Growing discontent with corporate governance and subsequent demands for the removal of directors have become increasingly common in listing companies. In practice, the review of such proposals by entities like the board of directors has become a significant hurdle to actualising these removals, and the legality of such obstructions has been a subject of debate.
Both the Company Law and the Rules for the Shareholders’ Meetings of Listed Companies specify that shareholders, either individually or collectively holding more than 3% of a company’s shares, can submit written interim proposals to the board of directors up to 10 days before a shareholders’ meeting. Additionally, the rules and the Regulatory Q&A for Information Disclosure of Listed Companies (phase II, no longer effective) stipulate that a proposal needs to satisfy three requirements:
- It must comply with relevant laws, administrative regulations and the company’s articles of association;
- It must fall within the scope of the shareholder meeting’s authority; and
- It must deal with specific topics and resolution matters.
These three requirements are commonly used as grounds for a board’s rejection of proposals. Most listing companies reject proposals primarily on the basis that they do not meet the legal, regulatory and articles of association requirements.
In response to these circumstances, article 5.4 of Regulatory Q&A specifically addresses the issue of whether a convener can conduct substantive reviews of proposals.
It clarifies that the convener of a shareholders’ meeting has no authority to conduct a substantive review of shareholder proposals. A convener is a member of the company’s board of directors and generally does not need to convene a separate meeting to review the proposals.
When a convener receives proposals from shareholders, as long as they verify the eligibility of the proposing shareholders and confirm that the proposals meet the three above-mentioned requirements, they should be submitted for consideration at the shareholders’ meeting.
If a board of directors believes that the formal requirements for shareholder eligibility or proposal-related information are incomplete, they should make a one-time request for a supplementary submission from the shareholders. The proposals should not be unreasonably delayed or be denied inclusion in the shareholders’ meeting agenda.
Consequently, both from a legal interpretation and regulatory perspective, the boundaries and criteria for reviewing proposals are clear: They should be limited to the three requirements and confined to formal reviews without involving substantive judgments.
Regarding the removal of directors, the authors believe that, firstly, this matter falls within the authority of the shareholders’ meeting and satisfies the second requirement. Secondly, as long as the target and reasons for removal are clear, even if the reasons lack rationality or are blatantly unfounded, it still fulfils the requirement of having a clear topic and specific resolution matter. The convener should only conduct a formal review, not a judgment of reasonableness.
Proposals such as the removal of directors are inherently adversarial and directors, as interested parties (the removal targets), are also involved in the proposal review process. This scenario inevitably leads to an impartiality issue, allowing the shareholders’ meeting to arbitrarily interpret or obstruct proposals on unjustified grounds. After all, facts are objective but determining them is subjective.
Shareholders and board directors have their own perceptions of facts, and the law should safeguard shareholders’ rights to propose the removal of directors based on their own subjective, albeit incorrect, views.
Such fact determinations should not be within the purview of a formal review by the convener; otherwise, any removal reasons contrary to the convener’s fact determination will be rejected in the formal review, rendering shareholders’ proposal rights unprotected.
Regarding one of the three requirements, “compliance with relevant laws, administrative regulations, and the company’s articles of association”, the authors believe that, based on the non-causal nature of the unilateral termination of the entrustment relationship, the Guidelines for the Work of the Supervisory Board of Listed Companies or the articles of association should not be used as a reason for blocking the dissolution of the underlying legal relationship. (The articles of association may set procedural and material requirements, but may not set the conditions for blocking the proposal that violates the underlying legal relationship.)
When the Company Law was revised in 2005, it eliminated the restrictive condition of “without just cause” from the provision, stating that, “before the expiration of the director’s term, the shareholders’ meeting cannot remove the director from office without just cause”.
The logic behind this revision was that legal scholars increasingly recognised the legal relationship between directors and companies as a delegation relationship, which could be terminated by the delegating party unilaterally, thus eliminating the requirement of just cause.
Renowned Chinese Company Law scholar and member of the expert panel for Company Law revisions, Zhao Xudong, pointed out that the revision of the Company Law signalled a legal attitude that shareholders’ meetings could change or remove directors from office at any time, even without a reasonable cause or fault on the part of the directors.
Further clarification was made in article 3 of the Company Law Judicial Interpretation V, issued in 2019, which explicitly states that, “if a director’s removal before the expiration of the director’s term is effectively resolved by the shareholders’ meeting or the shareholders’ general meeting, and the director claims that the removal is not legally effective, the people’s court shall not support the claim”.
Based on this, it is recommended that regulators should determine the non-causal nature of director removal based on the fundamental legal relationship appropriately, and adjust the relevant regulatory rules in line with the spirit of the Company Law.
The protection of shareholder proposal rights and the assurance of the right to convene shareholders’ meetings are both challenging. These matters are common means for shareholders to assert their rights in mature markets. As for the current regulatory rules, we hope that the focus will shift more towards formal legality rather than substantive reasonableness. The review criteria should be limited to formal checks, not substantive reviews, to safeguard shareholder proposal rights.
Wang Yuanyuan is a partner and Shi Cheng is an associate at Grandway Law Offices
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