Viewpoint | The main types of disputes over the right to claim profit distribution and their judicial remedies
Published:
2021-12-03
The right to claim profit distribution, also known as the right to pay dividends, refers to the right of shareholders to request the company to distribute surplus to themselves based on their shareholder qualifications and status. This right is a right based on the company's profits. Unlike the voting rights or the right to know enjoyed by shareholders, the demand for the expression of property interests of shareholders' right to request profit distribution is more obvious. If the company fails to perform or illegally performs the obligation of distribution, shareholders have sufficient reasons to apply for compulsory profit distribution.
According to Article 14 of the Interpretation IV of the Company Law issued in 2017, the key for the court to hear such cases is whether the shareholders submit a valid resolution of the shareholders' meeting or general meeting that sets out the specific distribution plan. In fact, if there is a clear and effective distribution plan, the court often supports the plaintiff's shareholder's distribution request, and such cases turn into a dispute between the shareholder and the company's debt. In practice, however, the situation is more complex, and several common types of disputes and the general practice of the courts are briefly described below.
1. Disputes over the confirmation of shareholder qualification and shareholding ratio
In the case of shareholder profit distribution claim litigation, the identification of shareholder status is the premise of whether the shareholder enjoys the right of shareholder profit distribution claim, but there is no clear stipulation on the standard of shareholder qualification in the fourth interpretation of the company law. In the trial, the court generally takes into account the substantive and formal elements, I .e. whether the shareholders have fulfilled their capital contribution obligations, whether there are records in the articles of association or the register of shareholders, and the industrial and commercial registration.
Common shareholder qualification disputes mainly include two types of withdrawal shareholders and dormant shareholders. With regard to withdrawing shareholders, the court's hearing of surplus distribution disputes mainly depends on whether the company has distributed profits and whether the shareholders' meeting has made relevant resolutions before the shareholders transferred their shares. If there is a resolution, according to the creditor's right theory of specific surplus distribution claim, this creditor's right has been established independently of the shareholder's identity, and the court directly distributes it according to the content of the resolution. If there is no resolution, it is generally believed that when the "former shareholder" transfers the equity, all the rights including the claim for surplus distribution will be transferred together, unless the transfer agreement stipulates that the former shareholder retains the surplus distribution right when he is "in office. Try to give an example.
case analysis]In October 2018, Jingxian Municipal Company acquired all the shares in Jingzhou Agricultural and Commercial Bank under the name of Yixin Company through a judicial auction. On February 13, 2019, Jingzhou Agricultural and Commercial Bank's 2019 Annual General Meeting of Shareholders made a resolution to withdraw a dividend of 50.03 million yuan at 10% of the company's 2018 profit distribution. On February 25, 2019, Jingzhou Agricultural Commercial Bank changed the above equity to Jingxian Municipal Company. Yixin Company believes that since the change of registration occurred after the dividend resolution was made by the general meeting of shareholders, it should have the right to claim profit distribution of the Company in 2018. The court of second instance held that Yixin's shareholding in Jingzhou Agricultural and Commercial Bank had been lost in November 2018 in the form of a forced auction by the People's Court, and that at this time the general meeting of shareholders of Jingzhou Agricultural and Commercial Bank did not make a profit distribution plan for 2018, so Yixin's shareholder profit distribution claim was lost. [(2019) Ji 11 Min Zhong No. 2514]]
On whether the dormant shareholder has the qualification of litigation subject. In its decision, the court mainly examines whether the other shareholders of the company are aware of the capital contribution of the anonymous shareholder and whether the other shareholders approve the exercise of their shares as shareholders, and if so, the anonymous shareholder has the qualification of the subject of litigation, and vice versa. This idea is similar to the process of "anonymous shareholders" and will not be repeated here.
