Remedies for minority shareholders in liquidations

By Xu Bangwei and Lin Xiaolu, Jingtian & Gongcheng
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In China, it is not uncommon for majority shareholders or members of the liquidation committee to damage the interests of the company and minority shareholders in the liquidation procedure, after dissolution of the company. In the author’s experience, after establishment of the liquidation committee, this damaging of the interests of shareholders may manifested in the following ways:

Xu Bangwei Jingtian & Gongcheng liquidations
Xu Bangwei
Partner
Jingtian & Gongcheng

(a) Majority shareholders fail to set up a liquidation committee within 15 days from the date of the cause of the dissolution, resulting in a failure to advance the liquidation procedure in a timely manner;

(b) Majority shareholders and their appointed liquidation committee members are lax in advancing liquidation procedures (including but not limited to being lax in issuing announcements on declaration of claims, registration of claims, formulating, confirming and implementing a liquidation plan, asserting legal claims and settling debts, preparing and confirming liquidation reports, issuing deregistration announcements and handling deregistration procedures, etc.);

Lin Xiaolu Jingtian & Gongcheng liquidations
Lin Xiaolu
Partner
Jingtian & Gongcheng

(c) Majority shareholders and their appointed liquidation committee members maliciously conceal in the liquidation report, or neglect to distribute, the remaining assets of the company.

Among them, (a) and (b) may eventually lead to the company’s delay in deregistration and a failure of distribution of the remaining assets to minority shareholders. The reason for the above-mentioned situation is often that majority shareholders think that advancing liquidation is unfavourable to themselves, or that majority shareholders should take advantage of their dominant position to obtain illegal benefits in the liquidation process.

According to the law and judicial practice, upon the occurrence of the above-mentioned circumstances, minority shareholders may seek the following remedies:

Apply for compulsory liquidation

In case of (a) above, minority shareholders may apply for compulsory liquidation in accordance with article 7.1.1 of the Provisions of the Supreme People’s Court on Certain Issues Concerning the Application of the Company Law of the People’s Republic of China (Company Law Interpretation II). In case of (b), minority shareholders may apply for compulsory liquidation in accordance with article 7.1.2 of Company Law Interpretation II. In case of tardiness in asserting legal claims in (b), or in case of (c), minority shareholders may apply for compulsory liquidation in accordance with article 7.1.3 of Company Law Interpretation II.

It should be noted that deliberately delaying liquidation usually means that the liquidation committee fails to advance liquidation unreasonably when it can in fact advance liquidation, for which the shareholders applying for compulsory liquidation should bear the burden of proof. If the liquidation committee has actually carried out the liquidation work, or the reason why the liquidation work cannot be promoted is not attributable to the liquidation committee, the application for compulsory liquidation might not be supported by the court.

In addition, in judicial practice, if the deliberation mechanism of the shareholders’ meeting or the liquidation committee fails in the liquidation process, which leads to a deadlock in liquidation, the court may accept the application of shareholders for compulsory liquidation.

Filing shareholder derivative litigation

Whether shareholders can bring representative litigation during liquidation is controversial in theory. Some people think that the shareholder derivative litigation system in article 151 of the Company Law is based on the normal operation of the company. After the company enters the liquidation stage, the company is taken over by the liquidation committee, and the directors and supervisors are no longer entitled to the corresponding functions and powers. The premise and foundation of shareholder derivative litigation no longer exist.

In this regard, the Supreme People’s Court ruled in the case of Zui Gao Fa Min Shen Zi No.663 [2016] that article 151 of the Company Law does not limit the status of the company. In accordance with article 23 of Company Law Interpretation II, during the liquidation of the company, or even when the company has been liquidated and deregistered, qualified shareholders can still file shareholder derivative litigation according to the law.

As per the attitude of the Supreme People’s Court in the above-mentioned case, entering the liquidation procedure itself is not enough to constitute an obstacle for shareholders to file representative litigation. In case of the liquidation committee’s laxity in asserting legal claims in (b) above, minority shareholders can file shareholder derivative litigation.

It should be noted that, in the above-mentioned case and another case, Yue 03 Min Chu No. 2838 [2016], the court further held that although the shareholder derivative litigation can be filed after the company enters the liquidation procedure, the filing of the shareholder derivative litigation should be premised on exhausting internal remedies.

Therefore, if minority shareholders intend to file a shareholder derivative litigation, it is recommended to request the liquidation committee to act first. If the liquidation committee disagrees, it is recommended to request the shareholders’ meeting to make a decision on litigation, or change the members of the liquidation committee.

After the above-mentioned internal remedial measures are put forward, if the majority shareholders or liquidation committee are still lax in asserting legal claims, then the minority shareholders may consider filing shareholder derivative litigation.

Shareholders directly bring lawsuits for damaging shareholders’ interest

If under (b) and (c), the actions of majority shareholders or members of the liquidation committee directly harm the interest of shareholders, rather than the interest of the company (such as delaying the distribution of remaining assets that should be allocated to a certain shareholder, infringing shareholders’ participation in liquidation procedures and their right to be informed, etc.), shareholders may bring lawsuits against majority shareholders or members of the liquidation committee in accordance with articles 20 or 152 of the Company Law.

In summary

To sum up, in existing legal and judicial practice, for the protection of minority shareholders in the liquidation procedure, at least three remedial measures are provided: applying for compulsory liquidation; filing shareholder derivative litigation; and litigation against damaging shareholders’ interests. The three approaches differ significantly in terms of levels of protection, required time and degrees of support, and may be mutually exclusive in some cases.

In case of such situations, it is suggested that the parties concerned take action under the guidance of experienced professional lawyers to effectively safeguard their legitimate rights and interests.

Xu Bangwei and Lin Xiaolu are partners at Jingtian & Gongcheng

Xu Bangwei Lin Xiaolu Jingtian & Gongcheng liquidations

Jingtian & Gongcheng
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