have a direct interest in the content of the resolutions, and not to derivative actions under Article 151 of the Company Law. However, the Section suggests that Article 1 may benefit from clarification on this point.
The Section understands that the initial burden of plaintiffs pursuing an action under ¶1 of Article 22 of the Draft Provisions must include a showing of a “direct interest in the content of the resolutions” that has caused harm personally to them beyond any interest arising from their responsibilities as directors, supervisors, shareholders, employees, and officers of the company. The Section notes that the issue of classifying actions as direct versus derivative remains challenging in the United States. The test adopted by the courts of the U.S. State of Delaware3 to identify a direct claim turns solely on two questions: (1) who suffered the alleged harm (the corporation or the suing shareholders, individually; and (2) who would receive the benefit of any recovery or other remedy (the corporation or the shareholders individually). Similarly, the American Law Institute (“ALI”) in its Principles of Corporate Governance § 7.01 provides that the court must look to the nature of the wrong, to whom the relief should go, the independence of the direct injury from any injury to the company, and whether the plaintiff can show that the duty breached was owed to the plaintiff and whether the plaintiff can prevail without showing a harm to the company. The ALI Principles of Corporate Governance § 7.01(c) also provide that transactions may give rise to both direct and derivative actions simultaneously but that “any special restrictions or defenses pertaining to the maintenance, settlement, or dismissal of either action should not apply to the other.” These approaches may prove useful in the context of the Draft Provisions and its instructions for judges in seeking to distinguish between Article 22 actions by shareholders and Article 151 actions under the Company Law.
a. It is understood that the scope of Article 1 of the Draft Provisions is limited to the first paragraph of Article 22 of the Company Law. It is further understood, then, that only shareholders may seek judicial relief under Article 22 ¶¶ 2 and 3 of the Company Law relating to deficiencies in the conduct of meetings and their resulting actions, and that those paragraphs do not require a showing of direct personal interest. It is understood that such shareholder action is subject to the authority of supervisors under Article 53 to correct misconduct. However, Article I does not make that clear, and a modification with appropriate cross references might be useful to judges seeking guidance.
b. Article 1 references only resolutions of the shareholders and the boards of directors. It does not reference the important resolutions of the supervisors under Articles 53 through 55 of the Company Law. Because these provisions give supervisors substantial authority to issue resolutions and to suggest changes to the resolutions of the board of directors, it is as likely that direct injury could result from supervisor resolutions as from those of directors and shareholders. Therefore, the Section suggests that Article 1 be expanded to include such resolutions.
c. Article 1 usefully provides a list of those classes of plaintiffs that may file actions under Article 22 ¶ 1 of the Company Law. The inclusion of an open ended term—“etc.”—suggests that the court has the authority to expand the classes of plaintiffs under Article 1 ¶ 1 at will. Because that is unlikely the intended meaning, Article 1 should be modified to eliminate the term “etc.” in order to clarify that ¶ 1 provides an exclusive list of all of the classes of plaintiffs that may take advantage of Article 22 ¶ 1 filings.
d. Article 1 does not specify the appropriate defendants. The Section notes that Article 3 of the Draft Provisions requires that the company be listed as a defendant under certain circumstances. The classes of individuals who may be named as defendants apparently include those who failed in their duties as specified in Articles 20 and 146-151 of the Company Law, which are limited to shareholders, directors, and supervisors. But it should also include representatives of staff members who participate in general meetings and issue resolutions under Article 18 of the Company Law, and should also include the legal representative of the company under Article 13 of the Company Law.
e. The Draft Provisions do not specify the right of the state or state organs to initiate actions under Article 1 of the Draft Provisions. The Section suggests that, in the event state and state organs are subject to other rules, Article 1 may be revised to expressly indicate that fact.
