In our previous
blog post
, we reviewed new rules set by recent guidance from the People’s Supreme Court designed to resolve and avoid irregularities in corporate decision making process. In this post, we will discuss rules put forth by the court detailing the protection of a shareholders’ legal right to know, or to be provided with important company documentation.
There are only 3 articles addressing a shareholder’s right to know within the Company Law. Yet, as a practical matter, disputes between shareholders, and particularly where a minority shareholder seeks greater access to company documentation or decision making, is a key area of dispute encountered by our China lawyers.
The new rules in the Provisions firstly provide that the plaintiff initiating a the lawsuit in order to enforce the right to know, or to gain access to certain documentation of the company should hold a position as the shareholder of the company at the time when the lawsuit is filed. A former shareholder whose interests were damaged while serving as a shareholder of the company, may also have a claim over certain documents which were generated during the period when it held the position as the shareholder. If neither of these conditions is met, then a claim seeking access to such corporate information will be rejected by the court.
Secondly, the Provisions specify that the right to know is legally conferred on shareholders, but may be voided where the company many prove that the shareholder claiming to enforce the right to know has any “unjustified purpose”, such purpose might be to sell the company’s information to a third party. The Supreme Court does list several specific situations which would qualify as an “unjustified purpose” in an effort to avoid further controversy on that point.
The company may not refuse the shareholder’s request to review or copy certain company’s documentation, and may not avoid such shareholder right by entering into contract with any shareholder or incorporating a restriction into the company bylaws.
Thirdly, the new Provisions indicates that Directors and senior management of the company bear personal civil liability to compensate any losses suffered by any shareholder due to incomplete production or storage of certain documents.
As China lawyers, we recommend companies to prepare, review and preserve company documents, including the Article of Association, Minutes of meeting of Shareholders, Resolutions of Board of Directors, Resolutions of Supervisors, Financial Reports, Accounting Books, Name List of Shareholders and the Company Bond Receipts in a proper manner to cope with any future requests raised by shareholders.
It is also important for minority shareholders, particularly in Joint Ventures to keep in mind these legal rights. As Shareholder disputes are the primary cause of Joint Venture failure, knowing your rights and carefully enforcing your rights, is essential for majority and minority shareholders alike.