Viewpoint... How to protect the rights and interests of small shareholders of the shareholder representative litigation system.
Published:
2022-06-08
Under the modern corporate system, investors tend to believe in capital majority decision, with the primary goal of having more control of the company. However, the problem that follows is that when the interests of controlling shareholders conflict with those of minority shareholders, the interests of minority shareholders are often vulnerable to infringement. This paper will focus on the protection of minority shareholders' rights and interests by means of shareholder representative litigation. The main forms of infringement of the interests of small shareholders in 1.. The fundamental reason for the infringement of the interests of minority shareholders is that the controlling shareholders can essentially control the operation of the company, but the company and shareholders are independent of each other at the legal level, and the property of the company is independent of the property of the shareholders. therefore, when the controlling shareholders make decisions involving the company, they do not proceed from the interests of the company, but encroach on the property of the company through a series of transactions that damage the interests of the company. This will lead to the loss of the company's property and endanger the interests of the company, other shareholders and creditors. If the company were to go bankrupt and liquidate as a result, although the controlling shareholder would have to share the losses with the minority shareholders, the controlling shareholder may have already benefited from the company by using its controlling position to far outweigh the loss of its capital contribution, and the interests of the minority shareholders would not be protected. In this regard, the shareholder representative litigation system directly gives minority shareholders the right to file lawsuits on behalf of the company under certain conditions, which is conducive to protecting the interests of the company and minority shareholders, and investigating the relevant responsibilities of controlling shareholders, directors and supervisors. 2. the subject qualification of shareholder representative litigation. The plaintiff in a (I) shareholder's representative action shall be a shareholder of the company, and the shareholder of a joint stock limited company shall also meet the limit on the period and number of shares held. According to Article 151 of the Company Law, the subject of the shareholder representative action is the shareholder. There are no restrictions on the shareholders of a limited liability company, but the shareholders of a limited liability company have restrictions on the period of holding shares and the number of shares held. The specific requirements are: the shareholders of a limited liability company hold more than 1% of the company's shares for more than 180 consecutive days in order to have the legal qualification to bring a lawsuit. (II) whether the damage to the company occurred before or after the plaintiff obtained shareholder status, it does not affect the right of the shareholder to bring a shareholder representative action. Article 24 of the Ninth Minute provides that "if a shareholder files a shareholder representative action and the defendant defends that the shareholder is not a qualified plaintiff on the grounds that the plaintiff has not yet become a shareholder of the company at the time of the act, the people's court shall not support it". (III) companies should be listed as third parties Since shareholder representative litigation is a dispute arising from the operation of the company, it is to safeguard the interests of the company and involves the entity rights and interests of the company. Therefore, Article 24 of the Judicial Interpretation IV of the Company Law stipulates that the company shall be listed as a third party in the shareholder representative action. Application of 3. shareholder representative litigation According to Article 151 of the Company Law, shareholder representative litigation applies to situations where others infringe on the interests of the company, including the following two types: (I) directors, supervisors and senior executives have caused losses to the company in violation of laws and regulations when performing their duties. This is the most typical situation of filing a shareholder representative lawsuit, directors, supervisors and executives are the actual management personnel of the company, and when they violate the duty of loyalty and diligence and cause losses to the company, they usually have no incentive to file a lawsuit against themselves in the name of the company, and allow the company's property to suffer losses. (II) another person to infringe upon the legitimate rights and interests of the company and cause losses to the company In addition to the previous typical application, the company law expands the scope of application of the shareholder representative litigation system, and any third party (including other shareholders) has room to apply the shareholder representative litigation system as long as it infringes on the legitimate rights and interests of the company. Common scenarios are as follows: 1. Abuse of control by controlling shareholders or actual controllers to infringe on the interests of the company 2. Defective contributions by shareholders 3. The non-performance of the debt of the company's debtor. 4. Misconduct by members of the liquidation team Pre-procedure for shareholder representative litigation in 4.. (I) statutory pre-procedure The main purpose of setting up the pre-procedure is to avoid excessive involvement of judicial factors, to ensure the internal autonomy of the company, and to prevent the abuse of shareholder litigation. According to Article 151 of the Company Law, shareholders are required to perform the legal pre-procedure to file a representative lawsuit, that is, a written request to the board of supervisors, the supervisor of a limited liability company without a board of supervisors, the board of directors, and the executive director of a limited liability company without a board of directors to file a lawsuit. A shareholder has the right to bring a shareholder representative action only if the aforementioned subject refuses to bring a lawsuit, or if the aforementioned subject fails to bring a lawsuit within 30 days from the date of receipt of the request. This requires that before filing a shareholder representative lawsuit, the shareholder must first exhaust the company's internal remedies, and if the plaintiff shareholder does not request the supervisory board, supervisor or board of directors or executive director to file a lawsuit in writing, and there is no sufficient evidence