f. The Section understands that direct actions under Article 22 ¶ 1 of the Company Law will arise in the context of Article 1 of the Draft Provisions only in a situation in which the plaintiff has suffered some unique loss. In many cases the action should center on the loss, usually by reason of the Company’s application of the resolution at issue. In many of those cases, then, the determination of the validity issue arises as a defense against an action by plaintiffs unless the plaintiffs seek to have a declaration of invalidity in anticipation of harm to their direct interests. But if that is the case then it is not clear that the plaintiffs have suffered any harm, and a plaintiff can seek such declaration only to the extent that such declaratory procedures are permitted generally under Chinese law. Article 1, however, is drafted to suggest that a lawsuit may be filed to attack the validity of a resolution where the litigant anticipates harm to direct interest as well as where such direct interests have already been harmed. The Section suggests that clarity on this issue is important and that a plaintiff’s right to sue be limited to cases where actual harm has occurred or is unavoidable. Otherwise, Article 1 broadens Section 22 ¶ 1 of the Company Law to permit any person to interfere with corporate action with which they disagree. The result would be to reduce efficiency and potentially flood the courts with actions that amount to little more than disagreement among stakeholders in corporate activity.
a. The Section suggests that since only shareholders have the authority to file actions under Article 22 ¶ 2 of the Company Law, the word plaintiff be changed to “plaintiff-shareholders” to make the concept of the class of plaintiffs and the shareholder status of the litigants clear.
b. Article 2 of the Draft Provisions appears to encourage arbitrage of shareholder status so that shares can be transferred within a 60-day period to a third party who may have been disadvantaged by the corporate action and wants to take legal action. The Section suggests as an alternative a modification of Article 2 of the Draft Provisions to provide that shareholder status should be determined both as of the date of the resolutions and as of the date of the filing.
c. The Section suggests that it may be useful to clarify Article 2 of the Draft Provisions to provide that litigation may proceed as long as there is at least one plaintiff who meets the standing requirement (share ownership). Moreover, it is not clear what happens under Article 3 of the Draft Provisions if all parties drop out except the company. In that case, it might be useful to include a provision permitting the company to dismiss the suit subject to its obligations under Articles 53 and 151 of the Company Law.
d. The Section notes the difference in the language of Article 1 of the Draft Provisions (“requesting conformation of the resolution as invalid or valid”) and Article 2 (“requesting revocation of the resolution”). The Section notes that the language of Article 2 appears narrower than that of Article 1 and suggests that both be made consistent, using the language of Article 1. The reason for this choice is that this provides consistency between Articles 1 and 2, and more importantly, better aligns with the objectives of Article 9 of the Draft Provisions on affirmance.
b. If the company is to be named as a defendant then it is important to determine who speaks for the company. In this case, it appears that this is the supervisors, but in the event the supervisors themselves are the cause of the liability then it is unclear who is authorized to speak for the company.
c. The connection between Articles 3, 4 and 5 is important. However, it might be useful for judges and litigants if that connection is made more comprehensively explicit, perhaps by changing the order of the provisions or otherwise revising to make it easier for the litigant and judge to better understand the structure of the instructions provided in the Draft Provisions.
d. With respect to ¶2 of Article 3, consideration should be given to adding a proviso to the effect that a judge may elect not to permit the participation of a co-plaintiff if the application is made after the commencement of court debate and the judge determines that participation would disrupt the proceedings.
a. Article 4 presumably will be interpreted in a way that does not otherwise impede shareholders, directors, staff or supervisors in their vigorous exercise of the fiduciary duty to the company. Likewise, it presumably will not be interpreted in a way that otherwise permits action that would be considered corrupt. Specific reference might be made to Article 147 of the Company Law as a limiting standard to the application of Article 4 of the Draft Provisions.
b. Article 4 only addresses what claims will be upheld from a Plaintiff under Article 1. The Section understands that the grounds for invalidity under Article 2 are specified in Article 22 ¶ 2 of the Company Law.
a. Article 6 of the Draft Provisions offers no guidance on the meaning of “excessive” distribution of profits. Helpful guidance is available, for example, in the Model Business Corporation Act (“MBCA”), promulgated by the Corporate Laws Committee of the Business Law Section of the American Bar Association and followed by a majority of states in the United States. MBCA §6.40 protects creditors by prohibiting distributions if, after giving effect to a distribution, the corporation would not be able to pay its debts as they become due in the ordinary course of business or the corporation’s total assets would be less than its total liabilities.
