Viewpoint... Related transactions harm the company's interests dispute practice discussion.

Published:

2022-11-16

Disputes over liability for damage to connected transactions have been classified as one of the cause of action under "company-related disputes", articles 21, 148 and 216 of the Company Law and the Supreme People's Court on the application of<公司法>Articles 1 and 2 of the (V) on Certain Issues, etc., and Article 84 of the Civil Code, etc., use terms such as "related relationships and related transactions. However, in judicial practice, there are no clear provisions on how to determine the liability for damage in related transactions, how to determine the subject of liability and the scope of damage. Through the study of the judgment case, the author extracts the relevant answers to the above questions in judicial practice, for reference only. 1. what is an association? Article 216 of the Company Law stipulates that the relationship refers to the relationship between the controlling shareholders, actual controllers, directors, supervisors and senior managers of the company and the enterprises directly or indirectly controlled by them, as well as other relationships that may lead to the transfer of the interests of the company. According to Article 21 of the company law, the controlling shareholders, actual controllers, directors, supervisors and senior managers of the company shall not use their related relationships to harm the interests of the company; those who violate the provisions of the preceding paragraph and cause losses to the company shall be liable for compensation. It can be seen that the company law does not prohibit related party transactions, but only regulates the behavior of "using related party transactions to damage the company" and makes it clear that it should be liable for compensation. The determination of the dispute over the liability for damage of the 2. constitutes a related transaction. In judicial practice, related transaction damage liability disputes need to be considered from the subject, behavior, damage results, causality four factors: First, the main body, to meet the provisions of the company law, the damage party is the company's controlling shareholders, actual controllers, directors, supervisors or senior managers; Second, the damaging party must have the act of actually carrying out related transactions; Third, the manifestations of damage are direct economic losses and the loss of indirect legitimate economic interests that should have been obtained; Fourth, there is a causal relationship between the related transactions of the damaging party and the damage to the company. [Case] (2021) Supreme Famin No. 181 This case is a dispute over liability for damage from a related transaction of the Company, and the parties have no objection that the transaction between Company S and Company Q is a related transaction. The focus of the dispute in this case is mainly on the issue of whether the related transactions involved in the case have harmed the interests of Company S, on which the court comments from the following three points: 1. Whether Gao and Cheng have fulfilled their disclosure obligations. [Guiding Case] (2018) Supreme Famin Re -192 Disclosure of connected transactions relies on directors and senior management to actively fulfill their duties of loyalty and diligence and to disclose and report to the Company the connected transactions they have entered. According to the "Articles of Association" of Company S, Gao and Cheng, as directors and senior managers in this case, failed to fulfill their disclosure obligations and violated the loyalty obligations of directors and senior managers. According to Article 21 of the Company Law, the behavior of Gao and Cheng not only violates the provisions of the articles of Association of S Company, but also violates the above-mentioned legal provisions. 2. Whether the price of the related transaction is in line with the fair market price. The Company Law protects lawful and valid related transactions and does not prohibit related transactions, and the substantive element of lawful and valid related transactions is the fairness of the transaction consideration. With reference to Article 1 of the (V) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law, which states that "connected transactions harm the interests of the company, the plaintiff company requests the controlling shareholder, actual controller, director, Supervisors and senior management personnel compensate for the losses caused, if the defendant only defends on the grounds that the transaction has fulfilled the information disclosure, approved by the shareholders' meeting or the shareholders' general meeting and other laws, administrative regulations or the company's articles of association, the people's court shall not support the spirit of", it shall be examined from the essence of the transaction, that is, the contract agreement, whether the performance of the contract conforms to the normal commercial transaction rules, and whether the transaction price is reasonable. In the procurement transaction model between Company S and Company Q, Company S could have purchased the relevant products in the market, while purchasing products through Company Q would have added unnecessary links and increased procurement costs, with Company Q enjoying the benefits of the additional links. ...... To sum up, S Company's claim that Gao and Cheng will purchase related products that could have been purchased through market procurement to Q Company to increase the purchase cost. The extra cost paid by S Company has damaged the rights and interests of S Company, which has factual and legal basis. Company S's appeal that the transaction consideration was higher than the market price and did not have fairness was accepted by the Court. 