to prove that there is an exception to the pre-procedure in the case, the court will rule to dismiss the lawsuit. Exceptions (II) exemption from statutory pre-procedure 1. In case of emergency According to Article 151 of the Companies Act, shareholders have the right to file a lawsuit directly in case of emergency, I .e. no statutory pre-procedure is required. Examples of emergency situations are as follows: (1) The failure of shareholders to immediately file a lawsuit will result in the expiration of the statute of limitations; (2) The infringer transfers the company's property, and its act of harming the company's interests is continuing, and the company's interests will be irreparable if it does not file a lawsuit immediately. Thus, "urgency" requires urgency to stop the violation, I .e., a real and imminent danger, rather than a remote or speculative one. 2. There is no possibility of litigation by the relevant authorities of the company. Article 25 of the Nine People's Minutes stipulates that "the pre-procedure is aimed at the general situation of corporate governance, that is, when the shareholders submit a written application to the relevant organs of the company, there is a possibility of litigation by the relevant organs of the company. If the relevant facts identified show that there is no such possibility at all, the people's court shall not dismiss the prosecution on the ground that the plaintiff has not fulfilled the pre-procedure". Among them, the case where "there is no possibility of litigation by the relevant organs of the company" is as follows: (1) The company does not have a board of directors, a supervisory board, or a person who has already left the company without serving; (2) The directors or supervisors of the company are under the control of the controlling shareholder who committed the infringement and it is impossible for the directors or supervisors to sue the controlling shareholder; (3) The directors and supervisors themselves have an interest in the act involving damage to the interests of the company, or the directors and supervisors are the defendants in the case. Therefore, "there is no possibility of litigation by the relevant organs of the company", which requires that there is no possibility of performing the pre-procedure objectively. Attribution of interests in 5. litigation Article 25 of the Judicial Interpretation IV of the Company Law stipulates that "in a case where a shareholder directly brings a lawsuit in accordance with the provisions of paragraphs 2 and 3 of Article 151 of the Company Law, the winning interest belongs to the company. If the shareholder requests the defendant to bear civil liability directly to him, the people's court shall not support it". Since in a shareholder representative action, the shareholder is suing to defend the interests of the company, the interest in the shareholder representative action is vested in the company. 6. Summary In general, China's shareholder representative litigation system provides less, but the future application scenario is more extensive, the current should encourage minority shareholders to sue. Before filing a lawsuit, the minority shareholders should self-examine whether the subject is qualified, whether it has fulfilled the pre-procedure, whether it meets the pre-procedure exemption and other preconditions for prosecution, in order to fully protect their rights and interests.
Under the modern corporate system, investors tend to believe in capital majority decision, with the primary goal of having more control of the company. However, the problem that follows is that when the interests of controlling shareholders conflict with those of minority shareholders, the interests of minority shareholders are often vulnerable to infringement. This paper will focus on the protection of minority shareholders' rights and interests by means of shareholder representative litigation.
The main forms of infringement of the interests of small shareholders in 1..
The fundamental reason for the infringement of the interests of minority shareholders is that the controlling shareholders can essentially control the operation of the company, but the company and shareholders are independent of each other at the legal level, and the property of the company is independent of the property of the shareholders. therefore, when the controlling shareholders make decisions involving the company, they do not proceed from the interests of the company, but encroach on the property of the company through a series of transactions that damage the interests of the company. This will lead to the loss of the company's property and endanger the interests of the company, other shareholders and creditors. If the company were to go bankrupt and liquidate as a result, although the controlling shareholder would have to share the losses with the minority shareholders, the controlling shareholder may have already benefited from the company by using its controlling position to far outweigh the loss of its capital contribution, and the interests of the minority shareholders would not be protected.
In this regard, the shareholder representative litigation system directly gives minority shareholders the right to file lawsuits on behalf of the company under certain conditions, which is conducive to protecting the interests of the company and minority shareholders, and investigating the relevant responsibilities of controlling shareholders, directors and supervisors.
2. the subject qualification of shareholder representative litigation.
The plaintiff in a (I) shareholder's representative action shall be a shareholder of the company, and the shareholder of a joint stock limited company shall also meet the limit on the period and number of shares held.
According to Article 151 of the Company Law, the subject of the shareholder representative action is the shareholder.
There are no restrictions on the shareholders of a limited liability company, but the shareholders of a limited liability company have restrictions on the period of holding shares and the number of shares held. The specific requirements are: the shareholders of a limited liability company hold more than 1% of the company's shares for more than 180 consecutive days in order to have the legal qualification to bring a lawsuit.
(II) whether the damage to the company occurred before or after the plaintiff obtained shareholder status, it does not affect the right of the shareholder to bring a shareholder representative action.
Article 24 of the Ninth Minute provides that "if a shareholder files a shareholder representative action and the defendant defends that the shareholder is not a qualified plaintiff on the grounds that the plaintiff has not yet become a shareholder of the company at the time of the act, the people's court shall not support it".
