J & T Capital Watch | Analysis on the Issue of Shareholder Removal of Limited Liability Company

Published:

2022-11-24

Introduction The removal of shareholders is the most severe punishment for shareholders of all the provisions of the Company Law. Its legislative purpose is to better maintain the orderly operation of the company and protect the trust interests of honest shareholders and the overall interests of the company. For the protection of the human nature of limited liability companies and to prevent the de-listing system from being abused by shareholders, the judicial authorities tend to be more conservative in the judicial practice of shareholder de-listing litigation. As a result, it is difficult to remove shareholders from the list, and differences between shareholders accumulate for a long time, which ultimately harms the vital interests of the company and shareholders, and makes the company fall into a "closed dilemma. 1. Overview Provisions on the Removal of Shareholders in the Judicial Interpretation III of the Company Law of (I) Article 17 of the "(III) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law" stipulates: "If a shareholder of a limited liability company fails to fulfill his capital contribution obligation or withdraws all his capital contribution, he has not paid or returned the capital contribution within a reasonable period of time after being urged to pay or return the capital contribution, the company shall dissolve the shareholder's qualification by resolution of the shareholders' meeting, and the shareholder requests to confirm that the dissolution is invalid, The people's court will not support". That is, if a company wants to remove a shareholder, it needs to meet both substantive and procedural conditions: in terms of substantive conditions, the removed shareholder has failed to fulfill its capital contribution obligations or has withdrawn all its capital contributions. In order to protect the interests of shareholders and the human nature of the company, the Judicial Interpretation III of the Company Law strictly limits the substantive conditions for the removal of shareholders: only shareholders who completely fail to fulfill their capital contribution obligations or withdraw all their capital contributions may become eligible for removal. For shareholders who have contributed but not fully, or who have only withdrawn part of their funds, it can only be considered that the shareholder's contribution is defective. Such shareholders are often limited only to their right to subscribe to new shares, the company's remaining property distribution claims, dividend claims, and liability for breach of contract. Shareholders only need to make up their capital contributions and bear joint and several liability for the company's debts for the part they have not contributed or withdrawn. From the point of view of procedural conditions, the company needs to fulfill the obligation of urging the shareholders to report before dismissing the shareholders. Only after a certain period of time can the shareholders disqualify the shareholders by resolution of the shareholders' meeting if the shareholders have not contributed or returned the withdrawn funds. If the company intends to remove the name of a shareholder and convenes a shareholders' meeting without urging the shareholder, or if the company directly removes the name of a shareholder without convening a shareholders' meeting to make a resolution, the removal of the shareholder cannot be achieved. Process for the removal of (II) shareholders The process of removing shareholders is generally as follows: Sorting out the Judgment Views on the Issue of Shareholder Removal in 2. Judicial Trials The court will not support the delisting lawsuit in which the (I) shareholder has partially contributed or not fully withdrawn. Representative Case:(2015) No.10163 of No.3 Middle School Min (Shang) Zhong Zi, Dispute over Confirmation of Effectiveness of Resolutions between Gu Mou, Zhao Mou and a Company of Beijing Yike In that case, the court held that such severe measures as disqualification of shareholders should only be applied in cases of serious breach of capital contribution obligations, I .e. failure to make capital contributions and withdrawal of all capital contributions, and failure to fully fulfill the capital contribution obligations and withdrawal of part of the capital contribution should not be included. Before the company deletes a shareholder who fails to fulfill its capital contribution obligations or withdraws all capital contributions, it shall give the shareholder the opportunity to make corrections, that is, it shall urge the shareholder to pay or return the capital contribution within a reasonable period of time. Therefore, the resolution of the shareholders' meeting made by a company in Yike did not meet the preconditions for the company to disqualify Zhao as a shareholder. Gu asked for confirmation of the validity of the agreement. The evidence was insufficient and the court did not support it. (II) of Exclusion of Voting Rights from Deleted Shareholders to Participate in Shareholders' Meetings at which They are Disqualified as Shareholders Representative