China Supreme People's Court: New Provisions of the Company Law

The 22nd of April 2019 the Supreme People’s Court published provisions related to some issues on the application of the Company Law.

The provisions (composed by 6 articles in total) were issued in order to ensure a correct interpretation and application of the Company Law, as promulgated in 2006 and amended in 2018.

In particular, the SPC’s interpretation focus on the protection of shareholders' equity inconsideration of the trial practices of the people's court.

The recently issued text, among many specifications, introduces some alternative ways to resolve disputes between LLC shareholders, if under certain circumstances as set out by the Court; regulates in a more detailed manner certain distributions of profits’ resolutions and related court’s revocation of such resolutions.

The above Provisions will be effective on April 29, 2019.

Here follows an unofficial translation of the original text issued by the SPC, and related articles of the P.R.C. Company Law.

Provisions

Article 1

For an affiliated transaction harming the interests of a company, if the plaintiff company claims that the controlling shareholder, the actual controller, directors, supervisors or senior executives shall compensate for the losses caused thereby in accordance with the provisions of Article 21 of the Company Law, but the defendant defends only on the grounds that it has performed the procedures as prescribed by laws, administrative regulations or the articles of association of the company, including information disclosure, the consent of the board of shareholders or of the general meeting of shareholders, etc. for the transaction, the people's court shall not uphold such defence.

If the company does not file a lawsuit, any shareholder meeting the requirements specified in Paragraph 1 of Article 151 of the Company Law may initiate legal proceedings with the people's court in accordance with the provisions of Paragraph2 or 3 of Article 151 of the CompanyLaw.

Article 2

Where an affiliated transaction contract falls under any of the circumstances of invalidation or revocability, and the company does not take legal actions against the contract counterparty, any shareholder meeting the requirements specified in Paragraph1 of Article 151 of the Company Law may lodge a lawsuit with the people's court in accordance with the provisions of Paragraph2 or 3 of Article 151 of the Company Law.

Article 3

Where a director who is dismissed by a valid resolution of the board of shareholders or the general meeting of shareholders before expiry of his/her term of office claims that the dismissal is not legally effective, the people'scourt shall not uphold such claim.

If, after being dismissed, a director files a lawsuit due to a dispute over indemnity with the company, the people's court shall, according tolaws, administrative regulations, the articles of association of the company or the contract, determine whether the company shall give indemnity and the reasonable amount of indemnity by taking into account the factors such as the reasons for dismissal, the rest of his/her term of office and his/her remuneration.

Article 4

After a resolution on distribution of profits is made by the board of shareholders or the general meeting of shareholders, the company shall complete the profit distribution within the period specified in the resolution. If no period is specified in the resolution, the provisions of the articles of association shall apply. If no period is specified in either the resolution or the articles of association or the period specified therein exceeds one year, the company shall, within one year from the date when the resolution is made, complete the profit distribution.

If the period for completion of profit distribution as specified inthe resolution exceeds that specified in the articles of association, the shareholders may apply to the people's court for revoking the provisions on such period in the resolution according to the provisions of Paragraph 2 of Article 22 of the Company Law.

Article 5

In hearing a case involving major disputes between shareholders of a limited liability company, the people's court shall attach importance to mediation. If the parties agree to settle their disputes in any of the following ways not violating the mandatory provisions of laws or administrative regulations, the people's court shall uphold such agreement.

(1) buy-back of the shares of some shareholders by the company;

(2) transfer of the shares of some shareholders to othershareholders;

(3) transfer of the shares of some shareholders to others;

(4) reduction in capital of the company;

(5) division of the company;

(6) any other way that can resolve the disputes, resume the normal operation of the company and avoid dissolution of the company.

Article 6

The present Provisions shall come into effect on April 29, 2019.

The Provisions apply to any case that has not been finalized yet after the effectiveness of these Provisions but shall not apply to any case that has been finalized before the effectiveness of these Provisions or is subject to retrial under the trial supervision procedures.

In case of discrepancy between any juridical interpretation previously promulgated by the Supreme People's Court and the present Provisions, the Provisions shall prevail.

Notes

Article 21 (The controlling shareholders, actual controlling party, directors, supervisors and senior management personnel of a company shall not use their relationship to cause damage to the company's interests. Persons who violate the aforesaid provisions and cause the company to suffer losses shall bear compensationliability).

Paragraph 1of Article 151 of the Company Law (shareholders of a limited liability company or a company limited by shares holding 1% or more of shares in the company for 180 days consecutively may submit a request in writing to the board of supervisors or the supervisor to file a lawsuit with a people's court).

Paragraph 2 or 3 of Article 151 of the Company Law (where the board of supervisors or the supervisor or the board of directors or the executive director refuses to file a lawsuit pursuant to the written request of the shareholder(s) or fails to file a lawsuit within 30 days from receipt of the request or where the circumstances are urgent and the company will suffer irrecoverable losses if a lawsuit is not filed forthwith, the aforesaid shareholder(s) shall have the right to file a lawsuit with a people's court directly in their own name to protect the interests of the company.

Shareholders may file a lawsuit with a people's court in accordance with the provisions of the aforesaid paragraphs).

Paragraph 2 of Article 22 of the Company Law (where the shareholders file for a lawsuit, the people'scourt may, upon a request of the company, ask the shareholders to provide the corresponding guarantee).