SPC Issues 4th Interpretation of Company Law

On 25 August 2017, the Supreme People's Court ("SPC") issued the Provisions on Various Issues on the Application of the Company Law of the People's Republic of China (IV), which took effect 1 September 2017.

The provisions, which follow a draft circulated in April 2016, are the SPC's fourth judicial interpretation of the Company Law of the People's Republic of China 2013.

The final provisions clarify the following issues (among others):

Validity of Resolutions

  • A company's shareholders, directors and supervisors can file a lawsuit to challenge the validity of a resolution.
  • A minor procedural defect does not provide a basis for a court to revoke a resolution.
  • A legal relationship formed between a company and a bona fide counterparty pursuant to a resolution is not affected when a court revokes or invalidates the resolution.

Shareholder's Right to Know

  • If a former shareholder has preliminary evidence to show its interests as a shareholder were harmed, it may inspect and copy specific documents from the period it was a shareholder.
  • The provisions define the meaning of an "improper purpose", where a company can deny a shareholder's request to inspect the company's books.
  • A shareholder and its agents are liable to a company for disclosing trade secrets obtained by exercising a right to know.

Shareholder's Right to Profit Distribution

A court must dismiss a claim for distributed profits if a shareholder does not produce a valid resolution with a specific distribution plan, except where the shareholder can prove that an abuse of shareholders' rights by another shareholder (such as concealing or transferring profits) led to the company not distributing profits.

Enforcement of Pre-Emptive Rights

  • Notice of a proposed equity transfer may be in writing or "any other reasonable method through which one can confirm receipt of the notice".
  • The term "same conditions" refers to a comprehensive examination of the price, payment method and time period.
  • A transferor may abandon a proposed equity transfer where another shareholder attempts to exercise its pre-emptive rights, except where a company's articles of association provide, or all shareholders agree, otherwise.

Derivative Suits

The provisions clarify several procedural issues relating to shareholders' derivative suits, such as the circumstances where a company is listed as plaintiff, the allocation of interest and costs, and so on.

Market Reaction

Jianwei (Jerry) Fang, Partner, Zhong Lun Law Firm, Shanghai

"The interpretation provides much needed clarity on a variety of issues of keen importance to shareholders, who now have powerful weapons to protect their rights and interests, including the revocation of certain resolutions, the right to inspect and copy certain documents, and so on. As such, the interpretation will likely bring a new wave of litigation, particularly in derivative suits, where the company now must bear reasonable costs in some circumstances, and long-simmering disputes involving Sino-foreign joint venture partners."

Action Items

General Counsel for any company, or shareholder of a company, registered in China will want to closely study the interpretation and take steps to ensure business colleagues are aware of the protections put in place by the interpretation. In some cases, counsel may wish to seek specialist advice to revise a company's constitutional documents and consider making or defending against potential claims.