Shareholders typically use three tools of private ordering to shape corporate governance: the articles of association; shareholders’ resolutions (or decisions); and shareholders’ agreements. The first two are expressly recognised by the Company Law, while a shareholders’ agreement is, formally, a contract allocating rights and obligations among shareholders, but often extends into the realm of corporate governance. Its privacy and convenience have made it widely used in practice.
However, the legitimacy and limits of shareholders’ agreements as governance instrument have long been questioned. Critics argue that using them as a governance tool is not a statutory mode, but rather a form of “shadow governance” (or “private governance”), which may lead to agreements supplanting corporate governance structures and even overriding shareholders’ resolutions.
Against this backdrop, the Supreme People’s Court (SPC) is drafting judicial interpretations for the new Company Law to clarify the rules and define the enforceability boundaries of shareholders’ agreements. This article explains the key rules and boundaries of their enforceability.
Prior cases
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In the 2017 civil retrial case No.172, the SPC held that the document, although labelled an “agreement”, was signed by the company and all shareholders, and dealt with matters that the law requires to be recorded in the articles. In substance, it amounted to a specific explanation of the articles, and therefore carried authority second only to them. A company resolution adopted in breach of that agreement was, accordingly, revocable.
In the 2018 civil final case No.209, the SPC stressed that the company and its shareholders are separate legal subjects; shareholders’ intent does not automatically translate into corporate intent.
In principle, a shareholders’ agreement binds only the shareholders who sign it, and by default does not bind the company. In that case, however, as all shareholders had unanimously approved the agreement, the SPC inferred that it could be treated as the company’s own expression of intent – and therefore binding on the company. Taken together, past decisions point to a baseline: shareholders’ agreements sit primarily within contract law and bind only their signatories. Unanimous consent can in some circumstances extend their effect to the company, and under specific conditions may bring their practical force close to that of the articles.
Rule evolution
As the Company Law is revised, more weight is being placed on the integrity of the governance framework, legitimacy of organisational rules, and seriousness of decision-making procedure. The new law strengthens directors’ duties of loyalty and diligence, moves governance in a more board-centred direction, and underscores that company interests do not automatically coincide with shareholder interests.
In that context, the earlier judicial move of treating “unanimity of all shareholders” as equivalent to “the company’s expression of intent” is harder to sustain, and the rules are being rebuilt. Article 12 of the draft Interpretation on Several Issues Concerning the Application of the Company Law sets out three situations in which a shareholders’ agreement binds the company.
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(1) All shareholders unanimously consent in writing to a matter within the purview of the shareholders’ meeting and execute a decision document. For the agreement to take effect against the company, three conditions must be met, namely: that all shareholders agree; matters fall within the shareholders’ meeting’s statutory remit under the new Company Law; and formalities are complete, namely a written instrument signed by all shareholders.
This means the agreement’s effect is confined to what the new Company Law assigns to the shareholders’ meeting. Arrangements that go beyond that scope may be invalid. The draft also does not define what is as a “decision document” – whether shareholders’ meeting resolution, the shareholders’ agreement itself, or a separate written decision issued by shareholders.
That ambiguity may lead to divergent governance practices. It also bears on the protection of shareholders’ right to information, particularly the scope of information rights for incoming shareholders. And because shareholders’ agreements are not required to be filed, they may increase transaction risk for external creditors and investors.
(2) The law expressly provides that unanimous shareholder arrangements bind the company. The new Company Law allows all shareholders to agree directly, with binding effect on the company, on specified matters such as: minimum notice period for shareholders’ meeting notices (article 64); dispensing with supervisors (article 83); distributing profits other than in proportion to capital contributions (article 210); non-pro rata or targeted capital reductions (article 224); and non-pro rata preemptive rights to contribute capital (article 227).
(3) The company approves the agreement by resolution, provided it does not breach mandatory provisions of laws or administrative regulations. Here, the company uses its internal resolution procedures to give a shareholders’ agreement governance effect. But the draft does not specify which body must pass the resolution – whether shareholders’ meeting, board of directors, or supervisory body – nor whether any special voting threshold is required.
Read in context, matters that fall within the board’s or supervisory body’s powers should be confirmed by the relevant corporate body, rather than automatically by a shareholders’ meeting resolution. Otherwise, distortions in the allocation of authority may persist, cutting across “red lines” between the shareholders’ meeting and the board.
Logic and challenges
The SPC’s logic is clear: even unanimous shareholder consent does not by itself make a shareholders’ agreement effective against the company. It still needs to be channelled through corporate governance procedures, and remains subject to the new Company Law’s overarching framework on governance structure and allocation of powers.
Put simply, “unanimity” does not automatically become a “governance rule”. Even so, the draft now released for public consultation remains imprecise in how it fits with the broader system. It does not fully resolve the tension between contract law and organisational law, and may open fresh disputes in application.
Questions include what happens to the agreement’s effect, and how information rights are protected, once new shareholders enter? How is the validity of resolutions adopted on the basis of an agreement assessed if the agreement is denied effect? And does the external counterparties’ duty of care expand to include reviewing shareholders’ agreements?
The implication is that, even with rebuilt rules, making shareholders’ agreements work safely as governance instruments still requires professional assessment and careful execution to avoid unnecessary risk and dispute.
Jiang Xuan is a partner and He Lingyu is an associate at Zhong Lun Law Firm
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E-mail: jiangxuan@zhonglun.com | helingyu@zhonglun.com
