Point of View | Litigation Practice of Corporate Deadlock

Published:

2023-04-25

Corporate autonomy is a basic principle in modern commercial conduct, and on the premise that a company has a sound internal governance and organizational structure, the judiciary usually respects the rules of autonomy of each company and tries to avoid judicial intervention. However, when the internal governance of the company fails, there are contradictions that are difficult to reach agreement among shareholders, it is difficult for the company to form resolutions necessary for operation, the company's business development is restricted, and the company's employees and partners will also be affected by the impact, then judicial intervention will become an effective firewall. The Identification Standard of 1. Company Deadlock Article 182 of the the People's Republic of China Company Law: If serious difficulties occur in the operation and management of the company, and the continued existence of the company will cause significant losses to the interests of shareholders, and it cannot be resolved through other means, shareholders holding more than 10% of the voting rights of all shareholders of the company may request The people's court dissolves the company. Article 1 of the (II) of the Supreme People's Court on Several Issues Concerning the Use of the the People's Republic of China Company Law lists four situations of corporate deadlock: (I) the company is unable to hold a shareholders' meeting or a shareholders' meeting for more than two years, and the company has serious difficulties in operation and management; (II) shareholders fail to reach the proportion stipulated in the law or the articles of association, and no effective resolution can be made at the shareholders' meeting or shareholders' meeting for more than two years, and serious difficulties occur in the management of the company; (III) there is a long-term conflict between the directors of the company, which cannot be resolved through the shareholders' meeting or the general meeting of shareholders, and serious difficulties arise in the operation and management of the company; (IV) other serious difficulties occur in the operation and management of the company, the continued existence of the company will cause significant losses to the interests of shareholders. Through the above criteria, it can be seen that serious difficulties in the company's operation and management and significant losses to the interests of shareholders are not clear criteria for judgment, and other ways that cannot be solved through other means are not listed and summarized, and in practice, they rely more on the freedom of judges and social experience. Thus, often in practice, judicial judgment gives way to commercial judgment, avoiding unnecessary interference of judicial power with corporate autonomy. The Preposition Principle of 2. Judicial Intervention As mentioned earlier, the judicial power needs to respect the principle of corporate autonomy, so there are necessary preconditions for the settlement of corporate impasse through litigation. Internal autonomy is no longer possible within (I) companies. Through the guidance case of the Supreme People's Court, it can be seen that if the operation of internal governance institutions such as the board of directors and shareholders' meeting encounters serious obstacles and cannot make effective resolutions on any matter, then the company will not be able to operate normally and the interests of the company and shareholders will be seriously damaged. In these circumstances, judicial intervention becomes a necessary means. The claims of (II) shareholders have a legitimate purpose. The shareholder's application for dissolution of the company must have a legitimate purpose, need to focus on the nature of the causes of the company's deadlock, if there is a shareholder's malicious threat to other shareholders or through the dissolution of the company to benefit from the behavior, there are no conditions for dissolution of the company. It should be noted that if the shareholders are at fault for the formation of the company deadlock, the author believes that their fault can be resolved in a separate case, and the shareholders who are at fault can still file a lawsuit for the dissolution of the company. (III) through equity transfer, capital reduction and other means can not solve the deadlock According to Article 5 of the (II) Provisions of the Supreme People's Court on Several Issues Concerning the Use of the the People's Republic of China Company Law, the people's court shall pay attention to mediation in the trial of litigation cases involving the dissolution of a company. If the parties agree through consultation that the company or shareholders shall purchase shares, or make the company survive by means of capital reduction, etc., and does not violate the mandatory provisions of laws and administrative regulations, the people's court shall support it. If the parties cannot make the company survive by consensus, the people's court shall make a judgment in a timely manner. According to the current judicial practice, on the premise of respecting the autonomy of the company, if the company can or has the conditions to resolve the contradictions of shareholders through other means such as capital reduction, equity transfer, the company's repurchase of shareholders' equity, then the judicial power needs to give way to the autonomy, and the dissolution of the company can only be used as the last way to resolve the deadlock of the company. Practical Problems of 3. Dissolution of the Company (I) the inevitability of mediation before or during litigation According to Article 5 of the (II) of the Supreme People's Court on Certain Issues Concerning the Use of the the People's Republic of China Company Law, mediation has become a necessary link in the lawsuit for the dissolution of the company, which also reflects that judicial intervention should avoid interfering with the autonomy of the company as far as possible. In judicial practice, the court will guide shareholders to re-negotiate the balance of interests through mediation to correct the cause of the deadlock in the company's operations. It is particularly important to note that Article 7 of the Supreme People's Court's Provisions on Several Issues Concerning Civil Mediation Work of the People's Courts clearly states that if the content of the mediation agreement exceeds the plaintiff's request, the people's court may grant permission. Therefore, in the mediation process, shareholders can resolve the causes of corporate deadlock by various means, such as equity transfer, company capital reduction, revocation of corporate resolutions, and exercise of the right to know. If the (II) insists on dissolving the company, it needs to maximize the burden of proof. According to the aforementioned laws and regulations, the dissolution of a company needs to prove to the greatest extent possible that the company