Arbitrability for intra-company disputes

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Arbitrability for intra-company disputes

Intra-company disputes are usually resolved by courts in China, but the absence of special procedural rules in the Civil Procedure Law leads to time-consuming and laborious settlements, with parties either unable to obtain a satisfying result or losing more than gaining due to the long and uncertain process.

In view of this, arbitration can be a useful alternative for resolving such disputes, as it is both more professional and efficient, substantially contributing to improvement of the business environment.

ENTERING ARBITRATION

China has made some strides in arbitration for intra-company disputes. Article 5(2) of the Opinions on Lawfully Conducting the Pilot Programme on Arbitration in the Securities and Futures Industry, jointly issued in 2021 by the China Securities Regulatory Commission and Ministry of Justice, provides that in disputes over securities or futures civil compensation, if an arbitration clause is in the contract or agreement between the investor and injured party, or included in articles of association of the company, the investor may apply for arbitration in accordance with such clauses.

So, although the opinions mainly apply to compensation disputes related to investment, they provide that consent to arbitration may be established by incorporating an arbitration clause in the articles of association, which is an important signal.

Meanwhile, article 7 of the Prerequisite Clauses of Articles of Association of Companies Seeking a Listing Outside provides that application for arbitration is one of the ways to resolve intra-company disputes. Article 163 clearly stipulates that the clause by which any dispute arising from articles of association shall be submitted for arbitration should be incorporated in the articles of association of any company seeking listing in Hong Kong.

For example, the articles of association of Fortune 500 real estate developer Vanke, with a respected reputation on governance structures, provide arbitration for intra-company disputes resolution. Article 268 of its articles of association directly stipulates: “If any dispute or claim concerning the company’s business on the basis of the rights or obligations provided for in the articles of association of the company, or in the company law, or other relevant laws or administrative regulations arises between a holder of foreign investment shares listed outside the People’s Republic of China and the company, between a holder of foreign investment shares listed outside the People’s Republic of China and a director, a supervisor, the manager or other senior management staff of the company, or between a holder of foreign investment shares listed outside the People’s Republic of China and a holder of domestic investment shares, the parties concerned shall submit the dispute or claim for arbitration.”

As the advantages of arbitration are gradually understood and accepted, not only companies seeking listing outside China but also domestic companies have begun to incorporate arbitration clauses in their articles of association, as affirmed and supported by the opinions.

It can therefore be predicted that the opinions will further promote arbitration of intra-company disputes.

SUITABILITY OF ARBITRATION

Generally, the key factor of evaluating whether an intra-company dispute can be settled by arbitration depends on if it meets the requirements of arbitrability.

First, is there a valid arbitration clause or agreement with genuine intent? The key issue here depends on whether the articles of association of the company can be treated as a contract.

From the practice of arbitration on intra-company disputes, it is generally considered that articles of an association possess both the attributes of organisational and contractual nature, and can be treated as a contract. In addition, in practice it is not uncommon that the shareholders of a limited liability company govern the company by adopting the shareholders’ agreement. Therefore, there is no obstacle in theory or in practice to treat the articles of association as a contract.

Second, how can “concerned others” – namely, other shareholders and the corporation who haven’t been introduced as a party to the arbitral proceeding – be protected? Taking a dispute over the validity of a corporate resolution as an example, when a shareholder files a request to revoke the resolution, how is it possible to protect concerned others and avoid possible conflict between different awards when other shareholders initiate another arbitration proceeding?

As a solution, arbitration institutes should consider the special nature of intra-company disputes when designing the supplementary rules for corporate law disputes, including: (1) ensure that concerned others are informed of the proceeding progress of the arbitration case; (2) ensure that concerned others are provided with an equal opportunity to participate in the arbitration proceedings; and (3) ensure that all disputes relating to a particular shareholder resolution shall be disposed of in the same arbitration case, which means providing a consolidated arbitration mechanism to avoid conflicting awards. Generally, where expressly provided for in the arbitration rules, there is no procedural obstacle to resolving multi-party intra-company disputes through arbitration.

The final questions: Is the issue of a company’s capacity as a legal person (e.g., dissolution) arbitrable? And how can other stakeholders, such as creditors, be protected?

A cautious attitude should be taken towards these issues. The key obstacle is that arbitration institutes currently lack the power to appoint a liquidator, and the confidential nature of arbitration leaves no possibility of notifying other stakeholders, such as creditors, by public announcement.

For example, in the dissolution dispute of China BlueChemical v Yangpoquan Coal Mine and Shanxi Hualu Thermal Power (2016), the Supreme People’s Court held that a shareholder could request the people’s court rather than an arbitration institute to dissolve the company, which indicates that current judicial practice in China tends not to recognise the jurisdiction of arbitration on the dissolution of a company.

However, the inability to directly dissolve a company does not prevent the arbitration institute from handling contractual disputes relating to the existence of the company. As a matter of fact, article 103 of the Partnership Business Law also provides that any intra-partnership dispute may be submitted to arbitration.

Currently, arbitration institutions represented by the Beijing Arbitration Commission/Beijing International Arbitration Centre have explored many insightful experiences in resolving intra-company disputes of private equity funds (in the form of partnerships), which will also be applicable to the resolution of intra-company disputes in the future.

In conclusion, where the articles of association of a company stipulate that intra-company disputes are to be settled by arbitration, it is feasible both in theory and in practice.

However, when intra-company disputes involve other shareholders, their rights to be informed and participate in the arbitration proceedings should be protected prior to commencement of any such procedure. The improvement of special arbitration rules in the future will go a long way to satisfactorily resolving such disputes.


Li Mi is a case manager at the BAC/BIAC