In the second overhaul of the Company Law since 2005, new revisions are in the pipeline to protect creditors’ and minority shareholders’ lawful interests, including: accelerating the maturity of subscribed capital contributions; increased accountability of directors; supervisors and senior management; curbing abuse of power by controlling shareholders; and expanding the scope of shareholders’ right to know.
The draft amendment to the Company Law, issued on 24 December 2021, is scheduled for the legislative work plan this year. In judicial practice, company disputes occur throughout the entire lifecycle of a company, with a year-on-year increase in both variety of disputes and number of cases recorded.
On the whole, the updated draft amendment reflects a dynamic legislative shift to balance the interests between companies and their shareholders, creditors and other subjects. From the perspective of dispute resolution, it may affect company-related litigation practices, providing more paths to litigation to protect the interests of creditors and minority shareholders from the following aspects.
Additional protection for companies and creditors. Lending legislative support to the idea introduced by the Supreme People’s Court, article 48 adds a provision on accelerating the maturity of shareholders’ subscribed capital contributions. This will grant companies or creditors the right to request shareholders to pay their capital contributions ahead of schedule if “the company is unable to settle its debts as they fall due, and clearly lacks the ability to do so”.
Currently, creditors generally must apply for the addition of shareholders who have not paid up their capital contributions as persons subject to enforcement, even after obtaining an effective judgment on the company. However, due to difficulty for the enforcing court to conduct a substantive review, creditors are unlikely to succeed in such applications, and often need to file a separate action for enforcement objection.
The drafted amendment may facilitate creditors to enforce on shareholders, or even enable creditors to request an accelerated maturity of shareholder capital contributions when suing the company.
Regarding shareholders’ failure to fully perform their obligations of capital contribution, withdrawal of capital, illegal distribution of profits, illegal reduction of capital, and other acts that falter the company’s capital, the draft provides that the shareholder should complement the difference or return their contributions, pay the interest on bank deposits over the same period, and assume compensation liabilities.
In addition, it sets out the responsibilities of directors, supervisors and senior management in maintaining the company’s capital adequacy, as well as their possible compensation liabilities. These provisions will help companies and creditors broaden the scope of defendants, and improve the likelihood of recovery. However, unlike the common practice of ordering shareholders to bear loan interest, shareholders are only required to bear deposit interest, although the rationality remains open to debate.
More lawsuits against directors, supervisors and senior management. Responsibilities of directors, supervisors and senior management are clarified and expanded, which may lead to more lawsuits pursuing their liabilities. It also clarifies the fiduciary duties and performance requirements of directors, supervisors and senior management, providing specific criteria for judging lawsuits against responsible personnel.
Article 180 provides a clear definition of the duty of fidelity and diligence; article 183 sets out requirements for reporting related party transactions and abstaining from voting, expanding the scope of related party transactions and related parties; article 184 lists exceptions for directors, supervisors and senior management seeking business opportunities attributable to the company; and article 185 provides restricting rules for engaging in competitive businesses.
Regarding liabilities of directors, supervisors and senior management, article 190 provides that those causing damage to others due to deliberate or gross negligence while performing their duties shall be jointly and severally liable with the company. This will impose on them a greater duty of honesty, diligence and care, and prevent them from shirking personal liabilities with the excuse of performing their duties.
Shareholders’ derivative suits are a common means of litigation for holding directors, supervisors and senior management accountable. Article 188.4 introduces the “dual derivative suits” system, which grants shareholders of the parent company the opportunity to file lawsuits on behalf of the wholly owned subsidiaries.
To some extent this confirms eligibility of the parent company’s shareholder to file lawsuits. However, the exact implementation awaits more refined stipulations.
Enhanced liability for abusing controlling shareholder rights. For common cases where controlling shareholders or actual controllers abuse their shareholders’ rights or controlling positions, harming the interests of the company’s creditors or minority shareholders, more liabilities are imposed on such shareholders.
Article 191 provides that controlling shareholders and actual controllers shall assume joint liabilities with directors and senior management; article 21 adds a horizontal corporate personality denial system, under which if a shareholder uses two or more companies under its control to infringe upon the interests of creditors, each company involved shall bear joint liabilities for the company’s debts.
However, provisions in the Supreme People’s Court minutes on common scenarios of rights abuse, such as mixed personality, excessive domination and control, and significant lack of capital are not fully adopted. Therefore, relevant rules under the minutes are expected to persist in litigation for some time to come.
Broadened scope for shareholder RTK lawsuits. The scope of shareholders’ right to know (RTK) in limited liability companies is expanded, granting them the right to access more files, including the register of shareholders and accounting vouchers. This may facilitate the unification of judgments on whether accounting vouchers can be viewed in practice. In addition there is a clarification that shareholders of joint stock companies may view accounting books and accounting vouchers under statutory conditions.
Lawsuits over shareholders’ RTK are often a resort for companies to compete for controlling rights, and for minority shareholders to protect their own interests. Its applicable scope is expected to see further expansion in the future.
Liu Xiaoyan is a partner at Tian Yuan Law Firm. She can be contacted at +86 132 6003 2248 or by e-mail at email@example.com