Shareholders bear limited liability to the extent of their contributions – a fundamental attribute of a limited company. In reality, the primary purpose of shareholder investment is to gain profits. The majority shareholder occasionally violates the principle of one share with one vote, and the principle of preventing the abuse of shareholder rights, crowding out and squeezing minority shareholders. This often results in companies withholding profits and infringing on the profit distribution rights of minority shareholders. If minority shareholders cannot gain profits from their investments and their rights are not effectively protected, the market loses its co-operative foundation and capital loses its value, ultimately damaging the entire business environment.
Managing Partner
Ronly & Tenwen Partners
Tel: +86 136 0192 1861
E-mail: pandc@rtlawyer.com.cn
Based on this, both the Company Law and the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (IV) provide clear regulations on the exercise of litigation rights by minority shareholders concerning undistributed profits. Specifically, a shareholders’ meeting resolution serves as conclusive evidence of the abuse of shareholder rights by major shareholders. But, in judicial practice, when deadlock occurs in the distribution of the surplus, how can the minority shareholders reach a de facto resolution at the shareholders’ meeting? How do they prove the majority shareholder has abused their rights? The author discusses these questions below.
Minority shareholders bear the burden of proof. According to the general principles of civil law and the rule that “the burden of proof lies with the party asserting a proposition”, the minority shareholder must bear the burden of proof in filing a claim for the distribution of a corporate surplus. This means they must provide evidence either of a shareholders’ meeting resolution for surplus distribution, or of the abuse of shareholder rights by majority shareholders. However, minority shareholders often find themselves in a disadvantaged position within a company, making it challenging for them to gather such evidence independently. Consequently, they often require the support of third-party expertise and strategic legal manoeuvres to navigate these complexities.
Associate
Ronly & Tenwen Partners
Tel: +86 136 5832 5130
E-mail: shuizy@rtlawyer.com.cn
Substantially proving the existence of a shareholders’ meeting resolution is crucial. If minority shareholders are actively involved in the company’s operations, gathering evidence for initiating a surplus distribution action is relatively straightforward. However, if they aren’t directly involved and the majority shareholder refuses to convene a shareholders’ meeting for surplus distribution, proving the existence of such a resolution becomes crucial.
In legal proceedings, although minority shareholders may not be able to pass a formal resolution for profit distribution, they can obtain alternative written evidence. In a recent case concerning surplus distribution, the Sichuan Provincial High Court ruled that documents such as the Investor Income Inventory and Shareholders’ Bill, unanimously signed by shareholders, hold the same weight as a shareholders’ meeting resolution as per the Company Law. These documents outline specific plans for income distribution, effectively satisfying the requirement for a valid resolution. This highlights that a formal shareholders’ meeting resolution isn’t always necessary; unanimous agreement among shareholders suffices to validate a distribution plan.
A formal resolution of a shareholders’ meeting is not necessary, as long as the shareholders unanimously decide to distribute profits. Therefore, the court rendered a final judgment in favour of the shareholders’ request for surplus distribution and held that the company should carry out the distribution.
Indirectly proving the majority shareholder’s abuse of shareholder rights in violation of the law. The author has handled a case concerning surplus distribution of a real estate company. Although there were project development and sales during the operation of the company, its controlling shareholder had been transferring profits through connected transactions, therefore failing to distribute profits to minority shareholders. In this case, the fact of “abuse of shareholder rights in violation of the law” encompasses the majority shareholder concealing or transferring profits through connected transactions. This legal fa?ade masks the unlawful transfer of company profits.
Given the company’s nature, the author scrutinised its business scope and projects, ultimately identifying a problematic project. Through the engagement of a third-party accounting firm to conduct a special audit, the true income and related matters of the project were unveiled. Thus, we could find out whether the controlling shareholder had encroached on project assets, harming the rights of other shareholders.
Based on the final audit report issued by the accounting firm, we determined that the controlling shareholder transferred profits to affiliated companies by inflating construction costs, misappropriated assets without compensation, carried forward greater revenue from sales, misappropriated the company’s operating profits, and damaged the rights and interests of other shareholders.
Admittedly, the audit report was not jointly commissioned by all shareholders, which meant the above evidence failed to meet the high standard of proof required by law. However, through the audit report, it was not difficult to see that the controlling shareholder did abuse the rights of shareholders in violation of the law during the company’s operation. Ultimately, we requested the court to initiate a judicial audit procedure and resolved the dispute by producing evidence approved by all parties.
As the German philosopher Leibniz said: “There are no two leaves in the world that are exactly the same”: each case has its own facts and unique focus. Determining the most effective method to safeguard the rights of minority shareholders requires analysis based on the fundamental facts of each case. Only by clarifying the corresponding disputes based on the facts of each case can the rights of minority shareholders be better safeguarded, ensuring they truly enjoy the shareholder rights conferred by the Company Law and the company’s articles of association.
Pan Dingchun is a managing partner at Ronly & Tenwen Partners. He can be contacted at +86 136 0192 1861 or by e-mail at pandc@rtlawyer.com.cn
Shui Zhenyu is an associate at Ronly & Tenwen Partners. He can be contacted at +86 136 5832 5130or by e-mail at shuizy@rtlawyer.com.cn