b. Article 34 of the Company Law references only the methods of distribution, and Article 37(6) of the Company Law vests shareholders with approval authority for dividend distributions. However, Article 46(5) of the Company Law vests the board of directors with the authority to formulate profit distribution plans and vests the supervisors with oversight authority to correct conduct that prejudices the interests of the company. Thus, in the case of dividend distributions there may be multiple resolutions involved and clarification regarding how conflicting resolutions should be addressed would be useful. Article 18 of the Company Law requires consultation with the company staff through their general meeting; those consultations may also touch on issues of the drafting and implementation of dividend distribution plans. A failure to consult may also affect the validity of the actions of the company, guidance on which may be usefully added to this article of the Draft Provisions.
a. It is not clear whether Article 8 applies to actions under ¶ 1 and ¶ 2 of Article 22 of the Company Law or just to ¶2. If it applies to ¶1, then, according to Article 1 of the Draft Provisions, the defenses listed in Article 8 should not be limited to shareholders as Article 8 suggests. The Section suggests that clarification here would improve the utility of this Article for judges.
b. Article 8 § 3 references “new resolutions”. It is assumed that these include resolutions of the supervisors under Article 53 of the Company Law. It is not clear whether this provision also includes resolutions adopted under Article 151 of the Company Law. That is, the Section assumes that the resolutions referenced in Article 8 § 3 include all resolutions that might supersede the defective resolution, and not just a resolution passed by the same body that originally enacted the allegedly defective resolution. Article 8 might be clarified in this regard.
c. The Section recommends deleting the word “expressly” in subparagraph (1) as this standard is nearly impossible to demonstrate. Instead, the provision might be modified to reference written consent.
d. The Section also recommends deleting the word “expressly” in subparagraph (2), as it would appear to have no relation to actions.
The Section appreciates the two alternatives presented for Article 9 of the Draft Provisions relating to the direct affirmation of the effectiveness of resolutions. The Section believes that the language in the first option is preferable. If the facts of the case do not substantiate the plaintiff’s claim, the plaintiff should not be given an opportunity to amend or re-litigate his/her case. The company should not be hampered by the continuation of an action that is not substantiated by the facts. The SPC may want to consider substituting the word “contrary to” for “inconsistent with” to give the People’s Courts discretion on technical, rather than substantive, inconsistencies. In addition, the Section assumes that this provision does not otherwise modify general rules under the Civil Procedure Law for claim or issue preclusion, which presumably continues to apply. The availability of general issue and claim preclusion rules should be sufficient to protect the rights of plaintiffs, especially where the issue revolves around direct harm as specified in Article 1 of the Draft Provisions and Article 22 ¶ 1 of the Company Law.
a. The Section is also concerned that the phrase “lawful rights and interests of the parties concerned or the interested parties” is too broad. The Section suggests that a materiality provision be included—a standard which would require the court to balance the harm to the company of halting the operation of the resolution against the harm to the plaintiff’s interest if the resolution implementation proceeds. That consideration might be useful as well in considering the amount of security to be posted under Article 10 ¶ 2 of the Draft Provisions. The Section notes the potential application of Article 101 of the Civil Procedure Law and expects that Article 10(2) will be applied consistently with the general bonding provisions of the Civil Procedure Law and binding SPC precedent.
b. The Section also assumes that the phrase “application by the plaintiff” refers to the action of plaintiffs after suit has been filed in accordance with Article 22 ¶ 1of the Company Law and Article 1 of the Draft Provisions, and suggests clarification on this aspect.
c. The Section agrees that the application should be dismissed upon a showing of malice or delay, as stated in Article 10 ¶ 3 of the Draft Provisions. The Section suggests clarification about what is being dismissed, because the reference could be either to the action for interim measures covered in Article 10 or the entire action filed or both. In addition, such a dismissal might be used as evidence should the company then seek to file an action against the plaintiff for violation of their obligations under Articles 146-150 of the Company Law.
The Section believes that Article 11 of the Draft Provisions should provide some protection for individuals who relied on a resolution in good faith before the commencement of the litigation. The SPC might consider whether such individuals should be allowed to sue the company after the resolution is declared invalid and the party suffers loss. That might be implied as part of Article 4 of the Draft Provisions where an individual suffers direct harm for the failure ab initio (i.e. from the outset) of a resolution on which he relied thinking that it was in force. That option should be made clear in the Draft Provisions.
