The subject of the request for judicial dissolution is the shareholders who hold more than 10% of the voting rights of all shareholders of the company. The purpose of the legislation is to limit the proportion of equity or shares in order to prevent malicious litigation. It should be noted that the law here provides for "voting rights". In the case of a joint stock company, Article 103 of the Company Law provides that each share held by a shareholder has one vote. However, in the case of limited liability companies, Article 42 of the Company Law provides for the exercise of voting rights in principle in proportion to the capital contribution of shareholders, but exceptions may be made in the articles of association. Therefore, when the shareholders of a limited liability company file for judicial dissolution, the articles of association are essential. Article 1 of the (II) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law (hereinafter referred to as "Judicial Interpretation II of the Company Law") further interprets Article 182 of the Company Law in accordance with the spirit of legislation. It is clear that "holding" can include "individual holding" and "total holding", and shareholders who hold more than 10% of the voting rights in total can become the subject of judicial dissolution.

In practice, the main disputes about the qualification of the subject are as follows:

1. Whether the shareholders who have not made the full capital contribution have the main qualification.

In the dispute over dissolution of Shaanxi Boxin Sports and Culture Communication Co., Ltd. and Chen Long and other companies [Case No.:(2021) Supreme Fa Min Shen No. 6453], the Supreme People's Court held that "after investigation, the fact that Chen Long holds 49% of Boxin's shares and has paid part of the capital contribution has been ascertained by the 1.'s second-instance judgment according to the company's articles of association, industrial and commercial registration data and the effective judgment in another case. Moreover, according to the provisions of Article 16 [Note 6] of the (III) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law (hereinafter referred to as the Judicial Interpretation of the Company Law III), shareholders are due to failure to perform or fail to fully perform The rights of shareholders restricted by the obligation of capital contribution do not include their right to file a lawsuit for the dissolution of the company." Article 16 of the Judicial Interpretation III of the Company Law stipulates that if shareholders fail to fulfill their capital contribution obligations, the company may, in accordance with the articles of association or the resolution of the shareholders' meeting, make corresponding reasonable restrictions on the rights of shareholders such as the right to claim profit distribution, the right to subscribe for new shares, and the right to claim the distribution of surplus property. Whether this includes voting rights is worth exploring. Equity can be divided into self-interest and co-interest rights based on the purpose of exercising shareholder rights or the content of the rights. The former refers to the right of shareholders to obtain property benefits, while the latter refers to the right of shareholders to participate in the management of the company's major affairs. The right to request profit distribution, the right to subscribe for new shares, and the right to request the distribution of surplus property are all self-interest rights, and it can be presumed that the shareholders' rights referred to in Article 16 of the Judicial Interpretation III of the Company Law only cover the scope of self-interest rights. [Note 7] In the context of the subscription system, shareholders are eligible for judicial dissolution as long as the percentage of voting rights corresponding to their individual or aggregate subscriptions exceeds 10 per cent.

2. Whether the anonymous shareholder has the main qualification.

Whether the actual contributor, I .e. the anonymous shareholder, belongs to the subject of judicial dissolution, there is a view that the connotation of "shareholder" refers to the shareholders registered in the register of shareholders, the anonymous shareholder does not have the subject qualification of judicial dissolution. For example, in the dispute over dissolution between Shen Fangfang, Ye Weiguang and Shenzhen Hongmei Hardware and Plastic Co., Ltd. [Case No.:(2016) Yue 03 Min Zhong No. 7868], Shenzhen Intermediate People's Court held that "investment rights and interests are not equivalent to" shareholders' rights and interests ". Shen Fangfang and Ye Weiguang cannot naturally enjoy the status of shareholders and exercise their rights to initiate judicial dissolution. As for the confirmation of the identity of the shareholders of Shen Fenfang and Ye Weiguang, it should be resolved by other legal means." Another view is that, for the dissolution of the company, the dispute mainly occurs between the company and its internal shareholders, which is an internal dispute, and the anonymous funder should be the appropriate subject of litigation. The author believes that judicial dissolution not only involves the company and internal shareholders, but also affects the rights and interests of external third parties such as creditors and counterparties, and should follow the commercial appearance doctrine to protect the trust interests of external third parties to the company's public registration. The actual investor can only obtain the subject qualification of judicial dissolution after the name-showing procedure.

