Dilemma of Behavior Preservation in Controlling Rights Dispute

Source: Beijing DOCVIT Law Firm  Time: 2021-03-02 10:36:29  Author: The dispute resolution team

Summary: In recent years, various disputes over the control of the company have emerged one after another. The struggle between shareholders and husband and wife for the control and management of the company is surging, and battles are happening every moment. In recent years, the "competition" of official seals and related licenses has been common in such disputes. The public security organs often do not intervene in the handling of disputes, and more guide the parties to file lawsuits in the courts. However, the litigation process related to the " battle for control " related to company resolution disputes, license return disputes, etc., has been in dispute for several years. How to ensure the realization of the company's control rights during the settlement process? How to ensure that the company's operations are not interfered by other disputes of the company? These are all major issues that need to be solved urgently. The "behavior preservation" entrusted by the law to the courts has shown its power at this time. Although due to various considerations, judicial administrative agencies often take a very cautious attitude when making behavior preservation decisions in practice. Because of this, the application of the behavior preservation system in the disputes over the control of the company is worthy of our in-depth discussion here. The dispute resolution team of Beijing Docvit Law Firm will analyze this issue in combination with a series of recent cases of corporate control struggles.

I. Preliminary exploration of behavior preservation system

The behavior preservation system is a system that orders the perpetrator to do or not perform certain behaviors. The behavior preservation system appeared earlier in the fields of intellectual property, maritime affairs and maritime business, and is widely used. However, as a common civil procedure system in China, it appeared in the revised Civil Procedure Law in 2013.

According to the "Civil Procedure Law of the People's Republic of China (2013)" ["The Civil Procedure Law of the People's Republic of China (2017)", this article is still retained. ] Article 100 stipulates: “For cases where the judgment may be difficult to execute or other damages caused by the actions of one of the parties or other reasons, the court may, upon the application of the other party, rule to preserve its property and order it to make certain behaviors or certain behaviors are prohibited; if the party does not file an application, the court may also rule to adopt preservation measures when necessary."

However, the current civil procedure law's provisions on the behavior preservation system are still obviously simple and broad, scattered in the civil law and related judicial interpretations.

The behavior preservation system is different from the general understanding of the preservation measures such as seizure and freezing of property. The content of the behavior preservation is "requires the execution object to perform certain positive behavior obligations, or prohibits negative obligations to perform certain behaviors".In the battle for control rights/official seal, behavior preservation can also prohibit the respondent from taking certain actions in time before the interests of the applicant are harmed, so as to buy time for the applicant in the litigation and immediately curb relevant actions of the counterparty.

II. Advantages and cases of applying for behavior preservation in the battle for company control

In the battle for company control, the situation of one party quickly becomes passive due to "private relief" methods such as grabbing the official seal. The police’s attitude towards such internal disputes of the company often suggests that both parties should resolve the dispute to the court through a civil lawsuit. It takes a long time and costs a lot of money. If the company can apply to the court for the preservation of the company's official seal or the preservation of the rights of the company's shareholders before or during the litigation process, it will play a huge role in stabilizing the company and the applicant's gaining control of the company.

1. Preventing the malicious transfer of the company's control rights in the company's resolution disputes, and gaining time for litigation

In the (2016) Yue 0304 Primary trial No. 24460 Civil Ruling on behavior preservation issued by the People’s Court of Futian District, Shenzhen on December 5, 2016, the legal representatives and company supervisors who were dismissed by the company's resolutions used the application for behavior preservation to fight for themselves in the lawsuit and prevent the company's control from being maliciously transferred

Ye Guojian is the legal representative of Shenzhen Xingang Real Estate Consulting Co., Ltd., and Dai Hong is a supervisor of Shenzhen Xingang Real Estate Consulting Co., Ltd. The sole shareholder of the company, Hong Kong Xingang Company, made a shareholder resolution to remove them from their positions. Ye Guojian and Dai Hong believed that they were meritorious in operating the company, and that the shareholder's seizure of control of the company violated their interests. They believed that the shareholders' resolution was invalid and took away the company's official seal. However, the company subsequently submitted an application for re-engraving the official seal to the department of Shenzhen Public Security Bureau. Dai Hong sued the court to invalidate the company’s resolution and requested the court to prohibit the company from engraving a new official seal.

