Fight for control: prevention & response to corporate deadlock

Source: Beijing DOCVIT Law Firm  Time: 2021-07-09 21:49:21  Author: The dispute resolution team

In reality, because of corporate governance, there are raising disputes between the company and shareholders, between shareholders and shareholders, which makes the company in a stalemate due to the intensification of contradictions. The shareholders' meeting, the board of directors and other corporate governance institutions can not make decisions according to the legal procedures or the articles of association, thus making the company unable to operate normally and damaging the interests of shareholders. Can this kind of corporate deadlock be prevented? How to deal with such a deadlock? 

Ⅰ.The causes of company deadlock

1. Self-benefit is an important reason for the deadlock of formal companies.

Shareholders often pursue the same interests when they initiate the establishment of a company. This also reflects the human nature of the company. At this time, there is great trust between shareholders. With the improvement of the company's operating conditions, the use of distributable profits generated by the operating conditions needs shareholders to make decisions. At this time, shareholders may start from their own interests, and the situation of trust basis at the beginning will be broken. The imbalance of common interests will lead to the formation of deadlock in the company.

2. There are some defects in the voting rights and shareholding ratio of the company based on the joint venture or joint venture design.

According to the Company Law, shareholders can exercise their voting rights in accordance with the provisions of the articles of association, but the exercise of voting rights will be linked with the proportion of capital contribution. If the agreement and restrictions on voting rights, once there is a conflict of interests of shareholders, it is very easy to form a corporate deadlock. The recognition of 51%, 2 / 3 and other figures in the equity design of founders and investors makes the company deadlock in subsequent major resolutions such as capital increase or capital reduction, separation or merger, dissolution or change of articles of association. The loopholes in the initial equity design easily lead to deadlock.

3. Shareholders do not have a strong understanding of the legal deadlock and risk prevention of the company.

The basis of cooperation between shareholders is interests. During the initial period of cooperation, shareholders consider how the company makes money. They do not foresee or foresee the risks when the company loses money or the cooperation is not established. However, for the premise of cooperation, it is very unlucky to discuss the above issues too much. In addition, in consideration of cost saving, there was no relevant professional to design the equity structure at the beginning of its establishment, which led to the subsequent deadlock of the company.

Ⅱ. Prevention and accordingly solution of company deadlock

1. For the company's ownership structure and voting rights for a reasonable design.

Shareholders' shares and voting rights can be consistent or inconsistent, and the decisions made by the shareholders' meeting and the board of directors are often related to the voting rights, which requires certain considerations in the equity design:

① The shareholders' meeting or the board of directors can not stipulate that the resolution can be formed only by unanimous approval. Once the shareholders' opinions are inconsistent, it is easy to form the deadlock of the company.

② For the provisions of the resolution can not be designed higher than 2 / 3 of the voting rights or higher voting rights stipulated in the articles of association, once the subsequent need for financing, capital increase or equity transfer, the proportion is too high, it is difficult to pass the vote, forming a corporate deadlock.

③ If the shareholders' meeting or the board of directors can not meet the conditions for holding the meeting after being convened twice, or even if the meeting can be convened but the resolution can not be reached, a shareholder or the director shall be given the final decision right to solve the general voting matters, and the major matters of the company still need to be carried out in accordance with the requirements of the Company Law.

④ No matter how thorough consideration is given to the formulation of the articles of association, unforeseen matters may arise. Therefore, no matter how the voting rights are distributed, it is stipulated that if the shareholders' meeting or the board of directors cannot meet the conditions for holding the meeting twice, or if the meeting can be held but the resolution cannot be reached, the company can be dissolved. This provides a way out for the company deadlock, which will not make the company deadlock and want to dissolve the company face difficulties.