3. Whether the fault shareholder has the main qualification.

Some people think that the shareholders who are mainly responsible for the deadlock of the company can easily dissolve the company through litigation, which is tantamount to "secondary damage" to other innocent shareholders, and does not meet the new requirements of judicial development. Therefore, the shareholders who are mainly responsible for the deadlock of the company and the malicious shareholders should not have the right to request the dissolution of the company according to law. The author believes that, according to the interpretation of the text, the main point of the court's review of judicial dissolution is whether there is a deadlock in the company and whether it meets the conditions for dissolution of the company stipulated by law, as to which party caused the deadlock in the company, it is not the substantive element of the court's review. In the dispute over dissolution of Shifeng Company v. Fujun Company [Case No.:(2011) Min Si Zhong Zi No. 29], the Supreme People's Court held that "whether the company can be dissolved depends on whether the company has a deadlock and whether it meets the substantive conditions stipulated in Article 183 of the Company Law, and does not depend on the historical reasons and responsibilities of all parties involved in the complicated company deadlock. Therefore, even if one shareholder is at fault for the company deadlock, it still has the right to request the dissolution of the company in accordance with the provisions of this article."

Article 1 of the Judicial Interpretation II of the Company Law clarifies the typical situation of corporate deadlock by enumerating and covering the bottom, and for the judiciary, the provision has the dual legal status of the "external threshold" of the preliminary judgment in the acceptance and examination of such cases and the substantive standard used to justify the judgment. Article 1 of the judicial interpretation of the company law lists three situations of company deadlock: first, the company is unable to hold a shareholders' meeting or a general meeting for more than two years, and the company has serious difficulties in operation and management; second, the shareholders can not reach the proportion stipulated in the legal or articles of association when voting, and can not make effective resolutions of the shareholders' meeting or general meeting for more than two years, The company has serious difficulties in operation and management; third, the directors of the company have a long-term conflict and cannot be resolved through the shareholders' meeting or the general meeting of shareholders, and the company has serious difficulties in management.

1. Analysis of "corporate deadlock"

According to the circumstances listed in Article 1 of the Judicial Interpretation II of the Company Law, corporate deadlock can be divided into shareholder (general) meeting deadlock and board deadlock. As a legal entity, the actual operation of the company mainly relies on institutions such as the shareholders' (large) meeting or the board of directors, and if the shareholders' (large) meeting or the board of directors is paralyzed, the management of the company will often encounter serious difficulties. The company deadlock will gradually exhaust the interests of the company and shareholders, in the case of internal can not make a dissolution resolution, shareholders can only seek the help of judicial organs.

(1) Shareholder (general) meeting deadlock

The deadlock of the shareholders' (general) meeting includes two situations in which the shareholders' (general) meeting cannot be held for more than two years and the effective resolution cannot be made for more than two years. "More than two years" is a continuous state. If a shareholder (general) meeting is held or a valid resolution is made during this period, the period will be interrupted.

First, it is impossible to hold a shareholders' (general) meeting for more than two years. "Unable" should be an objective state of fact. Shareholders who do not attempt to convene a shareholders' meeting or general meeting before suing may be found by the court to be negligent in fulfilling their rights and failing to try other means to resolve the corporate impasse. For example, in the dispute over dissolution of Yang Bo and Jilin Longshuo Real Estate Development Co., Ltd. [Case No.:(2021) Supreme Law Minshen No. 1650], the Supreme People's Court held that "in this case, the main reason for Yang Bo's request to dissolve Longshuo Company is the intensification of conflicts among shareholders, and the shareholders' meeting cannot be effectively convened and voted for a long time, resulting in the normal operation of the corporate governance structure. However, the intensification of shareholder conflicts is not the legal cause of the company's dissolution, the company did not hold a shareholders' meeting for a variety of reasons, did not hold a shareholders' meeting does not mean that the shareholders' meeting can not be held. Under the circumstances that Yang Bo did not provide evidence to prove that he had made a request to hold a shareholders' meeting, nor did he provide evidence to prove that the company was in serious difficulties in its operation, his request for dissolution of the company lacked factual and legal basis."