The Section understands that Article 12 of the Draft Provisions seeks to permit courts to apply the first 11 articles of the Draft Provisions to litigation involving single-owner limited liability companies and state-owned enterprises, to the extent they are useful or relevant. The Section appreciates the effort to thus create a more coherent rule of law environment for company law. The Section notes, especially in the case of state-owned enterprises, however, that it may be necessary to litigate against parties other than the shareholder.
Article 53(1) of the Company Law gives the board of supervisors certain inspection rights regarding financial matters and Article 53 otherwise authorizes supervisors to exercise other governance rights, including oversight of the board of directors and senior management and the right to initiate litigation on behalf of the company. The Section encourages the SPC to clarify how the provisions of Part II of the Draft Provisions on inspection rights apply to supervisors.
The Section welcomes the clarification provided in Article 15 regarding a shareholder’s right under Article 33 of the Company Law to request the People’s Court to enforce the inspection rights of shareholders. However, the Section is concerned that the condition for obtaining such a judgment is unclear.
Article 15 states that the People’s Court shall order the company to give shareholders access to information when it “finds that the claims of the plaintiff comply with the provisions of the Company Law” (人民法院经查认为原告的诉讼请求符合公司法规定的). In inspection cases premised upon a shareholder assertion of wrongdoing, this language may in fact impede shareholder inspection rights by leading courts to require plaintiffs to provide evidence sufficient to prove their underlying claims in a proceeding that is only intended to obtain access to relevant information to decide whether to commence litigation. The Section suggests that Article 15 be supplemented to state that, with respect to requests for board of directors and supervisory board minutes, as well as financial and accounting records, the shareholders need only demonstrate a credible basis for the claim from which the court can infer that there is possible wrongdoing. That standard, to require the plaintiff to show some evidence of possible wrongdoing, parallels a similar judicial standard adopted by the state courts in Delaware.4 It may also be advisable, as in Delaware, to require, in cases seeking board minutes or financial records, that relief be limited to that portion of board minutes or financial records directly connected to the purpose or purposes of the shareholder.
The Section suggests that, consistent with Article 33 and Article 97 of the Company Law, Article 15 be revised to state that, whenever a shareholder seeks the court’s help in obtaining access for inspection, the court shall render a judgment in favor of the shareholder if the shareholder’s claims are based on the Company Law, are not for an improper purpose, as defined by Article 17, and will not impair the lawful interests of the company.
The Section also suggests that the SPC clarify that shareholders who seek inspection or duplication of a company’s documents must pay for the costs of copying such materials. The current draft Judicial Interpretation and the Company Law are currently silent on this issue. Should the SPC adopt such a standard, Article 15 should be revised to provide that the People’s Courts should ensure that such costs are reasonable and should guard against abuse. To the extent records are maintained electronically, the costs of such reproduction should be relatively insubstantial. Abuse might occur, for example, where a party seeks to provide photocopies of records maintained electronically, which could be easily provided instead in a “pdf” or similar format. Alternatively, Article 15 may be revised to provide that the People’s Courts may specify the amount of reasonable compensation for the costs of copying.
The Section views Article 16 as applying the provisions of Article 33 of the Company Law. Article 16 permits the company to reject any request for inspection that is for an “improper purpose” or “may prejudice the legitimate interests of the company.” The Section suggests that the last sentence of Article 16 be revised to add “as defined in Article 17 herein” after “improper purpose.” The Section also suggests that the SPC define more clearly the “legitimate interests of the company” in a similar manner to the clarification of “improper purpose” provided in Article 17. The Section believes that it may be useful to require that the company specify in detail the basis for its conclusion of improper purpose, and that only those reasons may serve as the defense against shareholder actions to inspect under Article 33 of the Company Law. Provision should also be made where there has been an abuse of shareholder power, especially by a dominant shareholder, as liability for such abuse is provided under Article 20 of the Company Law.
a. The Section recommends that there be included some standard of culpability and materiality if liability is to be imposed.
