Professional Interpretation

Editor's note 

In 2013, Aileen Lee, a well-known American investor took the lead in referring to start-ups with a valuation of more than $1 billion in private equity and public markets as "unicorns". The remarkable feature of a unicorn enterprise is that although it is not well known in the initial stage, it almost dominates the market it belongs to. With the rapid development of China's socialist market economy, unicorn enterprises including Ant Financial Services Group and Didi Chuxing have emerged one after another. In this context, the Dispute Resolution Team of Beijing Docvit Law Firm launched “the Legal Service Product Line of Unicorn Enterprises” to help the rise of "unicorns".

In the struggle for the control right of a company, a situation often appears that any party of shareholders can not suppress other parties of shareholders and completely control the company, where shareholders of all parties are deadlocked, the company can not form effective decisions, the survival and operation of the company is difficult, thus forming the de facto "company deadlock", which will bring negative effects to the development and operation of the company and the protection of shareholders' rights. As the third part of a series of articles on corporate control game of Unicorn enterprise product line, this paper analyzes and discusses the legal provisions on “company deadlock” in the company law and judicial interpretation and the main points of proof in the lawsuit of company dissolution from the perspective of judicial practice. Just as the saying goes “break through and find another way”, take the company dissolution lawsuit as a breakthrough, may be a way to obtain corporate control.

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"Company deadlock" refers to the situation in which a company is in a deadlock due to the intensification of contradictions between shareholders and directors, which leads to the inability of the board of shareholders and the board of directors to make decisions in accordance with the legal procedures, which makes the company unable to operate normally or even paralyze. There is no direct expression of “company deadlock” in Company Law. Generally, the situation where any company meets any serious difficulty in its operations or management stipulated in Article 182 of the Company Law is regarded as the provision on "company deadlock". In addition, Article 1 of the Provisions of the Supreme People's Court on Several Issues concerning the Application of the Company Law of the People's Republic of China (II) (hereinafter referred to as the Judicial Interpretation of the Company Law (II)) stipulates four specific situations where any company meets any serious difficulty in its operations or management, which are usually understood as the specific performance of "company deadlock"

Article 182 of the company law stipulates that “Where any company meets any serious difficulty in its operations or management so that the interests of the shareholders will face heavy loss if the company continues to exist and the difficulty cannot be solved by any other means, the shareholders who hold ten percent or more of the voting rights of all the shareholders of the company may plead the people's court to dissolve the company.” Therefore, if the shareholders want to solve the company deadlock through the company dissolution lawsuit, the following four requirements shall be satisfied: first, the company encounters serious difficulty in its operations or management; second, if the company continues to exist, it will cause great losses to the interests of shareholders; third, the difficulties can not be solved through any other means; fourth, shareholders shall hold ten percent or more of the voting rights of all shareholders of the company. The following is a legal analysis of the four applicable conditions combined with specific cases and main points of proof in practice.

1.The company encounters serious difficulties in its operations or management

(1) Legal analysis

As for the serious difficulties in the operation and management of the company, the Judicial Interpretation of the Company Law (II) stipulates four specific forms of expression: first, the company can not hold the meeting of shareholders or the general meeting of shareholders for two or more consecutive years; second, shareholders fail to reach the proportion prescribed by the law or the articles of association when voting, and fail to make effective resolutions of the meeting of shareholders or the general meeting of shareholders for two or more consecutive years; third, the conflict between the directors of the company exists for a long time, which can not be resolved through the meeting of shareholders or the general meeting of shareholders; fourth, the company encounters any other kinds of serious difficulty in its operations or management and the continuous existence of the company will cause major damage to he interests of shareholders. Therefore, to judge whether the company encounters serious difficulties in its operation and management, it is necessary to make a comprehensive analysis of the current operation status of the meeting of shareholders, board of directors and board of supervisors of the company. The key point of serious difficulties in the company's operation and management lies in the existence of serious obstacles in the internal management of the company, such as the failure of the mechanism of the shareholders' meeting and the inability to make decisions on the operation and management of the company. Therefore, "corporate deadlock" actually refers to the deadlock of the internal authority of the company, mainly the deadlock of the shareholders' meeting and the board of directors.

In the case of dissolution dispute between Lvjie company and Tiantai company, Jinan Intermediate People's Court held that an important situation of "serious difficulties in the operation and management of the company" is that the operation state of the company's shareholders' meeting, board of directors and other company organizations encounters serious difficulties. In this case, Tiantai company had repeatedly submitted written applications to the directors, board of directors and supervisors of Lvjie company for holding shareholders' meetings and consulting the company's operating conditions and account information, but all of these applications were rejected by Lvjie company. Lvjie company was unable to normally hold the shareholders' meeting, make effective resolutions of the board of directors and the shareholders' meeting, and both parties could not reach an agreement. Therefore, the court found that the operation and management of the company was in serious difficulties, and "company deadlock" had been formed.