2. Disputes over whether the distribution scheme is effective
As for the validity of the distribution plan made by the shareholders' meeting, the court often only carries out the necessary formal element review, that is, the validity of such documents is generally recognized. The question is whether other similar resolutions can be recognized, such as a distribution plan made by the board of directors or an agreement signed by all shareholders.
case analysis]Liu Xien is a shareholder of New Oriental Cable Company and owns 26% of the shares. In April 2016, the board of directors of the company decided to distribute a cash dividend of 5.5 million yuan to shareholders in 2015. The resolution stipulates that the aforementioned dividends shall be distributed to the members of the board of directors and corporate shareholders before October 30, 2016, and the cable company fails to perform after the expiration of the period, and Liu Xien sued the court. The cable company defends on the grounds that there is no valid resolution of the shareholders' meeting. The court held that the articles of association of the company provided for the board of directors to decide on the distribution of the company's surplus, so it could be distributed in accordance with the resolution of the board of directors. [(2016) Su 04 Min Chu No. 444]]
As can be seen in this case, the court held that the right to determine the distribution of the company's surplus could be conferred on the board of directors through the articles of association, but this view is not without controversy. According to Article 46 of the Company Law, the board of directors can exercise other functions and powers stipulated in the articles of association. Under the condition that the company's company law has clearly stipulated that the company's surplus distribution plan is formulated by the board of directors and approved by the shareholders' meeting, it is doubtful whether the articles of association can change the provisions of the Company Law and give the final decision-making power of the company's surplus distribution plan to other company organs other than the shareholders' meeting, such as the board of directors. In practice, there are also courts that do not recognize the validity of the distribution resolution made by the board of directors.
3. Abuse of shareholder rights disputes
There is also a legal avenue of litigation when shareholders are unable to provide an effective distribution plan. According to Article 15 of Interpretation IV of the Company Law, if the abuse of shareholders' rights in violation of the law results in the company's non-distribution of profits and causes losses to other shareholders, other shareholders may file a lawsuit for the right to dividends. However, this is only a theoretical approach, in view of the professional operation of the company and the complexity of the business environment, relying on this clause alone does not give judges a clear standard for determining the abuse of shareholders' rights, the operation is poor, and different courts may make different decisions in practice.
case analysis]Datang Company is the controlling shareholder of Yilan Company (86.57 per cent) and Tianyi Company holds 13.43 per cent. Tianyi Company submitted evidence that Yilan Company had distributable profits of hundreds of thousands from 2012 to 2017. However, due to Datang Company's delay in making a resolution to distribute profits, Tianyi Company believed that it abused the rights of controlling shareholders and damaged its own dividend rights, so it sued the court. The court of second instance held that Datang Company's failure to express its position on whether to distribute the shares could not be regarded as an abuse of equity. Because there is no shareholder withdrawal to transfer profits in this case, profits always exist in the company, even if the company is now undistributed profits will not cause losses to shareholders. Even if the company's operating conditions deteriorate and profits decrease in the future, it is a normal investment risk that shareholders should bear, and it cannot be considered that Datang has abused its equity. [(2019) Heimin Zhong No. 391]]
4. Disputes over the system of shareholder dividend rights
Article 16 of the interpretation III of the company law stipulates that if a shareholder fails to perform or fully perform the obligation of capital contribution or evades capital contribution, the company shall, in accordance with the articles of association or the resolution of the shareholders' meeting, make corresponding reasonable restrictions on the rights of shareholders, such as the right to request profit distribution, the right to subscribe for new shares, and the right to request the distribution of surplus property, The people's court shall not support the shareholder's request. It can be seen that the court mainly examines two elements of such disputes: one is the capital contribution of shareholders, and the other is whether the relevant restrictions are based on the articles of association or the resolution of the shareholders' meeting.
case analysis]Yizhong Company and Lesheng Company are shareholders of Yihu Company. Yizhong Company believes that Lesheng Company has not fulfilled its capital contribution obligations and sued the court to restrict Lesheng Company's dividend rights. The court of retrial held that although Lesheng had not fully fulfilled its capital contribution obligations, the articles of association of Yihu Company did not specify that shareholders who did not fully fulfill their capital contribution obligations would be restricted in their rights. According to the articles of association of the company, the number of people attending the meeting of the board of directors shall not be less than the 2/3 of all shareholders. There are five directors in Yihu Company. However, the board of directors held in 2012 to restrict the rights of shareholders of Lesheng Company only has three directors, which does not meet the proportion stipulated in the articles of association. Therefore, the resolution is invalid and the rights of shareholders of Lesheng Company shall not be restricted. [(2016) Supreme Famin No. 357]]
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