b. The Section recommends that the SPC clarify whether civil liability might also extend to the supervisors and whether the liability of directors and senior officers is limited by actions of the supervisors. For example, where the board of supervisors has failed to oversee record-keeping, does that failure give rise to civil liability for the supervisors as well, and if so, does the liability of the supervisors displace the potential liability of directors and senior officers? Article 18 might be revised to clarify the application of Articles 149 and 152 of the Company Law in such circumstances, as Article 149 of the Company Law provides that supervisors who violate laws, administrative regulations or the company’s articles during the performance of their duties will be liable for compensation if any loss is caused to the company, and Article 152 of the Company Law limits liability in similar circumstances only to directors and senior managers where the damage is directly to the interests of shareholders.
c The Section understands that the intent of Article 18 is to protect the general interests of the company rather than the direct interests of the shareholders. At least to that extent, and for that reason, the Section suggests that Article 18 be revised to clarify that supervisors may be subject to personal civil liability for a failure to oversee the company’s directors and senior officers to such a degree that the Company fails to adequately maintain documents and records. Where such compensation under Article 18 is sought for damage to the direct interest of the shareholder, however, supervisors should not be liable. Provision should also be made where the failure to maintain books and records is caused by an abuse of shareholder power, especially by a dominant shareholder, as liability for such abuse is provided under Article 20 of the Company Law.
The Section welcomes the SPC’s clarification that, as a default rule, the statutory right of first refusal should not apply to transfers on account of a shareholder’s death.
The Section notes that, if the shareholders wish to restrict transfers on death, it is incumbent on them to include any rights of first refusal in the articles of association.
The Section agrees that, as a default rule, there should be no statutory right of first refusal on transfers between shareholders (Article 23) or on partial transfers (Article 24). Free transferability of equity interests encourages capital investment, and transfers among existing shareholders and their beneficiaries more closely follows the typical expectation of investors. The Section suggests that, if investors want to restrict transferability of equity interests under such circumstances, they are free to insert those restrictions in the articles of association.
The Section recommends that, if this is in fact the intention of the SPC, the SPC should clarify in the Draft Provisions that transfers upon death and partial transfers are not subject to the consent of a majority of the shareholders as required in the ¶2 of Article 71 of the Company Law.
b. The Section suggests that the SPC clarify the concept of exercise in the Draft Provisions.
c. The Section assumes that any transfer of equity interests is not effective until registration of the equity transfer with the registration authorities, but notes that such registration may take longer than 30 days. The Section’s concerns in this regard increase if there is a foreign transfer either by a foreign shareholder or to a foreign transferee. Therefore, the Section recommends that a statement be added that notice within the exercise period constitute a valid “exercise”, even if the transfer has not been registered with the registration authorities within the exercise period.
a. The Section suggests that a separate clause be added to Article 29 to avoid a potential conflict with the restrictions set forth in Articles 71 and 141 of the Company Law and clarify that those restrictions are not “excessive”.
The Section recommends that the SPC expand Article 29 to cover not just clauses in the articles of association, but also restrictions contained in any agreement among shareholders.
The Section agrees with the general objective of Article 31 of the Draft Provisions – to clarify the scope of ¶ 1 and ¶ 2 of Article 151 of the Company Law to include the directors, senior executives, board of supervisors, and supervisors of wholly-owned subsidiaries. Additionally, the Section agrees with Article 31’s general objective to define “other” for the purpose of ¶ 3 of Article 151 of the Company Law to include persons other than the directors, supervisors, and senior executives of the company or the wholly-owned subsidiaries thereof.
The last line of Article 32 states that “The judgement shall have legal force and effect on the shareholders not participating in the litigation.” The Section understands that the extent of issue or claim preclusion is subject to the general rules of the Civil Procedure Law and other applicable laws and administrative regulations and that Article 32 of the Draft Provisions is not meant to deviate from or modify the application of general law.
It appears that Article 33 of the Draft Provisions seeks to clarify when the company has the right to replace the shareholder as the plaintiff, limiting this action to require consent by the shareholder and to after the trial of the case. The Section understands that Article 33 focuses on actions in which the company itself has been damaged and that, under the circumstances of Article 151 of the Company Law, the appropriate representatives of the company ought to have direction of the litigation against wrongdoers to protect its own interests directly. In that respect the Section calls attention to the obligations and responsibilities of the legal representative of the company set forth in Company Law Article 13 and the role of the supervisors. The Section suggests that Article 33 be expanded to provide guidance as to when the company may seek to replace a shareholder as plaintiff, either without the shareholder’s consent or before the case has been tried.
