SPC Issues New Draft Judicial Interpretation on Company Law

On 12 April 2016, the Supreme People’s Court (“SPC”) circulated for public comment the Provisions of the Supreme People’s Court on Certain Issues concerning the Application of the Company Law of the People’s Republic of China (IV) (“Draft for Public Comment”). The draft would be the SPC’s fourth judicial interpretation of the Company law of the People’s Republic of China 2013 (“2013 Company Law”) and its first since the law was significantly revised in 2013. The draft can be viewed as an extension of a recent legislative trend toward protecting minority shareholders, consumers, employees and other vulnerable parties from parties such as majority shareholders that otherwise may exploit their dominant commercial position.

The draft interpretation is arranged by topic into five sets of articles that address, respectively:

  • the validity of resolutions adopted by a company’s governing body, that is, the shareholders’ meeting, general assembly or board of directors;
  • a shareholder’s “right to know”, that is, the rights of shareholders to inspect and copy corporate documents and materials;
  • certain procedures for enforcing a shareholder’s right to claim a distribution of profit;
  • the enforcement of pre-emptive rights, that is, a shareholder’s right of first refusal over an equity interest offered for sale by another shareholder to a third party; and
  • certain procedural issues related to derivative suits.

Comments on the draft judicial interpretation may be provided until 13 May 2016.

Market Reaction

Sherry Yin, partner, Morrison & Foerster, Beijing

“The impact of the draft interpretation depends upon the corporate form and ownership structure of a company. It does not appear that the draft would apply to a China-registered partnership, including a foreign-invested partnership, a non-legal person Sino-foreign cooperative joint venture or the shareholders of an offshore vehicle that holds a wholly foreign-owned enterprise. In addition, the impact would differ depending upon whether a shareholder holds a minority or majority stake. In particular, the provisions regarding the shareholders’ right to know and right to profit distribution would largely protect minority shareholders in practice. It is worth noting that the draft appears to provide more freedom to the shareholders of a LLC and a company limited by shares to reach their own agreement in the articles of association of a company, especially those regarding pre-emptive rights while the Company Law only provides certain principles.”

Action Items

Upon confirming that the draft would apply, General Counsel should consider the following actions:

  • compare the provisions in the draft, the 2013 Company Law and other relevant rules with the relevant provisions in the company’s articles of association (and joint venture contract, if any) to ensure that the sections on corporate governance, finance and accounting, profit distribution and share transfers are in compliance;
  • identify the provisions in the draft and the 2013 Company Law that permit the parties to include contrary provisions, as well as the provisions in these rules that expressly prohibit the inclusion of contrary provisions, and revise the company’s constitutional documents where permitted by law and commercial considerations;
  • confirm that the company keeps adequate corporate records, and ensure that detailed meeting minutes are recorded and signed by all shareholders and that the client keeps chopped originals of meeting minutes and resolutions in its sole possession; and
  • prepare to exploit potential opportunities to remedy abuses by majority shareholders, for example by consulting local litigation counsel and reviewing available evidence.