2. Design the exit mechanism of shareholders.

In the case of the loss of the basis of the company's shareholders' personal integrity, the exit of some shareholders may be able to better solve the company's difficulties, and also enable the shareholders with operating ability to get better opportunities. In the design of the articles of association, in the case of deadlock, any shareholder can issue a request to other shareholders to acquire or transfer shares. The shareholders who receive the request should make an expression within a certain period of time. If no expression is made within the time limit, the shareholders who receive the request should transfer or accept the acquired shares according to the proportion of their shares. Guarantee the smooth exit of shareholders after the deadlock of the company.

3. Reasonable procedure design of shareholders' meeting or board of directors' meeting.

In the case of irreconcilable conflicts between shareholders, it is sometimes difficult for the notice of the meeting to be delivered to shareholders or directors, or not to attend the meeting after the notice. In order to prevent the situation that the meeting can not be held under the conflict, the relevant articles of association can be designed.

① In the articles of association, various ways of receiving notice can be adopted, and the permanent address, common email address, common contact information, etc. shall be regarded as the receiving address. Once the notice of meeting is served in the prescribed manner, it is deemed that the shareholders or directors have received the relevant notice, which can solve the problem of difficult service of the notice.

② The articles of association may stipulate that if the shareholders who have received the notice fail to attend the meeting in accordance with the relevant notice or entrust others to attend the meeting on their behalf in accordance with the provisions, they shall be deemed to have abstained. However, there should be strict restrictions on this provision. The application of this provision can be used to deal with the deadlock of the company. The detailed articles of association need to be agreed by shareholders and professionals.

Ⅲ. CONCLUSION

In conclusion, when considering the establishment of a company, shareholders should also fully estimate the business risks and business deadlock. When considering the issue of "cooperation", they should also consider "separation". In fact, the design of "separation" can better guarantee the interests of all shareholders.

May be interested

Professional Team
Industry Research
More
  • 2018 Blue Book of Legal Health of China's Insurance Industry
    2018 Blue Book of Legal Health of China's Insurance Industry includes Part I Legal Health Index Report on Insurance Industry and Part II Special Legal Report on Insurance Industry. Among which, the Legal Health Index Report on Insurance Industry is the second report issued by Green Legal Global Alliance (GLGA) after it successfully issued the first Legal Health Index Report on Insurance Industry in 2018. The index can comprehensively and intuitively reflect the overall legal health status of the insurance industry in the past three years.
  • Legal Health Index Report on National Insurance Industry (2015 - 2017)
    Legal Health Index Report on National Insurance Industry (2015 - 2017) is compiled by Green Legal Global Alliance (GLGA), with the Beijing Docvit Law Firm as the professional support unit. Under the guidance of an external team of experts, it is one of the series of research topics in the legal health index report of capital market industry. In 2017, Green Legal Global Alliance (GLGA) successfully released its first research achievement of the series of research projects in the legal health index report on capital market industry, that is the Legal Health Index Report on Private Equity Industry. Report on Insurance Industry Legal Health Index is the second research result of this research topic.
  • 2018 Blue Book of China's Non-Performing Assets
    Based on an in-depth study and research on the overall non-performing asset industry, Green Legal Global Alliance Research Institute and Beijing Docvit Law Firm jointly complied 2018 Blue Book of China's Non-Performing Assets with certain academic and public welfare, hoping to bring guidance to the industry and reflect the innovation of the non-performing asset industry itself.
Fellow Program
More
  • 【Fellow Program I】
    With the launch of the "Fellow Program", Docvit hopes to unite with the like-minded lawyers of the country to build a career platform and realize their career dreams together. "Fellow Program I" aims to recruit partners, business partners and executive directors for the Docvit Branch in China.
  • 【Fellow Program II】
    "Fellow Program II" aims to recruit partners and lawyers for Docvit Headquarters and Beijing Office across the country and around the world to become what the industry, Docvit itself, market and clients want.
  • 【Fellow Program III】
    "Fellow Program III" aims to recruit partners for national branches of Docvit nationwide and globally. Docvit's national and global development blueprints require more partners to draw together, and let us work together to create a respectable law firm.
Brand Activity
More