Company law changes offer better protection

Inot second overhaul of the Companies Code since 2005, new revisions are in preparation to protect the legitimate interests of creditors and minority shareholders, in particular: the acceleration of the maturity of contributions of subscribed capital; increased director accountability; supervisors and senior management; limit abuse of power by controlling shareholders; and expanding the reach of shareholders’ right to know.

The draft company law amendment, published on 24 December 2021, is scheduled for this year’s legislative work programme. In court practice, corporate disputes arise throughout the life cycle of a business, with a year-on-year increase in the variety of disputes and the number of cases filed.

Overall, the updated draft amendment reflects dynamic legislative change to balance interests between companies and their shareholders, creditors and other subjects. From a dispute resolution perspective, it may affect business-related litigation practices, providing more remedies to protect the interests of creditors and minority shareholders from the following aspects.

Chen Zhuo
Tian Yuan Law Firm

Additional protection for businesses and creditors. Legislatively supporting the idea introduced by the Supreme People’s Court, Article 48 adds a provision for accelerating the maturity of subscribed capital contributions from shareholders. This will give companies or creditors the right to ask shareholders to pay their capital contributions in advance if “the company is unable to settle its debts as they come due and manifestly does not have the capacity to do so. “.

Currently, creditors must generally request the addition of shareholders who have not released their contributions as persons subject to execution, even after having obtained an effective judgment on the company. However, due to the difficulty for the enforcement court to conduct a substantive review, creditors are unlikely to succeed in such claims and often must file a separate action to challenge the enforcement.

The proposed amendment may facilitate enforcement by shareholders’ creditors, and even allow creditors to seek an accelerated maturity of shareholders’ capital contributions when they sue the company.

With respect to shareholders’ failure to fully meet their obligations of capital contribution, capital withdrawal, illegal distribution of profits, illegal reduction of capital and other acts that undermine the capital of the company, the project provides that the shareholder must make up the difference or return their contributions, pay interest on bank deposits over the same period and assume indemnification liabilities.

In addition, it defines the responsibilities of directors, supervisors and senior management in maintaining the capital adequacy of the company, as well as their possible compensation obligations. These provisions will help companies and creditors broaden the scope of defendants and improve the likelihood of collection. However, unlike the common practice of ordering shareholders to bear interest on loans, shareholders are only required to bear interest on deposits, although the rationale remains open to debate.

Company law amendments offer better protection, Liu Xiaoyan
Liu Xiaoyan
Tian Yuan Law Firm

No more lawsuits against directors, supervisors and senior management. The responsibilities of directors, supervisors and senior management are clarified and expanded, which can lead to more lawsuits pursuing their responsibilities. It also clarifies the fiduciary duties and performance requirements of directors, supervisors and senior management, providing specific criteria for judging lawsuits against responsible personnel.

Article 180 gives a clear definition of the duty of fidelity and diligence; Article 183 sets out reporting requirements for related party transactions and abstention from voting, expanding the scope of related party and related party transactions; Section 184 lists exceptions for directors, supervisors, and senior executives seeking business opportunities attributable to the corporation; and Section 185 provides restrictive rules for engaging in competitive businesses.

With regard to the liability of directors, supervisors and senior managers, Article 190 provides that those who cause damage to others through willful or gross negligence in the performance of their duties are jointly and severally liable with the company. This will impose a greater duty of honesty, diligence and care on them, and prevent them from evading their personal responsibilities under the guise of performing their duties.

Derivative shareholder suits are a common means of litigation to hold directors, supervisors and senior management accountable. Section 188.4 introduces the system of “double derivative suits”, which gives shareholders of the parent company the possibility of bringing suits on behalf of wholly-owned subsidiaries.

To some extent, this confirms the parent company shareholder’s eligibility to sue. However, the exact implementation awaits more refined stipulations.

Increased liability in the event of abuse of the rights of majority shareholders. For common cases where controlling shareholders or actual controllers abuse the rights or controlling positions of their shareholders, harming the interests of creditors or minority shareholders of the company, more responsibilities are imposed on such shareholders.

Article 191 provides that the controlling shareholders and the effective controllers assume joint responsibilities with the directors and the general management; Article 21 adds a horizontal denial of legal personality system, under which if a shareholder uses two or more companies under his control to harm the interests of creditors, each company involved is jointly and severally liable for the debts of the company.

However, the provisions of the Supreme People’s Court Minutes on common rights abuse scenarios, such as mixed personality, excessive dominance and control, and severe lack of capital are not fully adopted. Therefore, the relevant minutes rules are expected to persist in litigation for some time to come.

Expanded scope of RTK shareholder lawsuits. The scope of the shareholders’ right to know (RTK) in limited liability companies is widened, granting them the right to access more files, including the register of shareholders and accounting documents. This can facilitate the unification of judgments on the question of whether the accounting records can be consulted in practice. In addition, it is specified that shareholders of joint-stock companies may consult the accounting books and accounting documents under legal conditions.

Lawsuits over shareholder RTK are often a way for companies to compete for rights of control and for minority shareholders to protect their own interests. Its scope should be extended in the future.

Chen Zhuo is a partner at Tian Yuan Law Firm. He can be contacted at +86 138 1041 7260 or email [email protected]

Liu Xiaoyan is a partner at Tian Yuan Law Firm. She can be reached at +86 132 6003 2248 or email [email protected]