Case 1:(2014) Hu Er Zhong Min Si (Shang) Zhong Zi No. 1261, Dispute over Confirmation of Effectiveness of Resolutions of Wan Mou Company, Song Mou and Hao Mou Company In this case, the court held that the right of shareholders to remove the names of shareholders stipulated in Article 17 of the (III) for Judicial Interpretation of the Company Law is a legal power enjoyed by the company to eliminate the adverse effects of shareholders who fail to perform their obligations on the company and other shareholders, and is not based on the premise and basis of soliciting the meaning of the removed shareholders. In certain circumstances, when a shareholder's resolution to remove the name is made, it will involve the possibility that the removed shareholder may manipulate the voting rights. Therefore, when a shareholder has a special interest in the resolution discussed at the shareholders' meeting, the shareholder may not exercise the right to vote on the shares held by him. In this case, Hao company is a major shareholder holding 99% of the shares of Wan company. Wan company notified Hao company to attend the meeting before the meeting of shareholders, and the agent entrusted by it defended and raised objections at the meeting, thus protecting the rights of the shareholders to be removed. However, as mentioned earlier, when a company is voting on a resolution in dispute, the voting rights corresponding to its shareholding should be excluded. Representative Case 2:(2018) Supreme Law Minzai No. 328, if the shareholders' meeting disqualifies the shareholders who have withdrawn their capital contributions, the required approval ratio must be reached after excluding non-voting shareholders, otherwise the resolution of the shareholders' meeting will not be established. In this case, the Supreme Court held that when calculating the proportion of the shareholders' meeting to disqualify the shareholders who have withdrawn their capital contributions, the shares of non-voting shareholders should be excluded before voting; if it is illegally excluded, the resolution of the shareholders' meeting will not be established. In this case, Li did not participate in the resolution of the shareholders' meeting, nor did he participate in the litigation in this case. The plaintiff did not provide evidence and the court did not find out the fact that Li had withdrawn his capital contribution, and whether Kaifa Company had fulfilled the legal collection and notification procedures. Therefore, the resolution of the shareholders' meeting directly excluded Li's voting rights, lacking factual basis, and the resolution was not established. The articles of association of a (III) company may independently agree on the conditions for the removal of shareholders based on the autonomy of the company. Representative Case 1:(2017) Xiang Min Zai No. 75, Jiang Rong and Hengyang Tian 'an Passenger Transport Development Co., Ltd. Civil Judgment for Retrial of Surplus Distribution Dispute In this case, the court held that my country's "Company Law" and judicial interpretations did not negate the shareholder delisting system of limited liability companies. According to the principle of private law that "permission is permitted without express prohibition by law", the principle of good faith and public order and good customs are not violated. Under the circumstances, based on the autonomy of a limited liability company, the shareholders of the company can make an agreement on the reasons for the termination of shareholder qualification in the company's articles. If a shareholder violates the provisions of the articles of association relating to the termination of the shareholder's qualification and the exhaustion of internal relief procedures cannot be resolved, the shareholders' meeting of a limited liability company, as the highest authority for the shareholder to exercise the rights of the owner, has the right to make a resolution on the termination of the shareholder's qualification in accordance with the legal procedures. (IV) other refereeing views on the removal of shareholders Representative Case:(2017) Supreme Famin Shen No. 1010, Dissolution Dispute between Yinchuan Automatic Packaging Machine Manufacturing Co., Ltd. and Wen Mou and Other Companies In this case, the Supreme People's Court held that the "Company Law" did not clearly stipulate the procedures for removing the company's shareholders. With reference to Article 49, paragraphs 2 and 3 of the "the People's Republic of China Partnership Law", "The resolution to remove the partner shall be written Notify the removed celebrity. The date on which the removed celebrity is notified shall take effect and the removed celebrity shall withdraw from the partnership. If the removed celebrity has any objection, he may, within 30 days from the date of receiving the notice of removal, bring a suit in a people's court. At the same time, if the company urges the shareholders to pay the capital within the time limit, it shall state the consequences of not paying the capital within the time limit. Sorting out the problems related to prosecution in 3. The mode of litigation for the company's removed shareholders can be divided into the