One of the significant events in the legal sector in 2024 is the comprehensive revision of the Company Law. This amendment represents the most substantial modification since the comprehensive overhaul of the Company Law in 2005. The revision process spanned two years, during which four draft versions were submitted for deliberation before final approval. The new provisions officially took effect on 1 July 2024.
In my experience serving numerous start-up enterprises, I frequently encounter challenges related to the protection of minority shareholders' rights and the difficulties they face in safeguarding these rights. In reality, for most small and medium-sized private enterprises in China, neither the shareholders' meeting nor the board of directors can exert a truly decisive influence in corporate governance. Control and decision-making power typically reside with the majority shareholders or actual controllers. The current Company Law in China lacks adequate restrictions and liability regulations concerning majority shareholders and actual controllers. This revision marks a significant advancement in limiting the abuse of rights by majority shareholders and actual controllers, thereby protecting the legitimate interests of minority shareholders. The new Company Law introduces additional provisions related to the protection of minority shareholders' rights, which I believe constitutes a substantial progressive step. This article focuses on outlining and interpreting these key provisions.
1. Strengthening Shareholders’ Right to Information
The recent revision of the Company Law significantly broadens the scope of shareholders' right to information in the following four aspects:
a. Expanding the Scope of Shareholders’ Access to Information in Limited Companies
Firstly, the new Company Law grants shareholders of limited liability companies the right to access and copy the shareholder register and accounting vouchers. This is a noteworthy advancement. According to Article 56 of the new Company Law, the shareholder register records the names or titles and addresses of shareholders; the amount, method, and date of their subscribed and paid-up capital; and the dates of acquisition and loss of shareholder status. Shareholders listed in the register can exercise their rights based on the register, meaning the register serves as proof for shareholders to assert their rights. In the context of share transfers, the transferee’s entry in the shareholder register is a prerequisite for asserting rights against the company.
Additionally, the new Company Law explicitly affirms shareholders' right to access accounting vouchers. Previously, judicial practice lacked consensus on whether shareholders could access a company's accounting vouchers. The revision clarifies that shareholders are entitled to view these documents. According to Article 14 of the Accounting Law of the People’s Republic of China (2017 Amendment), accounting vouchers include both original vouchers and bookkeeping vouchers. Shareholders of limited liability companies can access original vouchers, significantly reducing the potential for fraud.
b. Enhancing Information Rights for Shareholders of Joint-Stock Companies
In practice, most non-listed joint-stock companies are fundamentally similar to limited liability companies, yet the rights of their shareholders differ markedly, which is unreasonable. For instance, shareholders of limited liability companies have the right to view and copy financial reports, whereas shareholders of joint-stock companies only have the right to view these reports. Limited liability company shareholders also have access to the company's accounting books, a right not extended to joint-stock company shareholders. The new law harmonises the rights of shareholders in limited and joint-stock companies across multiple dimensions. It grants shareholders of joint-stock companies the right to copy the company’s articles of association, shareholder register, minutes of shareholders' meetings, resolutions of the board of directors, resolutions of the board of supervisors, and financial reports. Furthermore, it stipulates that shareholders holding more than three percent of the company's shares, either individually or collectively for over 180 days, have the right to access accounting books and vouchers. Companies may also set a lower threshold in their articles of association, thereby significantly enhancing the protection of minority shareholders' rights.
c. Clarifying Confidentiality Obligations of Shareholders and Their Agents
There has been considerable debate over whether shareholders can delegate their right to information to intermediary institutions and how to balance shareholders' rights with the protection of company trade secrets. Previously, the Supreme People’s Court’s "Provisions on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (IV)" allowed shareholders, pursuant to a court judgment, to have intermediary professionals such as accountants and lawyers assist in accessing company documents, provided these intermediaries adhere to confidentiality obligations. The new Company Law advances this by explicitly permitting shareholders to delegate their right to information to intermediary institutions like accounting firms and law firms without requiring the shareholder’s physical presence. However, such delegations must comply with relevant laws and administrative regulations concerning national secrets, trade secrets, personal privacy, and personal information.
d. Allowing Shareholders to Access and Copy Materials of Wholly-Owned Subsidiaries
The new Company Law permits shareholders of limited liability companies and non-listed joint-stock companies to access and copy not only their own company's materials but also those of wholly-owned subsidiaries. This significantly expands the scope of shareholders' right to information, overcoming the limitations of accessing information from a single company. While this enhancement empowers minority shareholders, it also imposes higher governance and management standards on group-managed companies. If corporate governance does not keep pace, it may lead to a cascade of issues.
