On August 5, 2017, the Supreme People’s Court issued its 4th edition of Provisions concerning the application of the Company Law by people’ courts. The new provisions address several issues including the validity of company resolutions, shareholder’s right to know, right to distributions of profits, preferential rights to purchase shares, and shareholder’s derivative actions. The new Provisions will come into force on September 1, 2017.
In considering corporate resolutions, the court identified three common defects which may occur and affect the validity of a company’s resolution. Company resolutions displaying these defects may be found void, revocable or false. Currently, the Company Law only specifically addresses dealing with void and revocable resolutions within a few narrow circumstances, but does not prescribe in detail procedures for overturning faulty resolutions, particularity where various factions in the company may be in dispute. The Court now aims to expand the range of circumstances in which resolutions may easily be determined void, revocable or outright false, so as to avoid prolonged disputes.
To this end, the new Provisions explicitly and formally confer the right on shareholders, Directors and company Supervisors to initiate a lawsuit before people’s court against false or invalid resolutions. A Company which issues a false resolution shall be listed as the defendant in such lawsuit, and any interested party which may be involved in such false resolution may be listed as a third party in the lawsuit.
Furthermore, the Provisions explicitly provide the circumstances under which the party may claim to the court that an issued resolution should be deemed false. These circumstances cover the situations where no actual meeting was held by shareholders or directors for issuing the resolution in dispute, where no actual voting was made on the matter involved in the resolution in dispute, where the number of attendants of the meeting or voting rights held by shareholder did not comply with the quorum requirements stipulated in Company Law or in Article of Association of the company, where voting result did not reach the proportion provided in Company Law or in Article of Association required for the resolution to pass.
As China legal practitioners, the new Provision will facilitate us in acting for our clients against false resolutions, particularly in the case of minority shareholders. Also, we encourage China companies to consult with legal counsel when making any significant corporate decision to ensure that formalities of the decision making process, including as to shareholder’s and board meetings and attended resolutions are met.