following two categories according to the type of litigation: The first mode of litigation, based on the resolution of the shareholders' meeting made by the company, to the court to confirm the validity of the resolution of the shareholders' meeting. Article 17 of the Judicial Interpretation III of the Company Law stipulates that "if a company removes the shareholder's qualification as a shareholder by resolution of the shareholders' meeting, the people's court shall not support the request of the shareholder to confirm that the removal is invalid." This provision is an action to confirm whether the resolution of the shareholders' meeting of the company is defective. In this kind of litigation, the removed shareholder shall be the plaintiff, the company shall be the defendant, and the removed shareholder shall file this lawsuit, requesting to confirm the validity of the resolution of the shareholders' meeting. After accepting the lawsuit, the court shall conduct a substantial review of the company's removal resolution, determine that the company's resolution to dismiss the shareholder violates the law or the articles of association of the company, and then decide whether the company's resolution is effective or not, and finally decide whether to dismiss the litigation mode of dismissing the shareholder. In the second mode of litigation, the company directly requests the court to disqualify the shareholder. This model usually takes the company as the plaintiff and the shareholder to be removed as the defendant, and is an action for removal, because the removal action is a direct disqualification of the shareholder, so the action to confirm the effectiveness of the resolution of the shareholders' meeting is not necessary here, but has been included in the removal action. Such litigation should grasp the following principles: whether it is based on the provisions of the Company Law or the articles of association of the company to dismiss a shareholder, it must be that the shareholder's behavior has caused significant losses to the interests of the company, and only by dismissing the shareholder can the deadlock faced by the company be solved; The act of dismissing a shareholder must be guided by the principles of good faith, fairness and justice, and public order and good customs. Of course, delisting suits can also be merged with other suits, such as suits in which the company demands compensation from the company by the delisted shareholder or compensation from the company by the delisted shareholder, but the specifics should also be considered in terms of whether the merger can improve the efficiency of the lawsuit. Problems after the delisting of 4. shareholders Post-procedure for the removal of (I) shareholders When the company convenes a shareholders' meeting, in addition to removing the shareholders through legal procedures, it may also agree on the follow-up issues of the company's removed shareholders in the resolution. For example, the removed shareholder shall cooperate with the company in the registration of the change of equity, and carry out internal transfer or capital reduction procedures for the shares of the removed shareholder. If the interests of creditors are damaged or the shares of delisted shareholders are transferred due to the resolution of capital reduction, special protective measures for creditors can be added to the interests of creditors in the procedure of delisting shareholders. The delisting of shareholders cannot exempt them from their responsibilities. If the delisted shareholders fail to fulfill their capital contribution obligations, they shall be liable to creditors within the scope of capital contribution. Compensation for the delisting of (II) shareholders At present, the "Company Law" and its judicial interpretations do not clearly stipulate whether compensation is required after the dismissal of shareholders, but most judicial organs generally have reservations about compensation. "Shareholder removal" itself, as a company's punishment for shareholders who infringe on their rights and interests, is usually no longer necessary to require shareholders to pay punitive or compensatory damages to shareholders, unless otherwise provided for in the articles of association. 5. Summary This article is a summary of the relevant thinking caused by a shareholder de-listing litigation case recently handled by our lawyers, and this article is committed to analyzing the current situation of judicial practice and litigation path of shareholder de-listing through specific cases. Because the relevant legal provisions are not fully perfected, whether it is "to confirm the validity of the resolution to remove shareholders" or "to disqualify shareholders", there is a risk that the people's court may rule to reject the lawsuit, so when handling specific cases, it is still necessary for lawyers to choose different litigation strategies according to the actual situation. Finally, I would like to thank Zhong Qian Yi (a graduate student of Dongbei University of Finance and Economics) for his contribution to the collation and writing of the relevant materials in this article.

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