2. Expanding Avenues for Dissenting or Minority Shareholders to Request Share Repurchases
a. Broadening the Conditions for Share Repurchase Requests
Under the current Company Law, the pathways for shareholders to request the company to repurchase their shares are stringent, primarily to balance capital integrity and shareholder rights protection. However, provisions allowing dissenting shareholders to request repurchases have effectively remained dormant. Minority shareholders often find it challenging to participate in company management and have limited access to information, making it difficult to demonstrate continuous profitability over five years, let alone exercise their share repurchase rights. The new Company Law introduces a significant provision allowing shareholders to request the company to repurchase their shares if the majority shareholders abuse their rights, thereby severely harming the company or other shareholders’ interests. This provision effectively addresses the difficulty minority shareholders face in protecting their rights. Previously, although the Company Law mandated compensation for the abuse of rights by shareholders, minority shareholders struggled to prove such abuses and the resultant losses, often resulting in their claims being unsupported by courts. Now, minority shareholders can protect their rights by exercising the right to request the company to repurchase their shares, provided they can demonstrate that the majority shareholders have abused their rights to the detriment of the company or themselves, significantly reducing the burden of proof.
b. Facilitating Dissolution Actions by Minority Shareholders
Previously, disputes among shareholders, where majority shareholders abused their control to infringe upon minority shareholders' rights, could lead minority shareholders to file for company dissolution on the grounds of managerial difficulties and significant harm to their interests. However, dissolution actions have far-reaching implications, affecting the company, shareholders, executives, employees, external creditors, and even the government. Judicial practice treats dissolution with extreme caution. The new provision alleviates the pressure associated with dissolution disputes, substantially reducing the incidence of lawsuits seeking company dissolution.
c. Extending Share Repurchase Rights to Shareholders of Non-Listed Joint-Stock Companies
The new Company Law also grants shareholders of non-listed joint-stock companies the right to request the company to repurchase their shares, aligning the rights of shareholders in limited and joint-stock companies. Additionally, it introduces a provision requiring companies to notify other shareholders when merging with a company holding over ninety percent of their shares. In such cases, minority shareholders have the right to request the company to purchase their shares at a reasonable price, thereby providing an exit route for minority shareholders in such scenarios.
3. Enhancing Procedures for Shareholders to Call for Extraordinary General Meetings and Refining the Right to Propose Resolutions
The new Company Law delineates the procedures for shareholders of joint-stock companies to convene extraordinary general meetings and standardises the terminology by removing the term "shareholders'大会." It stipulates that qualified shareholders may submit temporary proposals in writing, and the board of directors must undertake a review. This review involves two aspects: verifying whether the proposal falls within the shareholders' meeting's jurisdiction and ensuring the proposal has clear topics and specific resolution items. Additionally, the board must substantively review the proposals to ensure they do not violate laws, administrative regulations, or the company’s articles of association. The board should refrain from dismissing proposals based solely on their commercial rationale to avoid undermining shareholders' legitimate rights.
Furthermore, the new Company Law lowers the threshold for shareholders to submit temporary proposals from three percent to one percent of shares held. It also prohibits companies from increasing the shareholding percentage required to submit temporary proposals. These changes further expand the protection of minority shareholders' rights.
4. Allowing Shareholders to Initiate Derivative Actions Against Directors, Supervisors, and Senior Management of Wholly-Owned Subsidiaries
The new Company Law introduces a "dual-layer shareholder derivative action and single-tier prerequisite procedure." This grants shareholders of limited liability companies and shareholders holding at least one percent of the company's shares for over 180 days, either individually or collectively, the right to initiate derivative actions against the directors, supervisors, and senior management of the company’s wholly-owned subsidiaries. Shareholders need only submit requests to the subsidiary's board of directors or board of supervisors.
For example, consider Company C, whose shareholders are Company A with a 90% stake and Company B with a 10% stake. If directors, supervisors, or senior management of Company C engage in actions detrimental to the company’s interests, Company B, as a minority shareholder, has the right to initiate a derivative action under the existing Company Law. However, if the directors, supervisors, or senior management of Company D, a wholly-owned subsidiary of Company C, violate laws, administrative regulations, or the company’s articles of association, causing losses to Company D, Company B previously had no direct recourse and could only rely on Company C to initiate such actions. Often, the majority shareholder, Company A, controls Company C and appoints the management of Company D, making it unlikely for Company C to act independently. The new Company Law empowers minority shareholders like Company B to file derivative actions directly against the subsidiary’s management, streamlining the process by requiring only a request to the subsidiary’s board. This provision, inspired by Japan’s multi-tier shareholder derivative action system, significantly enhances the protection of minority shareholders’ rights.
Summary and Recommendations
In summary, the new Company Law significantly enhances the protection of minority shareholders' rights based on the existing legal framework. Based on these new regulations, we offer the following recommendations:
1. Detail Shareholders’ Right to Information in the Articles of Association: It is advisable to specify shareholders’ right to information within the company's articles of association. Particularly for majority shareholders, it is unlawful to prohibit or improperly restrict minority shareholders’ right to information. However, limitations on the timing of information requests, clarifications on the scope and extent of accounting books and vouchers per the Accounting Law, and confidentiality obligations and responsibilities of shareholders and their delegated intermediaries can be finely tailored to suit the company’s specific circumstances.
2. Enhance Share Exit Mechanisms in the Articles of Association or Shareholder Agreements: The provisions for dissenting or minority shareholders’ repurchase rights offer valuable insights. It is beneficial to pre-establish shareholder exit mechanisms in the articles of association or shareholder agreements, tailored to the company’s specific context and aligned with legal stipulations. This can help prevent or mitigate shareholder disputes and internal conflicts. For instance, predefined terms for share repurchase prices or calculation formulas can be detailed in the articles or agreements.
3. Adopt Proposals Rights Provisions in Limited Liability Companies: Given the new regulations on shareholders’ proposal rights in joint-stock companies, it is recommended that eligible limited liability companies consider adopting similar provisions in their articles of association. This approach promotes standardized governance within the company and facilitates smoother transitions during future corporate restructuring or potential public listings.
