How can minority shareholders seek relief from profit hoarding?

Persistent profitability without dividend distribution frequently leaves minority shareholders disadvantaged, stoking tension between shareholders. When confronted with this impasse, two primary legal remedies are available: shareholders may either stay and litigate for a court-ordered distribution of profits; or exit by seeking a statutory share buyback from the company.

Stay for payout

A shareholder’s claim for distribution encounters no difficulty once the company has resolved on a specific distribution plan at a shareholders’ meeting, with article 212 of the Company Law mandating that the board completes distribution within six months of the resolution. The crux of most practical disputes, however, lies in a company’s persistent delay in adopting any distribution resolution. The prevailing Provisions on Several Issues Concerning the Application of the Company Law (IV) (judicial interpretation [IV]) provides, in article 15, that a profit distribution claim unsupported by a shareholders’ resolution specifying a distribution plan should be dismissed. An exception is nonetheless recognised where the failure to distribute profits stems from an abuse of shareholder rights that harms the interests of other shareholders. A claim for compulsory distribution may then proceed.

Two recent cases in which this exception was applied are instructive and warrant review. In Ji Min Zhong No.18 (2025), a Sino-foreign joint venture profit distribution dispute ruled by Jilin High Court – and recognised as a leading case by the Supreme People’s Court – distribution plans for 2020 and 2021 were frustrated by successive vetoes of directors nominated by the Chinese shareholder. Under the articles of association, profits were to be distributed annually, a practice established since 2003.

When shareholders explicitly requested profit distribution, as the company’s operating period was set to expire in 2026, redirecting what should have been distributed into a substantial capacity expansion investment was held to lack legitimate justification and cause dual prejudice to the company and its shareholders.

The court found the shareholders in question abused their rights, ordering full distribution of profits exceeding RMB90 million (USD13.2 million).

In Jing 02 Min Zhong No.14602 (2025), a profit distribution dispute ruled by the Second Intermediate Court of Beijing, the company held distributable profits for six successive years without distribution, as minority shareholders failed to produce a resolution containing a specific distribution plan.

The court invoked article 15 of judicial interpretation (IV) to compel distribution, while cautioning that “judicial intervention must also take into account the need to safeguard the company’s sustainable operating capacity, as well as its solvency and resilience against risk … one must not fish out the pond”.

Exercising this discretion, the court fixed distribution at 50% of distributable profits.

Notably, the Exposure Draft of the Interpretation on Several Issues Concerning the Application of the Company Law introduces material adjustments to this article.

Article 52.1 omits the abuse of rights exception, providing that, without a resolution specifying a distribution plan, the court shall not support a claim for profit distribution. Article 52.2 then narrows the exception to circumstances where “the company satisfies the conditions for profit distribution and a specific distribution plan can be ascertained by reference to the company’s articles of association or its prior distribution history”.Overall, the above-mentioned exposure draft curtails the scope for compulsory distribution.

Exit via buyout

A shareholder with no intention of remaining in the company may invoke the right to request a share buyback.

The Company Law sets out two distinct routes under article 89. Article 89.1.1 entitles a shareholder who voted against a resolution not to distribute profits to require the company to buy back their shares at a fair price, provided the company has been profitable and met the conditions for distribution for five consecutive years without distributing profits for five consecutive years. Should the parties fail to reach agreement within 60 days of the resolution date, the shareholder may initiate proceedings within 90 days.

Alternatively, article 89.3 provides that if a controlling shareholder abuses their shareholder rights, seriously harming interests of the company or other shareholders, other shareholders may demand that the company buy back their equity at a reasonable price.

Added in the 2023 revision, this paragraph is not limited to the circumstances of five consecutive years of profitability without distribution. It represents a more flexible exit channel for minority shareholders who suffer abuse at the hands of the controlling shareholder.

The evidentiary threshold for proving such conduct, and the valuation methodology for purchase price, are both fraught with complexity in practice, necessitating case-by-case analysis.

Recommendations

Choosing which of the two paths to pursue depends on whether the shareholder still wishes to remain, and the company’s actual situation. Compulsory distribution is most appropriate when shareholders retain faith in the company’s long-term value and seek continued participation. Where a fundamental crisis of confidence arises with the controlling shareholder – and the minority shareholder has no desire to remain – share repurchase and exit resolves the dispute more conclusively.

Rulings in the above-mentioned cases demonstrate that whether compulsory distribution is upheld – and the amount awarded – turns on factors including: whether the articles of association prescribe a distribution mechanism; whether the company consistently distributed profits in the past; and the company’s underlying debt-servicing capacity and sustainability.

The Jilin court’s ruling seems to have drawn on the approach reflected in article 52.2 of the exposure draft, placing greater weight on the articles of association and the company’s distribution history.

In practice, minority shareholders are advised to exercise their information right to access the company’s financial records to secure evidence of sustained profitability, mitigating the uncertainties inherent in profit distribution disputes. They should also be mindful to preserve evidence of any attempts by the controlling shareholder, or directors appointed by them, to obstruct distribution or divert profits. Litigation over profit distribution brings in its wake judicial audits, boardroom deadlock and reputational damage, draining management resources at a cost that frequently outstrips the disputed sums themselves.

A more prudent course than retrospective bargaining is to put in place, from the outset, a transparent and predictable distribution framework that sets out when distributions are triggered, how decisions are made, and under what rules profits may be retained. Clarity of rules and transparency of accounts can curb needless litigation and foster shareholder buy-in for profit retention that is commercially necessary.

Jiang Xuan is a partner and Yang Yue is a paralegal at Zhong Lun Law Firm