Blind spots and remedies for defective corporate resolution

When a company resolution – which reflects the will of the company as a legal person – is defective in terms of procedure or content, and does not accurately and completely reflect the true intent of the legal person, timely and effective action is needed to prevent damage.

Due, perhaps, to uneven development, or restrictions of the company’s shareholding structure and internal management system, it is common for individuals to use the company seal without authorisation and sign in the name of the legal representative on behalf of the company. In cases where the seal management system is almost entirely lacking, and the rights and responsibilities of the company management are not clear, finding the correct remedy becomes more complicated.

Together with the current blind spot of enterprises for the remedy of defective resolutions, this article briefly analyses one of the often overlooked remedies for such defects – the lawsuit for the untenability of company resolutions caused by forged signatures and abuse or misappropriation of a company’s seal.

Whether a resolution takes effect

Regulations of the Supreme People’s Court on Certain Issues Concerning the Application of the Company Law of the People’s Republic of China (IV) stipulate that resolutions made at shareholders’ meetings, or by the board of directors when the company has not convened a meeting – except those “made directly without convening and signed by all shareholders according to the law” – are open to claims by any party that the resolution has not taken effect. In such a case, the courts shall support the claim, according to the regulation.

In the civil case of Fu Hua Guo Cai Technology Development v Zhong Shang Cai Le Commerce (2019), the plaintiff and a third person were corporate shareholders of the defendant. In May 2019, without knowledge of the legal representative of the defendant and the third person, the supervisor of the defendant company was changed to an employee of the third person.

The plaintiff discovered that the official seal needed for important company documents, such as an application for a change in company registration, the power of attorney and for resolutions of shareholders’ meetings, was forged. The defendant also told the court that the signature of the legal representative and the official seal were forged, and that it did not approve the content of the resolution.

Meanwhile, the third person argued that it was aware of the request for a change in the original supervisor of the company, but also did not approve the content of the resolution and did not, in fact, do it, and had entrusted the specific matter of change to the original supervisor of the defendant company.

The court commissioned an appraisal to confirm that the plaintiff’s and defendant’s official seals and the defendant’s legal representative’s signature in the shareholders’ resolution and the corresponding change application were not affixed with the same seal and written by the same person as those in the submitted examination materials.

The court held that the company had not convened a shareholders’ meeting, and the resolution formed by forged signatures and seals did not meet the basic conditions for the resolution to be deemed effective. From this, it can be seen that when the company’s resolution procedure is defective, the application for revocation or confirmation of invalidity are not the only two remedies. It should first be confirmed whether the resolution has taken effect at all.

The risk of a wrong remedy

Choosing an inappropriate remedy may result in losing the case. In the case of Hui Qingyan, Zhang Hui v Wang Fang, Shaanxi Pucheng Baiyun Flour Company (2016), the plaintiff applied for an order to invalidate the resolution of a shareholders’ meeting, as well as the amendment to the articles of association filed in March 2005. It claimed that the resolution and the amendment were forged and formed by the defendant, Wang Fang, in the absence of a shareholders’ meeting.

The court held that, under the Company Law, corporate resolution disputes fall into one of two categories – validity confirmation disputes and revocation dispute litigation.

Disputes over the validity of a corporate resolution are mainly about the defects in the content of the resolution of the shareholders’ meeting, or the general meeting of shareholders or the board of directors. Revocation disputes mainly revolve around violation of the laws, administrative regulations or the articles of association by the convening procedure and voting method of the shareholders’ and directors’ meetings.

Article 5 of the regulations provides that in addition to validity and revocation disputes, there is a type of litigation for the untenability of a company resolution. Accordingly, combined with the facts described by the plaintiff in the case, the evidence submitted and the defendant company’s industrial and commercial registration files retrieved by the court, the case should have been one about the untenability of the company resolution, rather than its validity.

The plaintiff’s request that the forged share transfer agreement, the shareholders’ resolution and the amendment to the articles of association were invalid was based on a wrong understanding of the law, and therefore the claim should be rejected.

Some suggestions

When faced with such defective corporate resolutions, it is common for companies to seek to have them revoked or ruled invalid. However, with the promulgation of the regulations, the issue of whether the company’s resolution has taken effect has become a prerequisite that should be considered. If the resolution cannot be confirmed to have taken effect, it will be meaningless to talk about its validity. And making the wrong choice about the basis of the claim will probably lead to losing the lawsuit, unnecessarily prolonging the time it takes to effectively protect the plaintiffs’ rights.

Professional knowledge and practical experience are needed to accurately choose the most timely and effective remedy and legal solution. When faced with such disputes it is advisable to seek the advice of legal professionals who are expert in the field of corporate law so, that the damaged rights and interests can be remedied as soon as possible.

Lu Yiying is an associate and Pan Hao is a paralegal at Tiantai Law Firm