On the other hand, the simple contradiction between shareholders and the infringement of minority shareholders' rights by majority shareholders are not the proper reasons to identify "serious difficulties in the operation and management of the company". In the case of dissolution dispute between Zhejiang Tianshi company and Beijing Anshikai company, the court held that if Anshikai company’s voting right, right to know, right to receive dividends and other specific rights of shareholders have been infringed, China's current law provides corresponding relief procedures, such as compensation for damages of related parties transactions, litigation for revocation or invalidation of resolutions, litigation for the right to know, shareholders subrogation litigation and share repurchase. When the shareholders' meeting and the board of directors can still make a formal and effective resolution, there is no serious obstacle to the corporate governance structure, and the company's operation and management can not be identified as encountering serious difficulties. At this time, "the oppression of shareholders" shall not lead to the dissolution of the company. Therefore, the pure contradiction between shareholders does not belong to "company deadlock" and shareholders can protect their own or the company's rights and interests through other ways, which is not suitable for the company dissolution litigation.

(2) Key points of proof

In order to prove that there are serious difficulties in the operation and management of the company, it is mainly based on the four forms of expression stipulated in the Judicial Interpretation of the Company Law (II).

If it is to prove that the company has the situation of the first three paragraphs of Article 1 in the Judicial Interpretation of the Company Law (II), the shareholder should first list the contents of the shareholders' meeting or the general meeting of shareholders and the board of directors in the articles of association, such as the procedures and conditions for convening the shareholders' meeting or the general meeting of shareholders and the board of directors, voting proportions of resolutions on various matters, shareholding proportions of each shareholder, etc.

If it is to prove the existence of the circumstances stipulated in paragraph (1), the shareholder should provide evidence that it does not meet the conditions for convening the shareholders' meeting or the general meeting of shareholders and that other opposing shareholders have not convened the meeting. For example, the shareholders has repeatedly requested the relevant parties to hold a meeting but has not received a reply.

If it is to prove the existence of the circumstances stipulated in paragraph (2), the agenda of the shareholders' meeting or the general meeting of shareholders, relevant motions, attendance register, meeting minutes, statistical table of voting results, etc. shall be provided.

If it is to prove the existence of the situation mentioned in paragraph (3), the attendance of directors, the minutes of the board meeting and the resolution of the board of directors may be provided to prove that the long-term conflict of directors cannot be resolved through the shareholders' meeting or the general meeting of shareholders.

"Other serious difficulties in operation and management" stipulated in the paragraph (4) is a summary and covering clause. The plaintiff may prove that the basis of cooperation between the shareholders of the company has completely broken down and the company has completely lost its personal integrity and thus there are serious difficulties in the operation and management of the company by proving that the shareholders have been in litigation for a long time or even have physical conflicts and are suspected of criminal crimes.

2.The continuous existence of the company will cause great losses to the interests of shareholders

(1) Legal analysis

The clause that “the continuous existence of the company will cause great losses to the interests of shareholders” focuses more on the expected future development of the company” focuses more on the expected future development of the company. Therefore, even if the company is still in a profitable state, it will not affect the establishment of this condition. In fact, if there are serious difficulties in the operation and management of the company, the continuous existence of the company will lead to the exhaustion of the company's assets and shareholders' rights and interests in the deadlock, which is bound to seriously damage the interests of shareholders.

In addition, "the continuous existence of the company will cause great losses to the interests of shareholders" shall be based on the premise that there is no other way of relief. If losses can be avoided through other ways, it is difficult to determine that the continuous existence of the company will cause significant losses to the interests of shareholders.

In the case of dissolution dispute between Changrun company and Shiximing company, the plaintiff adduced that although the company's undistributed profit had reached 366 million yuan as of December 31, 2010, the company's income has not been seen since the defendant developed, sold and leased real estate, and the defendant violated the "Bidding Law of the people's Republic of China" in the operation. The court held that although the company was still in a profitable state at that time, the interests of shareholders would be damaged, and thus this case was in line with the situation that the existence of the company would damage the interests of shareholders.

In the case of dissolution dispute between Huiguan company, Dongzheng company, Dongbeiya company and Dong Zhanqin, the abstract of the judgement clearly pointed out that, the purpose of dissolution of a company is to protect the legitimate rights and interests of minority shareholders as the existence of the company has lost its significance for the minority shareholders, which shows that they can not participate in the decision-making, management or profit sharing of the company, and even can not freely transfer shares or withdraw from the company. In the case of exhausting all kinds of relief means, dissolution of the company is the only choice. The company shall operate in accordance with the company law, and the dissolution of the company is also a powerful measure to standardize the corporate governance structure.

(2) Key points of proof

The plaintiff may provide evidence on the bank flow, business status, labor cost, equipment depreciation expense and relevant transaction conditions of the company, or employ an accounting firm to issue an audit report on the company's operation status. For example, in some cases, the plaintiff may prove that the company has ceased business or closed down and it needs to continue to pay labor costs if it is not dissolved, thus proving that the company's continued existence will damage the interests of shareholders. Some plaintiffs may also prove that other shareholders take advantage of the company's control right to require the company to provide external guarantee, so as to increase their guarantee liability to prove that the interests of shareholders will be further damaged.