has serious difficulties, I .e. there is no internal remedy, and that it cannot be resolved through other means, I .e. there is no external solution. In the internal relief of the company, the shareholders who propose to dissolve the company should try their best to prove that the company has lost the ability to operate or the decision-making organ does not have the ability to make decisions and cannot form effective resolutions, in particular, it is necessary to collect evidence that internal systems, including the articles of association, cannot solve existing problems, evidence that the structure of internal management cannot solve the deadlock, evidence that the company cannot hold a board of directors or shareholders' meeting, and evidence that the meeting held by the company's resolution body is too divergent to form an effective resolution. In the external relief of the company, the shareholders who propose to dissolve the company also need to prove that there is no possibility of execution through capital reduction, transfer of shares to a third party, and repurchase of shares by the company. At this time, special attention needs to be paid to the protection of the pre-emptive rights of other shareholders of the company, the impact of capital reduction on the company's creditors, and the determination of the transfer price of the proposed transfer of shares to avoid harming the interests of others. 4. Class Case Reference Case 1: The Supreme People's Court Jilin Financial Asset Management Co., Ltd. and Hongyuan Group Co., Ltd. Dissolution Dispute [(2019) Supreme Fa Min Shen No. 1474] held that, first of all, as of December 31, 2016, the financial management company's external The loan problem has not been resolved. As the operating funds of the financial management company were unilaterally changed by Hongyun Group Company as loan lending and could not be recovered for a long time, the main business of the company's bulk acquisition and disposal of non-performing assets could not be carried out normally, and the purpose of the establishment of the company was defeated, and the company's operation was seriously difficult. Secondly, from the perspective of the operation of the company's management mechanism. After the financial management company was established on February 28, 2015, except for the board of directors held on April 27, 2015, it has never held an annual meeting of shareholders and a regular meeting of the board of directors in accordance with the company's articles of association. Since then, until the financial holding company filed a lawsuit in October 2017, the financial management company failed to hold a shareholders' meeting and the board of directors to solve the existing problems when there were conflicts between shareholders and serious difficulties in the company's operation. After filing the lawsuit in this case, although the financial management company held the board of directors and the shareholders' meeting in November 2017, the number of directors attending did not meet the conditions for holding the board of directors stipulated in the articles of association, and the shareholders' meeting was only attended by Hongyun Group Company unilaterally. The legality of the shareholders' meeting and the convening procedure of the board of directors and the validity of the resolution could not be recognized, and the shareholders had gone to court, the shareholders' meeting and the board of directors mechanism can no longer function properly. In summary, the 1. court of second instance ruled that the dissolution of the financial management company was not improper in law and reason. Case 2 The Supreme People's Court held in the case of Dong Zhanqin and Changchun Northeast Asia Logistics Co., Ltd.'s dissolution dispute [(2017) Supreme Law Minshen No. 2148] that to judge whether the company's operation and management has serious difficulties, it should conduct a comprehensive analysis from the operation status of the company's organization, focusing on whether there are serious internal obstacles in the company's operation and management, and whether the shareholders meeting or the board of directors is in a stalemate due to the intensification, the shareholders of one party cannot effectively participate in the operation and management of the company. In this case, Huiguan Company proposed to amend the company's articles of association three times, all of which were rejected by Dong Zhanqin. Since February 3, 2015, Northeast Asia Company has not held a shareholders meeting for two years, and the shareholders meeting mechanism has failed. In terms of daily operation, the candidates appointed by Huiguan Company as vice chairman, general manager and deputy general manager in recommend were rejected by Northeast Asia Company on the grounds that they did not reach the proportion of 3/5 stipulated in the articles of association. After the conflict, the company tried to change the company's decision-making mechanism by amending the articles of association, transferring equity to Dong Zhanqin and other ways to resolve the company's deadlock, but failed. The court of first instance and the court of second instance also failed to organize mediation. In summary, the failure of the decision-making management mechanism of the Northeast Asian company, the continued existence of the company will inevitably harm the major interests of the company, and can not solve the company deadlock through other means, the conditions of the company's insistence on the dissolution of the Northeast Asian company has been achieved. Case 3 The Supreme People's Court held in the dispute over the dissolution of Ningxia Yongri Elevator Marketing Service Co., Ltd. and Zhao Lili Company [(2017) Supreme Fa Min Shen No. 3364] that at present, it is difficult for the shareholders of Yongri Company to form a valid vote and manage the company by forming a resolution of the shareholders. The original judgment found that there were serious difficulties in the operation and management of the company, and that the continued existence of the company would cause significant losses to the interests of its shareholders. In the original trial, the case was mediated by the court many times, but because Yongri Company was unwilling to disclose the company's financial and operating conditions, the two shareholders did not agree to entrust a third party to evaluate the company's assets, and the equity transfer price could not be determined. Although Yongri proposed a mediation plan, it was only a unilateral proposal, and the parties have never been able to reach an agreement on a solution to maintain Yongri's survival, such as equity transfer, company repurchase or capital reduction. 1. the judgment of the second instance found that the serious difficulties in the operation and management of the company could not be solved through other means, it was not improper to dissolve Yongri company.

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