Second, no effective resolution can be made for more than two years. There are mainly the following common situations: in the first category, the shareholding ratio between the shareholders of the two parties is 50% respectively, and the two sides are deadlocked and unable to reach an agreement, such as Lin fangqing v. Changshu kailai industrial co., ltd. and Dai Xiaoming company dissolution dispute [case no:(2012) min Shen zi no 336]. In the second category, the company's equity is more dispersed, the shareholders are divided into several parties without a majority opinion, resulting in the voting can not reach the statutory or articles of association of the company.

(2) Board deadlock

The board of directors and the shareholders' (general) meeting will have internal contradictions that will lead to the failure of normal operation. However, since the board of directors is elected and replaced by the shareholders' (general) meeting, some contradictions of the board of directors can be directly resolved through the shareholders' (general) meeting, for example, the shareholders' (general) meeting can replace the conflicting directors, change the number of the board of directors from an even number to an odd number, etc. Only when the shareholders (general meeting) cannot reconcile the conflicts of the board of directors, and the company's operation and management are in serious difficulties, can they request the court to dissolve the company.

2. Understanding of "serious difficulties in the management of the company"

At present, the mainstream judicial view of the understanding of "serious difficulties in the management of the company" focuses on the analysis of whether the operating mechanism of corporate governance is seriously malfunctioning from the perspective of human nature, and the simple operating difficulties of the company do not belong to the fundamental obstacles to the operation of the company structure. Commercial risks such as company losses are not grounds for shareholders to initiate judicial dissolution. The person in charge of the Second Civil Division of the Supreme People's Court pointed out in response to a reporter's question on the "(II) on Several Issues Concerning the Application of the the People's Republic of China Company Law" that "if the shareholder, when filing a lawsuit for dissolution of the company, the reason for the lawsuit is expressed as serious operating losses of the company, or the rights and interests of its shareholders have been infringed, or the company has not been liquidated after its business license has been revoked, etc., because it does not belong to the reasons stipulated in the company law, it should be rejected in the process of acceptance."

In other words, even if the company is still profitable, as long as there are fundamental obstacles to the corporate governance structure, it is a serious difficulty in the management of the company. For example, in the case of Lin Fangqing v. Changshu Kailai Industrial Co., Ltd. and Dai Xiaoming Company Dissolution Dispute [Case No.:(2012) Minshen Zi No. 336], the Supreme People's Court held that "to judge whether there are serious difficulties in the operation and management of the company, a comprehensive analysis should be made on the operation status of the company's shareholders' meeting, board of directors or executive directors and board of supervisors or supervisors. The focus of" serious difficulties in the operation and management of the company "lies in the serious internal obstacles in the management of the company, such as the failure of the mechanism of the shareholders' meeting and the inability to make decisions on the operation and management of the company. It should not be one-sidedly understood as the company's lack of funds, serious losses and other operational difficulties."

3. The circumstances listed in Article 1 of the Judicial Interpretation II of the Company Law are actually not conducive to the protection of the interests of small and medium-sized shareholders.

One of the legal bases of the judicial dissolution system is the theory of shareholder's duty of good faith. Usually refers to the obligations of the company's senior management to the company, but as the rights of small and medium-sized shareholders are impaired by the actions of controlling shareholders, the law also extends the duty of good faith to controlling shareholders. The duty of good faith requires that controlling shareholders cannot abuse the principle of capital majority to bully small and medium-sized shareholders and harm the interests of the company. However, the circumstances listed in Article 1 of the Judicial Interpretation II of the Company Law are actually not conducive to protecting the interests of small and medium shareholders.

(1) "It is not possible to convene a shareholders' meeting or general meeting".

The Supreme People's Court held that "the inability to convene means that it should be convened but cannot be convened, because China's company law has no special requirements on the number of shareholders and the number of shares held at the shareholders' (general) meeting, and this inability to convene is mainly manifested in two situations, such as no one to convene or no one to attend the meeting after the convening". In my opinion, there is a logical contradiction between the aforementioned "should be convened but not convened" and "no one convened" and "no shareholder attended the meeting after convening. According to the provisions of Articles 39 and 40 as well as Articles 100 and 101 of the Company Law, shareholders who individually or collectively hold more than 10% of the voting rights have the right to propose and convene to preside over the shareholders' meeting or general meeting of shareholders. Therefore, shareholders who have the qualification to file a lawsuit for dissolution of the company can convene and preside over the shareholders' meeting or general meeting of shareholders on their own. In the above-mentioned dispute over dissolution of Yang Bo and Jilin Longshuo Real Estate Development Co., Ltd. [Case No.:(2021) Supreme Fa Min Shen No. 1650], the Supreme People's Court held that if shareholders did not try to propose to convene a shareholders' meeting or a shareholders' meeting before filing a lawsuit for dissolution of the company, they could not prove the fact that they "could not" convene, and the court would also consider that they had not tried other internal relief channels. Therefore, shareholders with subject qualification must propose to convene a shareholders' meeting or general meeting before suing. If a shareholder with the qualification of the subject proposes to convene a shareholders' meeting, it is inevitably impossible to have the so-called "no one to convene" or "no shareholder present after the convening", so there is a logical contradiction in the provision.

