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The revised Company Law introduces multiple legal avenues for a shareholder exit, including a share transfer, share repurchase, capital reduction and company dissolution and liquidation. In exceptional cases, shareholders may also exit by invalidating investment actions or revoking company establishment.

Additionally, the new law allows dissenting shareholders to request that the company repurchase their shares in cases of oppression and request the deregistration of inactive or ¡°zombie¡± companies.

Shareholders may seek to exit through enforced share transfers or share cancellations after initiating disputes over company share repurchases due to shareholder oppression. The limited liability company framework in the Company Law is primarily designed around the principles of partnership and the nature of a closed company, which adheres to the majority rule in capital decisions. To safeguard the interests of minority shareholders, the revised Company Law extends the principle prohibiting shareholder abuse of rights, granting minority shareholders the right to exit through dissenting shareholder buybacks when facing oppression.

Article 89(3) of the revised Company Law stipulates: ¡°If a controlling shareholder abuses its rights and severely damages the interests of the company or other shareholders, other shareholders are entitled to request the company to repurchase their shares at a reasonable price.¡±

Article 89(4) further provides: ¡°Shares repurchased by the company under the circumstances specified in paragraphs 1 and 3 of this article must be lawfully transferred or cancelled within six months.¡± This means that when a controlling shareholder engages in oppressive conduct, minority shareholders may sue the company to repurchase their shares. Following the buyback, the company must transfer or cancel the shares within six months, facilitating the shareholder¡¯s exit. The application of this mechanism requires evidence of controlling shareholders¡¯ abuse of rights causing severe harm to the company or other shareholders.

Minority shareholders should initiate disputes over company share repurchases. In such litigation, proving the abuse of rights and the resulting harm to interests is crucial. When necessary, minority shareholders can lay the groundwork for litigation by persistently asserting their shareholder rights and thoroughly organising evidence. This may include filing supplementary lawsuits and employing a ¡°combined strategy¡± to strengthen their case.

According to article 3 of the Interpretation on Several Issues Concerning the Application of Book One General Provisions of the Civil Code, key factors in proving abuse of rights include the target, purpose, timing, method and degree of interest imbalance between the parties.

However, article 89 of the revised Company Law does not clarify whether controlling shareholders include de facto controllers, nor does it specify whether the mechanism applies in extreme cases where the largest shareholder is oppressed by other concerted parties. Additionally, issues such as the determination of abuse, the severity of harm, and the evaluation of a reasonable price require further exploration through judicial interpretation or case practice.

The shareholder oppression mechanism aims to prevent abuse by controlling shareholders and provides minority shareholders with more flexible exit options. It addresses the predicament faced by minority shareholders when shares cannot be transferred, and dissolution or liquidation conditions are unmet. By allowing companies to repurchase shares at a reasonable price and subsequently transfer or cancel them in accordance with the law, the mechanism offers broader solutions to governance deadlocks and optimises resource allocation. Therefore, its application conditions should not be overly stringent.

Another aspect worth monitoring is how the requirement to ¡°lawfully transfer or cancel shares within six months¡± will be adjudicated and enforced, as well as how it aligns with company registration changes.

Shareholders can now exit ¡°zombie¡± companies or streamline subsidiary companies more efficiently through compulsory deregistration. Article 241 of the revised Company Law provides: ¡°If a company¡¯s business licence is revoked, it is ordered to close, or it is dissolved, and no application for deregistration is made to the company registration authority within three years, the authority may issue a public notice via the National Enterprise Credit Information Publicity System (NECIPS). The notice period must not be less than 60 days. If no objections are raised after the notice period, the authority may deregister the company.¡±

This newly introduced rule provides a legal framework for clearing ¡°zombie¡± companies and offers shareholders a new pathway to exit or reduce subsidiary companies. Shareholders can apply to the company registration authority to initiate the public notice procedure for compulsory deregistration. If no objections are raised by the end of the 60-day notice period, the company can be deregistered, enabling shareholders to exit.

On 1 July 2024, alongside the implementation of the new Company Law, Provisions of the State Council on Implementing the Registration Management System for Registered Capital under the Company Law was officially released and came into effect. This regulation provides the following details on compulsory deregistration provisions under the new Company Law: (1) if a company fails to apply for deregistration with the company registration authority within three years after its business licence is revoked, it is ordered to close, or it is dissolved, the registration authority may issue a public notice via NECIPS, with a notice period of no less than 60 days; (2) if objections are raised by relevant authorities, creditors or other interested parties during the notice period, the deregistration process will be terminated; and (3) if no objections are raised by the end of the notice period, the registration authority may proceed with deregistration and make a special annotation in the National Enterprise Credit Information Publicity System.

Compulsory deregistration does not exempt shareholders and liquidation obligors from their responsibilities. If objections are raised during the notice period, the deregistration process will be halted, and the company must address its actual debts and liabilities. According to article 232 of the new Company Law, directors, as liquidation obligors, are required to initiate the liquidation process and fulfil their liquidation duties.

The new Company Law introduces two new pathways for a shareholder exit: the shareholder oppression mechanism and the compulsory deregistration mechanism, both of which hold significant practical value.

Zuo Yuru is a partner and Jing Nanheng is an associate at Zhong Lun Law Firm