The Section appreciates the SPC’s consideration of its comments. 5 See Section 202(c) of the Delaware General Corporation Law.
1 The Section members who drafted these comments included Maritza T. Adonis, Larry Backer, Paul Edelberg, Virginia Harper-Ho, and Emilia Liu, with helpful input from a task force of the ABA Section of Business Law Corporate Laws Committee.
2 The Section’s comments are based on an unofficial translation of the Draft Provisions, which is annexed.
3 See, e.g., Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004).
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Court at No. 2, Dong Jiao Min Xiang, Dongcheng District, Beijing, Postal code: 100745 or emailed to gsfjss_yang@163.com. The deadline for providing feedback is May 13, 2016.
Where companies' shareholders, directors, supervisors as well as the senior executives, employees and creditors, etc. that have direct interests in the content of the resolutions of meetings or general meetings of shareholders and board of directors file actions in accordance with Paragraph 1 of Article 22 of the Company Law requesting the confirmation of the resolutions as invalid or valid, such actions shall be accepted in accordance with the law.
In the cases filed by plaintiffs for confirming the non-existence of a resolution as prescribed in Article 4 hereof, failure to form a valid resolution as prescribed in Article 5 hereof and the invalidity, validity or revocation of resolutions, companies shall be listed as defendants.
Where another person applies for participating in the litigation with the claims same as those made by the plaintiff prior to the end of the court debate in the first instance and is eligible to be a party to the litigation as required under the Civil Procedure Law and the Company Law, such person shall be listed as co-plaintiff.
(2) Where the company convenes a meeting or general meeting of shareholder or a meeting of the board of directors but fails to vote on the resolution.
(4) The content of the resolution exceeds the authority of the meeting or general meeting of shareholders or the board of directors.
(3) Other circumstances where the content of the resolution violates the compulsory provisions of laws and administrative regulations.
A valid resolution for revising the company's articles of association does not fall under the circumstances where "the content of a resolution violates the company's articles of association" as prescribed in Paragraph 2 of Article 22 of the Company Law.
(3) Where new resolution is made to substantially recognize the content of the litigious claims of the shareholder.
Where the plaintiff files an action for confirming that a resolution of the meeting or general meeting of shareholders or the meeting of board of directors fails to exist or form a valid resolution or is invalid or revoked, which is inconsistent with the decision rendered by the people's court based on the facts of the case, judgment shall be made directly.
Another opinion: Where the plaintiff files an action for confirming a resolution of the meeting or general meeting of shareholders or the meeting of board of directors fails to exist or form a valid resolution or is invalid or revoked, which is inconsistent with the decision on the effectiveness of the resolution as rendered by the people's court based on the facts of the case and in accordance with the law, the plaintiff shall be notified that the litigious claims may be modified. If the plaintiff fails to make the modification, the action shall be dismissed.
Where a resolution of the meeting or general meeting of shareholders or the meeting of board of directors involves the circumstances where its implementation will make the restoration of the original condition impossible or cause irremediable harm to the lawful rights and interests of the parties concerned or the interested parties, the implementation of the resolution may be prohibited upon the application by the plaintiff.
If the people's court, upon examination, finds that the application of the plaintiff involves the circumstance of maliciously disturbing or delaying the implementation of the resolution, it shall dismiss the application.
Where the people's court rules that a resolution of the meeting or general meeting of shareholders or the meeting of board of directors fails to exist or form a valid resolution or is invalid or revoked, such resolution shall not be legally binding ab initio.
In the trial of the cases involving the disputes over the effectiveness of the decisions made by one-person limited liability companies in accordance with Article 61 of the Company Law or the decisions made by the State-owned assets supervision and administration departments by exercising rights of shareholders in accordance with Article 66 of the Company Law, the people's courts may apply relevant provisions of Article 1 through Article 11 hereof as reference.