(2) The situation where "the shareholders are unable to vote in proportion to the statutory or the articles of association".

In practice, it is often the minority shareholders who file a lawsuit for the dissolution of the company, because the majority shareholder can resolve the dispute directly through the resolution of the shareholders' meeting or the general meeting of shareholders, rather than through the dissolution of the company, and the court may not agree to the dissolution of the company by the majority shareholder. For example, in the dissolution dispute between Su Xuesong, Tang Zhaofen and Zhongjun Minrong Sute (Beijing) Energy Science and Technology Research Institute Co., Ltd. [Case No.:(2017) Jing01 Minzong No. 5519], the First Intermediate People's Court of Beijing held that "In this case, Tang Zhaofen holds 70% of the shares of Zhongjun Energy Company. According to the regulations of the articles of association of Zhongjun Energy Company, tang Zhaofen has the right to make effective resolutions on important matters such as the merger, division, dissolution or change of corporate form of Zhongjun Energy Company by convening a shareholders' meeting. Therefore, Zhongjun Energy Company does not meet the conditions for the people's court to order the dissolution of the company. The court of first instance rejects Tang Zhaofen's application accordingly, and it is not improper."

If the shareholders' meeting or general meeting of shareholders is successfully held and the majority shareholder passes a resolution to reject the minority shareholder's proposal, there is no situation where "the shareholders cannot reach the statutory or the proportion stipulated in the articles of association when voting. Although the resolution can be made smoothly, the contradiction between shareholders still exists. There is no way to protect the rights and interests of small and medium-sized shareholders, nor can they obtain relief through judicial dissolution.

(3) The situation where "the directors of the company have a long-term conflict that cannot be resolved through the shareholders' meeting or the general meeting of shareholders"

Many small and medium-sized enterprises do not have a board of directors, but only set up executive directors, which are often held by major shareholders or subjects designated by major shareholders. There is no so-called "long-term conflict of directors". Even if a board of directors is established, if the majority shareholder's shareholding ratio has reached the level of actual control of the shareholders' meeting or the general meeting of shareholders, it is impossible to "cannot be resolved through the shareholders' meeting or the general meeting of shareholders". In this case, the small and medium shareholders cannot file a lawsuit for the dissolution of the company according to this clause.

In summary, according to the company deadlock situation listed in Article 1 of the Judicial Interpretation II of the Company Law, it is more difficult for small and medium shareholders to initiate judicial dissolution on this basis, and the rights and interests of small and medium shareholders cannot be effectively protected. The author believes that in the choice of legal interest protection, legislators are more inclined to protect the interests of external third parties than the interests of small and medium shareholders. On the one hand, as a commercial subject, the company will have many contacts with external third parties in the course of operation, and judicial dissolution is the direct elimination of the company, which may involve the interests of many third parties and affect the safety and stability of commercial activities. On the other hand, small and medium-sized shareholders, as rational economic entities, have a clear understanding of the problems that may arise in the company's business decision-making when they enter the shares, and still choose to enter the shares to indicate that they voluntarily accept the corresponding risks. If small and medium shareholders can force the dissolution of a company that can still operate normally through public power only because of the damage to their interests, it is not in the public interest.

 Introduction to the Author

 

 

 

 

THE LAWYERS

 

Lawyer Bu Bin

 

Lawyer of Shengdian Law Firm, Master of Civil and Commercial Law of the Chinese University of Hong Kong, has many years of legal experience, and has rich theoretical and practical experience in corporate litigation, commercial contracts, financial disputes, corporate compliance, criminal defense and other fields. Large listed financial institutions have provided legal services.