Disputes over company resolutions and legal applications

By Wang Kun, Tiantai Law Firm
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A company is an organisation made up of shareholder investment and various production factors, and has legal personality according to law. The will of a company, originating from the will of individuals, is expressed through resolutions passed by shareholder meetings/general meetings and the board of directors, which have a material effect on the company, its shareholders and stakeholders. Therefore, disputes arising from resolutions of a company are the most common.

Pursuant to the Civil Code, Company Law and Judicial Interpretation IV of the Company Law, disputes over resolutions of a company mainly involve three scenarios: confirmation of resolution validity; revocation of resolutions; and failure of resolutions. This article looks at their differences and specific applications.

BASIS FOR CLAIM

Wang Kun, Tiantai Law Firm
Wang Kun
Partner
Tiantai Law Firm

Article 22.1 of the Company Law and article 1 of Interpretation IV provide that a resolution passed by the shareholders’ meeting/general meeting and board of directors that violates laws and administrative regulations shall be void – while granting shareholders, directors and supervisors the right to request courts to confirm voidness of the resolution.

Article 85 of the Civil Code and article 22.2 of the Company Law provide that, where the convening procedures and voting method of shareholders’ meetings/general meetings and board meetings violate laws and administrative regulations or articles of association of a company, or where contents of a resolution violate the articles of association, shareholders may request courts for revocation of the resolution within 60 days from the date of resolution.

Article 4 of Interpretation IV further emphasises that a meeting should not be revocable if it only has minor defects in convening procedures or voting methods without substantial impact on the resolution.

Article 134.2 of the Civil Code and article 1 of Interpretation IV clarify the right of shareholders, directors and supervisors to request courts to confirm failure of resolutions passed by shareholders’ meetings/general meetings and boards of directors. Serious defects in the convening procedure and voting procedure that cause failure of the resolution are set out in article 5 of Interpretation IV.

DIFFERENCES, KEY POINTS

According to laws and regulations on validity of resolutions, evaluation mainly focuses on content and procedure.

In terms of litigants, shareholders, directors and supervisors may all act as plaintiffs in disputes over failure or voidness of resolutions, with the company as the defendant. Other stakeholders involved in the resolution may be listed as third parties.

In disputes over resolution revocation, rules on the defendant and third party are identical to those in the above-mentioned two scenarios, but the plaintiff can only be shareholders, which means the lawsuit of revocation may only be brought by shareholders.

In terms of defects, if there are serious defects in the resolution contents, the resolution will be void; if there are serious defects in the resolution procedures, the resolution will fail. If there are minor defects in the content or procedure of the resolution, shareholders may exercise the right of revocation more flexibly.

When reviewing the company’s resolution procedure, the adjudicator should examine whether defects in the procedure will result in shareholders, including minority shareholders, being unable to fairly participate in the formation of majority opinion and obtain the required information.

In practice, common situations where resolutions may be considered as void include but are not limited to: infringement of shareholders’ dividend rights; illegal change of shareholders’ capital contribution or shareholding ratio; non-qualification of elected directors, supervisors and officers; distributing company’s assets without financial accounting; depriving shareholders of their benefits during the capital contribution period; and applying the majority voting method to change or advance the capital contribution period.

Scenarios involving revocation of resolutions mainly include: inconsistency between the content of notice with that of resolution; inconsistency between the resolution content with the articles of association; failure to fulfil the notification obligation within the statutory period; and convening and holding a meeting without requesting the company’s managing directors and supervisors to convene the meeting. In addition, common scenarios involving failure of resolutions are clearly provided in Interpretation IV.

The provisions on statutory period and statutes of limitation are not applicable to voidness or failure of resolutions, while the provisions on statutory period are applicable to revocation of resolutions – which means if shareholders fail to file a lawsuit for revocation within 60 days from the date of resolution, the right of revocation will be extinguished.

In terms of legal consequences, if a resolution is deemed void, it is void since the beginning; in other words, the expected legal effect should be deemed as non-existent from the beginning of the act. If a resolution is failed, it will be deemed as non-existent from the beginning; and the resolution may be made by convening a new meeting. If a resolution is revoked, it will have no effect after revocation, but the civil legal relationship formed by the company and the bona fide counterparty based on the resolution will not be affected.

It can be seen that voidness of resolutions is mainly related to infringement of substantive rights. However, revocation and failure of resolutions are related to procedural issues. The difference between revocation and failure is that procedural issues involved in the failure of resolutions are more serious.

SUMMARY AND SUGGESTIONS

When there is a defect in the expression of a company’s resolution, the first examination is whether it meets the conditions/scenarios of “failure of resolutions”. If not, it should be determined whether the content of the resolution violates laws or administrative regulations. If there is such violation, a lawsuit for void resolution should be filed; otherwise, examine whether the conditions to exercise the right of revocation are met – and if so, a lawsuit should be filed within the statutory time limit. Lawsuits related to voidness, revocation and failure of resolutions of a company are remedies that aggrieved parties may consider. However, the result of the above-mentioned situations will inevitably have a great impact on corporate governance.

Therefore, in daily operations, it is necessary to strengthen compliance management at the corporate governance level, including clearly defining the authority of proposing resolutions of the shareholders’ meeting/general meeting – and setting up strict and express procedures for the convening of, and voting at, such meetings.

Wang Kun is a partner at Tiantai Law Firm

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