(III) companies should be listed as third parties
Since shareholder representative litigation is a dispute arising from the operation of the company, it is to safeguard the interests of the company and involves the entity rights and interests of the company. Therefore, Article 24 of the Judicial Interpretation IV of the Company Law stipulates that the company shall be listed as a third party in the shareholder representative action.
Application of 3. shareholder representative litigation
According to Article 151 of the Company Law, shareholder representative litigation applies to situations where others infringe on the interests of the company, including the following two types:
(I) directors, supervisors and senior executives have caused losses to the company in violation of laws and regulations when performing their duties.
This is the most typical situation of filing a shareholder representative lawsuit, directors, supervisors and executives are the actual management personnel of the company, and when they violate the duty of loyalty and diligence and cause losses to the company, they usually have no incentive to file a lawsuit against themselves in the name of the company, and allow the company's property to suffer losses.
(II) another person to infringe upon the legitimate rights and interests of the company and cause losses to the company
In addition to the previous typical application, the company law expands the scope of application of the shareholder representative litigation system, and any third party (including other shareholders) has room to apply the shareholder representative litigation system as long as it infringes on the legitimate rights and interests of the company. Common scenarios are as follows:
1. Abuse of control by controlling shareholders or actual controllers to infringe on the interests of the company
2. Defective contributions by shareholders
3. The non-performance of the debt of the company's debtor.
4. Misconduct by members of the liquidation team
Pre-procedure for shareholder representative litigation in 4..
(I) statutory pre-procedure
The main purpose of setting up the pre-procedure is to avoid excessive involvement of judicial factors, to ensure the internal autonomy of the company, and to prevent the abuse of shareholder litigation.
According to Article 151 of the Company Law, shareholders are required to perform the legal pre-procedure to file a representative lawsuit, that is, a written request to the board of supervisors, the supervisor of a limited liability company without a board of supervisors, the board of directors, and the executive director of a limited liability company without a board of directors to file a lawsuit. A shareholder has the right to bring a shareholder representative action only if the aforementioned subject refuses to bring a lawsuit, or if the aforementioned subject fails to bring a lawsuit within 30 days from the date of receipt of the request. This requires that before filing a shareholder representative lawsuit, the shareholder must first exhaust the company's internal remedies, and if the plaintiff shareholder does not request the supervisory board, supervisor or board of directors or executive director to file a lawsuit in writing, and there is no sufficient evidence to prove that there is an exception to the pre-procedure in the case, the court will rule to dismiss the lawsuit.
Exceptions (II) exemption from statutory pre-procedure
1. In case of emergency
According to Article 151 of the Companies Act, shareholders have the right to file a lawsuit directly in case of emergency, I .e. no statutory pre-procedure is required. Examples of emergency situations are as follows:
(1) The failure of shareholders to immediately file a lawsuit will result in the expiration of the statute of limitations;
(2) The infringer transfers the company's property, and its act of harming the company's interests is continuing, and the company's interests will be irreparable if it does not file a lawsuit immediately.
Thus, "urgency" requires urgency to stop the violation, I .e., a real and imminent danger, rather than a remote or speculative one.
2. There is no possibility of litigation by the relevant authorities of the company.
Article 25 of the Nine People's Minutes stipulates that "the pre-procedure is aimed at the general situation of corporate governance, that is, when the shareholders submit a written application to the relevant organs of the company, there is a possibility of litigation by the relevant organs of the company. If the relevant facts identified show that there is no such possibility at all, the people's court shall not dismiss the prosecution on the ground that the plaintiff has not fulfilled the pre-procedure". Among them, the case where "there is no possibility of litigation by the relevant organs of the company" is as follows:
(1) The company does not have a board of directors, a supervisory board, or a person who has already left the company without serving;
(2) The directors or supervisors of the company are under the control of the controlling shareholder who committed the infringement and it is impossible for the directors or supervisors to sue the controlling shareholder;
(3) The directors and supervisors themselves have an interest in the act involving damage to the interests of the company, or the directors and supervisors are the defendants in the case.
Therefore, "there is no possibility of litigation by the relevant organs of the company", which requires that there is no possibility of performing the pre-procedure objectively.
Attribution of interests in 5. litigation
Article 25 of the Judicial Interpretation IV of the Company Law stipulates that "in a case where a shareholder directly brings a lawsuit in accordance with the provisions of paragraphs 2 and 3 of Article 151 of the Company Law, the winning interest belongs to the company. If the shareholder requests the defendant to bear civil liability directly to him, the people's court shall not support it".
Since in a shareholder representative action, the shareholder is suing to defend the interests of the company, the interest in the shareholder representative action is vested in the company.
6. Summary
In general, China's shareholder representative litigation system provides less, but the future application scenario is more extensive, the current should encourage minority shareholders to sue. Before filing a lawsuit, the minority shareholders should self-examine whether the subject is qualified, whether it has fulfilled the pre-procedure, whether it meets the pre-procedure exemption and other preconditions for prosecution, in order to fully protect their rights and interests.
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