If the company provides evidence showing that the plaintiff has ceased to possess shareholder status at the time of filing the lawsuit or during the litigation, the lawsuit shall be dismissed.
(3) The agreement among shareholders stipulates the restriction of inspection or duplication of company's documents and materials by shareholders.
Where the people's court, upon examination, finds that the litigious claims of the plaintiff comply with the provisions of the Company Law, it shall render a judgment under which the company shall make relevant documents and materials available for inspection or duplication by the shareholder at the specified time and at the place of domicile of the company or any other place determined by the plaintiff and the company through consultation. The shareholder may inspect or duplicate the documents and materials of the company by proxy.
Where a shareholder of a limited liability company files a lawsuit for inspection of the company's accounting books and the bookkeeping vouchers, original vouchers or other materials relating to the information recorded in the accounting books, the lawsuit shall be accepted in accordance with the laws.
If the company presents evidence showing that the inspection of the materials such as bookkeeping vouchers or original vouchers by the shareholder is for improper purposes and may impair the lawful interests of the company, the litigious claims shall be rejected.
(4) Where there are other facts that can prove the shareholder is for the purpose of hindering the business operation of the company or impairing the interests of the company or the common interests of shareholders.
In a case where a shareholder requests the company to distribute profits, the company shall be listed as defendant.
Any other shareholder that applies for participating in the litigation with the claims same as those made by the plaintiff prior to the end of the court debate in the first instance shall be listed as co-plaintiff; the shareholders that disagree to the distribution of profits may be listed as third parties.
Where a shareholder submits the valid resolution of the meeting or general meeting of shareholders specifying the distribution plan and thereby files a lawsuit requesting the company to distribute profits, judgment shall be made for the company to pay dividends to the shareholder within a specified time limit according to the plan determined in the resolution. The judgment shall be legally binding on the shareholders that fail to participate in the litigation but have the right of claim for distribution of profits.
Where a shareholder files an lawsuit requesting the company to distribute profits but fails to submit the resolution of the meeting or general meeting of shareholders specifying the distribution plan, the litigious claims shall be rejected, unless a shareholder of a limited liability company presents evidence showing that the abuse of shareholder rights by any other shareholders or the fraud committed by any directors or senior executives has resulted in the failure of the company to distribute profits.
Where, after the people's court has rejected the litigious claim of the shareholder for distribution of profits by the company, any shareholder that has not participated in the litigation files a lawsuit separately with the same claim, facts and reasons, such lawsuit shall not be accepted.
After the people's court has rendered the judgment for the company to distribute profits, the shareholders that have not participated in the litigation but have the right of claim for the distribution of profits may apply for enforcement based on the judgment.
When there is change to a shareholder of a limited liability company due to reasons such as inheritance or legacy, the claim of any other shareholder for preemption of the equity concerned shall not be upheld, unless otherwise provided for by the company's articles of association.
Where a shareholder claims preemptive right in the transfer of all or part of equity between other shareholders of a limited liability company, such claim shall not be upheld, unless otherwise provided for by the company's articles of association.
For the purpose of Paragraph 3 of Article 71 of the Company Law, "equal terms" shall be determined by the factors such as the equity transfer price, payment method and payment period on comprehensively basis.
Where a shareholder of a limited liability company transfers equity to a person other than a shareholder, the claim of any other shareholder for preemption of part of the equity shall not be upheld, unless otherwise provided for by the company's articles of association.
(2) Where the exercise period is not specified in the notice or the exercise period as specified is shorter than 30 days from the date of the service of the notice, the exercise period shall be 30 days.
Where other shareholders fail to claim preemptive right during the exercise period prescribed in the preceding paragraph or claims preemptive right but the claim fails to conform to the equal terms specified in the Company Law and judicial interpretations, they shall be deemed as consenting to the transfer and waiving the preemptive right.
The shareholder that expressly indicates the withdrawal of transfer during litigation shall bear court costs.
(3) Where a shareholder engages in malicious collusion with a person other than a shareholder and violates the provisions on equal terms under the Company Law and judicial interpretations by such means as falsely offering a high price, which results in the waiver of preemptive right by other shareholders, while the actual transaction terms between both parties are lower than the terms in the written notice.