3.The difficulties can not be solved through any other means

(1) Legal analysis

The company deadlock does not necessarily lead to the dissolution of the company. In judicial practice, the judge often takes a very cautious attitude towards the judgment of the company dissolution lawsuit. If the company deadlock can be solved through other ways, the court will not adopt the method of dissolving the company. In judicial practice, the judge generally takes a very cautious attitude towards the judgment of the company dissolution lawsuit. If the company deadlock can be solved through other ways, the court will not adopt the method of dissolving the company. Article 5 of the Judicial Interpretation of the Company Law (II) stipulates that,"the people’s court shall pay attention to mediation when trying a lawsuit for dissolution of a company. If the parties concerned agree through consultation to make the company continue to exist through share purchase by the company or its shareholders, reduction of registered capital or other means, which does not violate the mandatory provisions of laws and administrative regulations, the people's court shall support it. If the parties concerned fail to reach a consensus on the existence of the company, the people's court shall make a judgment without delay.” Article 5 (6) also stipulates that the people's court shall pay attention to mediation when hearing cases involving major differences among shareholders of a limited liability company. If the differences can be resolved by other means and the normal operation of the company can be resumed, the dissolution of the company shall be avoided. Therefore, only other ways to solve the company deadlock have been exhausted, the request of shareholders to dissolve the company may be supported.

In order to protect their own shareholders' rights and interests, shareholders can negotiate, transfer shares, apply for external agencies to intervene in mediation and other ways. In addition, they can also take such litigation means as damage compensation litigation for related party transactions, litigation for revocation or invalidation of resolutions, litigation for the right to know and shareholder subrogation. In a word, if there exists other ways to protect the interests of shareholders, the means of dissolving company will not be adopted.

In the case of dissolution dispute between Si Weishi and Qianlong company, the court held that the company dissolution dispute was caused by the shareholder's application for dissolution when the company's operation was in deadlock and the purpose of its establishment was to adjust the unbalanced interest relationship by judicial means after the weak shareholders have exhausted the internal relief means of the company. Therefore, the legislative intention of the Company Law is to solve the deadlock between shareholders by means of internal autonomy of the company. "The difficulties can not be solved by other means" is a necessary prerequisite for shareholders to request dissolution of the company. Only when the deadlock of the company can not be solved after exhausting all possible relief means, the shareholders may be entitled the right to dissolve the company by judicial procedure.

(2) Key points of proof

The main point of proof of this article is that the plaintiff needs to prove that he has tried various other possible solutions, but still failed to solve the contradiction between shareholders and solve the deadlock of the company. Therefore, the plaintiff took the way of appealing for dissolution of the company to protect his interests of shareholders.

Therefore, the plaintiff can propose to hold an interim shareholders' meeting for the dissolution of the company, invite other shareholders to negotiate, require the company to reduce capital and buy back his shares, or require other shareholders to purchase his shares at a reasonable price and take other possible relief measures before filing a lawsuit for company dissolution. When taking the above measures, the plaintiff should pay attention to making relevant letters in written form to inform the other parties and keep the corresponding receipt. If conditions permit, the proof of the other party's express refusal to negotiate or compromise shall be retained. After the company deadlock cannot be solved by the above means, the shareholders shall file the lawsuit of dissolution to the court and submit the evidence that other means mentioned above have been exhausted.

4.Shareholders shall hold ten percent or more of the voting rights of all shareholders of the company

(1) Legal analysis

According to the provisions of Article 182 of the Company Law and Article 1 of the Judicial Interpretation of the Company Law (II), a company dissolution lawsuit shall be brought by shareholders who individually or jointly hold ten percent or more of the voting rights of all shareholders of the company, which is a requirement of the qualification of the plaintiff in the dissolution lawsuit of the company. In judicial practice, it is generally based on the industrial and commercial registration information and the register of shareholders. Whether the capital contribution is in place or whether the shareholder is only a nominal shareholder does not affect his right to sue.

In the case of dissolution dispute between Xu Yanguo and Shentai company, the defendant pleaded that the plaintiff did not make the actual capital contribution, the shareholders' meeting had removed the plaintiff, and the plaintiff was not a real shareholder, but the Supreme People's court held that the shareholder identity of plaintiff should be determined based on the industrial and commercial registration information.

(2) Key points of proof

According to the current judicial cases, the shareholders who file a company dissolution lawsuit only need to provide the evidence that they hold ten percent or more of the voting rights of all shareholders of the company in the industrial and commercial registration and the register of shareholders.

5.Conclusion

The dissolution of a company has the characteristics of finality, irreversibility and limited judicial intervention, so the court generally takes a cautious attitude when trying the company dissolution dispute. In the special situation of struggle for the control right of a company, the deadlock among shareholders often leads to the emergence of "corporate deadlock". To protect shareholders’ rights and interests, fight for control or break the deadlock, it is a useful approach for shareholders to bring a lawsuit of company dissolution.