The court made a ruling prohibiting the company from engraving a new official sea. The company filed an application for reconsideration, believing that the inability to engrave a new official seal would affect the company's operations. The court finally rejected the application for reconsideration and maintained its ruling that the company was prohibited from engraving a new official seal.

In this case, the court held that: "After review, the court found that the plaintiff filed a lawsuit with the court on the invalidity of the resolution of the shareholders meeting. The resolution of the shareholders meeting involved a change in the control of the company. The seal was made in line with the purpose of restricting the control of the company, and the court’s adoption of the above-mentioned preservation measures was not improper. Furthermore, after investigation, the defendant had actually completed the industrial and commercial change registration in accordance with the resolution of the shareholders meeting in the dispute.The seal of the defendant company does not need to be re-engraved due to loss."

It can be seen that when the control of the company is maliciously contested, the applicant applying to the court for the preservation of the official seal can effectively delay the lawsuit and prevent the control of the company from being easily transferred.

2. Raising salaries from the bottom of the pan——directly apply to the court to restrict the rights of the respondent’s shareholders and regain control

In the case of a company's control over disputes caused by equity transfer disputes, there are not a few applications for behavior preservation to restrict the use of the official seal, but there are few examples of restricting the rights of competitors' shareholders. In the battle for control between Zhongchao Group and Shenzhen Xintenghua Company, Zhongchao Group's application for prohibiting Shenzhen Xintenghua from exercising shareholder rights can be described as "snake strikes seven inches".

As the first case of "sell shells on gambling" in the A-share market, in 2017, Jiangsu Zhongchao Investment Group Co., Ltd. and Shenzhen Xintenghua Asset Management Co., Ltd. transferred 29% of the shares of Jiangsu Zhongchao Holding Co., Ltd. held by Zhongchao Group , Aroused widespread concern in the market.

However, after less than a year, the two parties had disputes over the equity transfer. After Shenzhen Xintenghua obtained control of the company, the equity transfer payment was not in place for a long time, making the equity transfer transaction not complete.

In order to protect its own rights and interests, the Zhongchao Group has taken a variety of measures. The most noteworthy is the Zhongchao Group and its actual controller Yang Fe,On October 7, 2018, they filed an arbitration with the Shanghai Arbitration Commission and applied for behavior preservation, requesting that Shenzhen Xintenghua be prohibited from exercising shareholder rights in order to restrict Shenzhen Xintenghua from voting on the proposal to remove directors at the upcoming extraordinary general meeting of shareholders. The Jiangsu Yixing Court subsequently made a ruling prohibiting the respondent Shenzhen Xintenghua from exercising shareholder rights (including but not limited to proposal rights, voting rights, and surplus distribution rights, shareholders' right to know and other shareholder rights) before the Shanghai Arbitration Commission makes an arbitration award. In the end, the directors of the Shenzhen Xintenghua Department were successfully removed by the Zhongchao Group without the support of 20% of Shenzhen Xintenghua's shares. So far, the control of the company has returned to the Zhongchao Group.

III. The practical dilemma of applying to the court for behavior preservation in practice

Although applying to the court for behavior preservation in a dispute over the control of a company is a way to quickly deter opponents, and searching for legal precedents, it can be found that many courts also accept behavior preservation, However, when the Docvit dispute resolution team represented the case, after communicating with the court and professional insurance professionals, it was found that the current cases of Beijing courts that recognize the applicant's behavior preservation are very limited, mainly including the following reasons:

1.There is no difficulty in enforcement for the objects targeted by behavior preservation

When the company’s official seal is preserved, the premise for the court to take action preservation measures is to ensure the execution of the judgment or avoid causing other damage to the parties. However, only from the perspective of implementation, in accordance with Article 22, paragraph 3 of the "Company Law" and Article 40 of the "Company Registration Management Regulations", there is basically no future difficulty in the company's changes and registration matters. Even if the resolution on which the registration is based is determined to be invalid or revoked, even if other shareholders do not cooperate in the future, the company can also apply for the direct cancellation of related changes and filing registrations in accordance with the provisions of Article 40 of the "Regulations on the Administration of Company Registration." The courts rarely approve the behavior preservation measures brought by the company's internal disputes and litigation that restrict the company's handling of changes and filing and registration, and they are very cautious when they really need to use them.