3. There is a causal relationship between the behavior of Gao and Cheng and the occurrence of the damage result of S company. Related transactions occurred during the tenure of Gao and Cheng as directors, and during the period when Gao was the general manager in charge of production and operation, the proportion of related transactions to the total procurement of S Company increased significantly, and after Gao and Cheng were removed from their positions, related transactions decreased rapidly and disappeared. The occurrence and changes of related transactions are synchronized with the changes in the tenure and position of Gao and Cheng. According to the provisions of Article 21 of the Company Law, the related party transactions jointly carried out by Gao and Cheng have harmed the interests of Shaangu Steam Turbine Company. Identification of the Subject of Liability for 3. Damage In the case of liability disputes against the interests of the company, the defendants mainly include the shareholders of the company and the directors and supervisors. In practice, there are often situations such as unclear articles of association, irregular operation of the company, and inconsistency between the authority and position of the company's personnel. For example, the terms of reference of the person in charge of a branch of the company include a number of company management responsibilities, but in the case of the articles of association of the company does not list them as senior managers, whether such personnel can be the main body of responsibility for harming the interests of the company, there are still differences in practice. [Case] Guangdong Shenzhen Intermediate People's Court (2020) Yue 03 Min Zhong No. 28310 Judging point of view: the main body responsible for the damage to the interests of the company by related party transactions shall be the controlling shareholders, actual controllers, directors, supervisors and senior managers of the company. Senior managers refer to the managers, deputy managers, financial officers, secretaries of the board of directors of listed companies and other personnel stipulated in the articles of association of the company. In the opinion of the Court, first, although Tao Linlin worked for Froude, Liu Lishun, Long Jianhua and Liu Songlin did not prove that they were the financial officers or other senior managers stipulated in the articles of association of the company, and that they were not senior managers of the company and were not the responsible subjects of related transactions. [Case] Haidian District People's Court of Beijing (2008) Hai Min Chu Zi No. 21067 Referee's point of view: In practice, for the typical manifestations of senior management personnel, the standard of formal review is generally adopted, that is, the judgment is made according to whether the position of a specific person in the company is consistent with the legal provisions. However, due to the complexity and diversity of practice, formal review also has the risk of anomie. Therefore, while not excluding the limited role of formal review, more attention should be paid to the substantive review of the identity of the company's senior managers. Regarding the perspective of substantive review, it can be considered from the following aspects: one is the relationship between the job responsibilities of the review object and the company's main business; the second is the causal relationship between the salary of the review object and its job responsibilities; the third is the review object The degree of influence of the performance of job responsibilities on the company's main business status. Taking into account the above three aspects, it is appropriate to determine whether the subject of the review has the status of senior management. [Case] Gansu Higher People's Court (2018) Gan Min Zhong No. 590 Referee's point of view: Zhou's identity is as the manager of the marketing department of Gansu Company, who is fully responsible for the sales work. During this period, Gansu Company did not set up a deputy general manager. Zhou has the decision-making power on the selection of trading objects and whether to sign contracts. Zhou also has the right to decide how to recover funds. Zhou actually exercises the authority of the company's senior managers. This judgment is a comprehensive determination made after a substantive review of Zhou's identity. How is the scope of 4. loss determined? Circumstances under which (I) loss can be determined 1. The amount of compensation for losses is calculated according to the difference between the price of the related transaction and the market price. [Case] (2021) Lu 0792 Minchu No. 989 Referee's point of view: The three heat exchangers involved in the case totaled 40 ㎡, and the amount was 400000 yuan according to the general market price at that time. The two defendants used the related relationship to purchase 280000 yuan from the plaintiff through Yide Company. The difference of 120000 yuan can be regarded as a loss. Therefore, based on the actual situation of the case, the court determined that the defendants Ji and Niu jointly compensated the plaintiff for the economic loss of 120000 yuan. 2. The amount of compensation for losses is based on the income obtained through the related transaction less the cost of its expenses. [Case] (2020) Lu 0704 Minchu No. 712 Referee's view: Song should compensate Home and Hing for the loss on the basis of deducting reasonable costs from the subject matter of the contract. The evidence of its cost expenditure provided by Song can not directly reflect the relevance of the performance of the contract involved, and the court will not accept