When the transfer contract is determined to be invalid, the claim made simultaneously by other shareholders for purchasing such equity based on the actual transaction terms shall be upheld. If the transferee is in good faith and has no fault in transaction, the request of such transferee for the shareholder to bear compensation liability shall be upheld.
When the "written notice" and "equal terms" prescribed in Paragraph 2 and Paragraph 3 of Article 71 of the Company Law is applied to the transfer of State-owned equity on the property exchanges established in accordance with the laws and administrative regulations on the administration of State-owned assets, the trading rules of the property exchanges shall be taken as reference.
Where the board of supervisors, any supervisor, the board of directors or the executive director files a lawsuit in accordance with Paragraph 1 of Article 151 of the Company Law, the company shall be the plaintiff and the person in charge of the board of supervisors, the supervisor, the chairman of the board of directors or the executive director shall act as the litigation representative.
The people's court shall, after accepting a case filed by a shareholder in accordance with Paragraph 2 or Paragraph 3 of Article 151 of the Company Law, notify the company to participate in the litigation as a third party.
For the purpose of Paragraph 1 and Paragraph 2 of Article 151 of the Company Law, "directors, senior executives", "board of supervisors" and "supervisors" shall include the directors, senior executives, board of supervisors and supervisors of wholly-owned subsidiaries.
For the purpose of Paragraph 3 of Article 151 of the Company Law, "others" shall refer to the persons other than the directors, supervisors and senior executives of the company or the wholly-owned subsidiaries thereof.
When the people's court conducts trial of a case filed by a shareholder in accordance with Paragraph 2 or Paragraph 3 of Article 151 of the Company Law, any other shareholder that applies for participating in the litigation on the ground of the same claims prior to the end of the court debate in the first instance shall be listed as co-plaintiff. The legal proceedings already completed shall be legally binding on such other shareholder participating in the litigation. The judgment shall have legal force and effect on the shareholders not participating in the litigation.
Where the company applies for replacing the shareholder in the lawsuit filed by the shareholder in accordance with Paragraph 2 or Paragraph 3 of the Article 151 of the Company Law after the people's court has tried the case, the consent of the shareholder shall be obtained. If the shareholder consents to the replacement, the litigation acts already performed thereby shall be valid; if a lawsuit is filed separately, the people's court shall refuse to accept or dismiss the lawsuit.
Where the parties concerned reach a mediation agreement in the trial of a case filed by a shareholder in accordance with Paragraph 2 or Paragraph 3 of Article 151 of the Company Law, the resolution of the meeting or general meeting of shareholders for approving the mediation agreement shall be submitted. If no resolution of the meeting of shareholders is submitted in the case of a limited liability company, all shareholders shall sign or seal the mediation agreement or issue to the people's court the written opinions for consent to the mediation agreement.
Where the shareholder requests the defendant to directly bear civil liability thereto in accordance with Paragraph 2 or Paragraph 3 of Article 151 of the Company Law, such request shall not be upheld.
Where a shareholder, on the grounds that the interests of a wholly-owned subsidiary of the company is impaired, files a lawsuit in accordance with Article 151 of the Company Law requesting the defendant to bear civil liability towards the wholly-owned subsidiary, such request shall be upheld; if the shareholder requests the defendant to bear civil liability towards the company, such request shall not be upheld.
Where the shareholder, after winning the case, requests the company to bear reasonable attorney's fees as well as the reasonable expenses paid for the litigation such as investigation fees, evaluation fees and notarial fees, such request shall be upheld.
These Provisions shall apply to the first-instance cases accepted by the people's courts after the implementation hereof.
These Provisions shall not apply to the first-instance and second-instance cases accepted by the people's courts before the implementation hereof but not yet concluded after the implementation hereof and the cases for which final judgments have been rendered before the implementation hereof but of which retrial is applied by the party concerned or decided according to trial supervision procedures.
Larry, Many thanks for your contribution to this effort and for the link to my blogpost. I've been the liaison person with the Supreme People's Court on this. I had given comments on an earlier draft of the interpretation about one year ago, and met the drafting team then.

References: § 7
 § 7
 §6
 § 3
 § 3
 v.