2. Whether it caused damage to the applicant is difficult to determine but it is easy to cause fatal damage to the company

In practice, another important reason for the court not to approve the applicant's application for behavior preservation is that restricting the normal use of the company's official seal or the exercise of the company's shareholder rights may affect the company's normal operations and cause fatal harm to the company. For example, due to the preservation of the company's official seal, important contracts during the company's operating period cannot be stamped with the official seal, and the company's daily business activities cannot be carried out normally.When examining whether the preservation of the company's official seal or shareholder rights is urgent and necessary, the court requires a higher level of judgment ability, and the court is also extremely cautious in making its decision.

IV. TIPs for applying for behavior preservation

1.Specify the behavior of applying for preservation and emphasize the urgency of preservation

Behavior preservation is different from property preservation. The object of preservation is often more abstract. When applying to the court, it is necessary to clearly explain in detail in the application. It is hoped that the court will prohibit which entities from doing which behaviors, and to prove as far as possible that behavior preservation will not affect the normal operation of the company.

In addition, the original intention of applying for behavior preservation in control rights litigation is often to buy time for the litigation. Although the pre-litigation behavior preservation is more difficult, However, after the relevant evidence is complete and the tense is really urgent, the applicant effectively proves that his rights and interests will be difficult to enforce due to the respondent’s reasons, and the applicant provides corresponding guarantees in accordance with the requirements of the court, the court may also make a ruling within forty-eight hours for pre-litigation behavior preservation.

2. Grasp the application time

Take the struggle for corporate control between Zhognchao Group and Shenzhen Xintenghua as an example. Zhognchao Group was once faced with the dual dilemma of not being able to obtain full share transfer funds and handing over control of  Zhognchao Group. For Zhognchao Group, if it does not apply for behavior preservation , It is necessary for the judging body to judge the effectiveness of the "Share Transfer Agreement" and related gambling agreements between the two parties before regaining control of Zhognchao Group.

But for the rapidly changing capital market, time is money. While the Zhognchao Group initiated arbitration, it initiated behavior preservation in a different way, and regained control of the company by prohibiting Shenzhen Xintenghua from exercising shareholder rights.

It can be seen that it is very important to reasonably grasp the time point of initiating behavior preservation. The Zhognchao Group achieved the effect of timely stop loss by filing a behavior preservation application in time.

3. Understanding the application process

Act preservation should mainly be applied by the parties to the court or arbitration institution. The arbitration institution has no right to take preservation measures and must be ultimately decided and enforced by the court. If the applicant applies for pre-litigation behavior preservation, he must also provide a guarantee to the court. Generally speaking, he must first contact the insurance company and ask the insurance company to issue an insurance policy.

Regarding the confirmation of the amount of the preserved property, in property preservation, legal practice generally requires it to provide the same or equivalent property as the preserved property as a guarantee. However, behavior preservation is different from property preservation. It is generally difficult to define the value of behavior, and judges need to exercise discretion. In practice, it is possible to determine whether it is necessary to provide a guarantee, as well as the method and amount of guarantee, by weighing the size of the losses that may be caused by the respondent's actions and the amount of money needed to compensate for these losses.

4. Reasonable use of legal provisions for relief

Article 108 of the "Civil Procedure Law" stipulates that if a party is dissatisfied with the ruling on preservation or advance enforcement, it may apply for reconsideration once. The execution will not stop during the reconsideration. It can be seen that the parties can apply for reconsideration of the ruling on behavior preservation, but the execution of the behavior preservation is not stopped during the reconsideration period. It is necessary to pay attention to relevant nodes in the process of applying for preservation and claim rights in time.

V. CONCLUSION

In summary, although behavior preservation is still in the process of being cautiously adopted and repeatedly discussed in judicial practice, it is necessary for lawyers to actively try to protect the rights and interests of the parties in a company control dispute in a timely manner.

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