it according to law. Jia Hexing Company claims that the cost of performing the contract is about 47000 yuan per month, which is the self-admission of the parties to their own unfavorable facts and is more in line with the actual situation. The court will accept it according to law. Therefore, after deducting the cost, Song should compensate Jiahe Xing Company for the loss of 85000 yuan. Situations where (II) loss is difficult to determine 1. If the defendant fails to prove the reasonableness of the consideration of the transaction, the court will directly take the price of the related transaction as the amount of the loss. If the plaintiff raises reasonable doubts about the related transaction, the defendant shall prove the reasonableness of the transaction, and if it cannot prove the reasonableness of the transaction price, it shall bear the adverse consequences of the failure of the proof, and the court will directly use the price of the related transaction as the amount of the loss. [Case] (2020) Su 12 Min Zhong No. 2251]] Referee's Point of View: Dagnoth Company did not pay 600000 yuan and 900000 yuan as scheduled after the signing of the License Contract for Proprietary Technology for Production of Ractopamine Testing Reagents. After that, it was paid by 1.5 million yuan, the research and development fee of the Aimeib-C Agreement, which was obviously contrary to normal trading practices, and the other 500000 yuan to be paid, which was obviously against common sense. In this regard, the price of 2 million yuan licensed by China Peptide Company for the production of ractopamine testing reagents should be proved by proof. However, because China Peptide Company failed to submit evidence in this regard, it should bear the adverse consequences. 2. If the evidence and claims of both parties are not fully accepted by the court, the court will determine the amount of loss according to the facts. [Case] (2021) Lu 0403 Minchu No. 1350 Referee's view: The Court believes that the investment lending event is significant and that a meeting of shareholders should be held to form a resolution of the meeting. For many years the plaintiff knew or should have known of the defendant's lending and did not prevent it, so the defendant's liability for damages should be mitigated. In addition, due to the interest charged by the defendant identified by the Court, according to the audit report issued by Shandong Xuzheng Accounting Firm, the third party's repayment of the defendant's loan is not clearly stated in the account book vouchers, and it is not determined which loan the repayment is to repay, and whether the repayment amount is to repay the principal or interest. The defendant in this case also did not provide evidence to prove the specific calculation method of interest charged. Also, because the defendant approved the above audit report, the plaintiff filed a lawsuit based on the audit report. Based on the case and the principle of fairness, the plaintiff considered that the third party used a large amount of the defendant's funds to maintain and increase the value of the third party's assets. If all the interest is returned, it is obviously unfair to the defendant. The defendant returns the interest to the third party. The court will determine the return of interest 6,742,585.15 yuan according to the principle of fairness. practical recommendations] 1. Strengthen the company's compliance management, carry out regular audits, and improve the ability of the board of supervisors to perform their duties. A good internal governance system can effectively avoid improper related party transactions. The company should strengthen internal compliance management, improve internal governance system, carry out regular audit, improve the ability of the board of supervisors to perform supervision duties, and implement the resolution approval system for major matters such as operation, investment and contract, so as to avoid providing space for directors and senior executives to seek personal interests. 2. Detailed loyalty obligations and responsibilities in the articles of association or in the internal system. The company should be good at standardizing and detailing the responsibilities and authorities of directors and executives in the operation through the system design of the articles of association. For transactions that may result in the transfer of interests of directors and senior executives, risk prevention shall be carried out in advance through the articles of association or internal system. 3. Attach importance to the appointment and management of directors and senior management, and appropriately expand the scope of senior management. In other cases involving this type of dispute, the defendant's defense is more because he is not a director or senior executive of the company. Because the subject of such cases is specific, the company should pay attention to the appointment and management of relevant directors and senior executives, pay attention to the clarification of positions, appropriately expand the scope of senior executives, and fix the identity of senior executives through written documents. 4. Fully organize evidence and exercise power in a timely manner. The damaged company should fully organize the evidence, especially for the damage act, the result of the damage, the causation, and avoid the consequences of the failure to prove. In addition, the company should pay attention to the timely exercise of power, related transactions damage to the interests of the company's litigation for tort liability disputes, should know or should know that the company's interests damaged three years from the date of the exercise of litigation rights.</公司法>

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