Understanding the magic rings: lawsuits over corporate seals

By Li Tao, Dacheng Law Offices
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Lawsuits for the return of seals are disputes over keeping and ownership of the seals among particular parties like shareholders, directors, supervisors, officers or the company, which arise from holding and using the seals in relation to corporate management and operations. Such disputes occur in many cases, and the legal basis has not been well clarified.

Before 2005, the courts took distinct positions to deal with such cases; some rejected the case for the reason of not being justifiable, while some ruled on them as disputes over shareholders’ interests or infringement on property.

Court opinion

Article 85 of the guiding opinion of the higher people’s court in Shandong province in 2005 stipulates: if shareholders, directors, managers or other people wrongfully possess the seals while the company sues for their return, and for damages, the people’s court shall support it.

李涛 Li Tao 北京大成律师事务所 高级合伙人 Senior Partner Dacheng Law Offices
李涛
Li Tao
北京大成律师事务所
高级合伙人
Senior Partner
Dacheng Law Offices

The higher people’s court in Shanghai in 2006, in its Reply on Several Issues Concerning Hearing Corporate Disputes, provides: regarding how to define the nature of the cases on disputes arising from control of corporate seals, given that corporate seals represent apparently the company’s will externally, such disputes in essence involve internal battles for corporate control, and the cases should be tried by the civil and commercial tribunal on corporate disputes, rather than as general disputes for return of property.

The cause of action for such cases can be defined as infringement of corporate rights and interests. These two high courts raised the mainstream ideas for judicial adjudication, and clarified that the Company Law shall apply.

Legal basis

Regarding lawsuits for the return of corporate seals, the legal basis for their adjudication under the Company Law lies in the Decision on Amendment of Rules on Cause of Action in Civil Cases issued by the Supreme Court on 18 February 2011, in which “disputes on return of corporate seals” are included under “(article 22) disputes related to corporations” as an additional cause of action.

A company in its business operations must at least have a business licence, corporate seal, financial seal, etc., and a company in a special industry must also obtain a charter.

The above-mentioned certainly cover the corporate seals. Although the company has the ownership of the seals, for the convenience of its internal management the seals are usually in the charge of different corporate bodies and staff members, so employees, legal representatives, shareholders, directors and managers could keep and possess them.

In case of a change in the relevant staff members, those who have held the seals may not have such power anymore and should return the seals to the company. If they do not, disputes can arise over return of the seals.

Key points for return of seals

Eligibility. The company applies and the department of security reviews and approves, before the seals are obtained. The seal’s function is to express the company’s will in its external business activities. As mentioned above, the seals are the property of the company and completely owned by the company. Therefore, the party who is eligible to claim for return of the seals, namely the plaintiff, should be the company rather than any others. The defendants are those who wrongfully possess the seals.

In practice, there are parties with various identities who sue as plaintiffs in such disputes – shareholders, directors, managers, supervisors, or even the authorised keeper of the seals. When they sue in their own names as plaintiffs for return of the seals, the case will be rejected by the court.

The complaint filed by the company with the court should have the company seals affixed to it for the case to be accepted. However, in a case where the seals are not in the control of the company, the company can have its legal representative sign the complaint to file the case.

Such practice has been confirmed as well in the guiding opinions issued by the high courts in Shandong province and Shanghai, and is currently widely applied in courts.

Limited judicial involvement. In disputes over corporate seals, there can only be limited judicial power, rather than unlimited.

According to the current mainstream ideas of the judiciary, only in two situations can courts exercise jurisdiction and have remedial procedures started: when there have been stipulations or resolutions in articles of association, by shareholders’ meetings, general meetings of shareholders, or the board of directors regarding keeping or use of the seals, and these stipulations or resolutions were breached; or when the corporate seals are wrongfully possessed and used without the company’s authorisation.

Autonomy of will

The rationale is that administration of the corporate seals – that is to say who keeps them and how, who uses them and how – needs to be specified in corporate governance and falls within the realm of autonomy of will, while no others have any right to exert influence and interference, and no courts should have power to decide either. Only when the order of management is infringed can judicial power be exercised, to protect legal business operations and interests of the company. This is where the value of the judicial remedy lies.

A magic ring

A seal dispute in itself is not a popular type of dispute. This round object with a diameter of no more than four or five centimetres, and with too small a price to be appraised, is like a magic ring that stirs the company, shareholders, directors, supervisors and officers to ceaseless battles and litigation.

The underlying cause is that the seals involve the actual control of the company, the outcome of which will have direct impact on the future and development of the company. So the resolution of such disputes should be sufficiently understood and carefully conducted.

Li Tao is a senior partner at Dacheng Law Offices

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