On April 12, 2016, the Supreme People’s Court issued the Provisions of the Supreme People’s Court on Issues Relating to Application of Company Law of the People’s Republic of China (IV) (Draft for Public Comments) (“Provisions”).

The Provisions include 36 clauses covering five parts. Among others, six clauses relating to the direct litigation and shareholder representative litigation will be discussed hereof.

1. Basic Regulations on Direct Litigation and Shareholder Representative Litigation Stipulated in the Company Law of People’s Republic of China (“Company Law”)

1.1 Applicable Scope

Subject to Article 149 and Article 151 of the Company Law, a direct litigation or a shareholder representative litigation (together as the “Litigations”) shall be brought under the following circumstances:

a. A director, supervisor or senior management personnel violates the provisions of laws, administrative regulations or the articles of association of the company in his/her performance of duties and powers, causing damages to the company; or
b. An infringement of interests of the company by other parties causes damages to the company.

1.2 Pre-Condition of Direct Litigation

a. Regarding the aforementioned misbehaviors of a director, senior management personnel or other parties, a shareholder or a group of shareholders of a limited liability company or a company limited by shares holding 1% or more shares in the company for 180 days consecutively is entitled to submit a written request to the board of supervisors or the supervisor to file a lawsuit to the court; or
b. Regarding the aforementioned misbehaviors of a supervisor or other parties, the shareholder(s) mentioned above is entitled to submit a written request to the board of directors or the executive directors to file a lawsuit to the court.

If the board of supervisors or the supervisor or the board of directors or the executive director of the company accepts such request of the shareholder(s) and files the lawsuit, such lawsuit belongs to a direct litigation in the name of the company (“Direct Litigation”).

1.3 Pre-Condition of Shareholder Representative Litigation

The aforementioned shareholder(s) could directly bring litigations on their own behalf (“Shareholder Representative Litigation”) under the following circumstances:

a. The board of supervisors or the supervisor or the board of directors or the executive director refuses to file a lawsuit pursuant to the aforementioned written request of the shareholder(s) or fails to file a lawsuit within 30 days as of receipt of such request; or
b. There are urgent circumstances which will cause irrecoverable losses to the company if the lawsuit couldn’t be filed immediately.

2. Further Regulations Stipulated in the Provisions regarding Litigations

2.1 Litigation Status

For the Direct Litigation, subject to Article 30 of the Provisions, the company shall be listed as the plaintiff, and the head of the board of supervisors or the supervisor or the chairman of the board of directors or the executive director shall be the representative of the litigation.

After accepting the Shareholder Representative Litigation, the court shall notify its company to attend such litigation as a third party.

Comments:

Article 30 clearly distinguishes the different litigation status of a company under different circumstances. Regarding the Direct Litigation, the previous provisions (draft for comments) list the head of the board of supervisors or the supervisor or the chairman of the board of directors or the executive director as the plaintiff of the litigation. By contrast, the Provisions, listing the company as the plaintiff, are in conformity with the basic principle of “independent legal personality of the company” and “corporate governance”.

2.2 Definitions of the Director, Senior Management Personnel, Board of Supervisors, Supervisor and Others

Subject to Article 31 of the Provisions, the “director”, “senior management personnel", "board of supervisors" and "supervisor" specified in Article 151 of the Company Law shall include the director, senior management personnel, board of supervisors and supervisor of the company’s wholly-owned subsidiaries.

"Others" specified in Paragraph 3 of Article 151 of the Company Law refer to persons other than directors, supervisors, senior management personnel of the company or its wholly-owned subsidiaries.

Comments:

Article 31 expands the application scope of the Litigations, which are not only applicable to the company, but also to its wholly-owned subsidiaries. Under such conditions, the parent company is able to supervise the behavior of directors, supervisors, senior management personnel of its wholly-owned subsidiaries. Moreover, the parent company could make a breakthrough regarding the principle of “independent legal personality of the company” and maintain its own benefit and interest through the Litigations against its wholly-owned subsidiaries.

2.3 Participation of Litigation by Other Shareholders

Subject to Article 32 of the Provisions, for the Shareholder Representative Litigation, where other shareholders apply for attending the litigation based on the same claim before the end of the debate at the court of first instance, they shall be listed as co-plaintiffs. The legal proceedings which have already been under process shall be legally binding to other shareholders that have participated in the Shareholder Representative Litigation. The judgement shall be legally binding to the shareholders that haven't participated in the Shareholder Representative Litigation.

Comments:

Article 32 clarifies the possibility of the participation of other shareholders in the Shareholder Representative Litigation and confirms their litigation status.

2.4 Plaintiff Replaced by Its Company during the Shareholder Representative Litigation

Subject to Article 33 of the Provisions, after the court initiates the hearing regarding a Shareholder Representative Litigation, where the company applies for replacing the shareholder in such litigation, the company shall seek the consent from the shareholder. If the shareholder agrees on such replacement, the litigation proceedings which have already been under process shall be valid, and if the shareholder files another case regarding the same circumstance, it shall not be accepted or shall be dismissed by the court.

Comments:

Article 33 regulates the possibility of transferring the Shareholder Representative Litigation to the Direct Litigation, and also indicates that the shareholder has the right to refuse such replacement. Once the company replaces the shareholder and continues the litigation, the shareholder will lose the control to the whole case, and could not resume through filing anther case.

In addition, it is suggested that the term of “shareholder” in this article shall be further defined/explained. Subject to Article 32 thereof, the legal proceedings which have already been under process shall be legally binding to other shareholders, and the judgement shall be legally binding to the shareholders that haven't participated in the Shareholder Representative Litigation. Therefore, when determining the replacement issues, the shareholder shall ask for the consent of other shareholders in order to form the unitary will of all shareholders.

2.5 Mediation during Litigation

Subject to Article 34 of the Provisions, for the Shareholder Representative Litigation, where involved parties have reached a mediation agreement, they shall submit to the court the resolution of shareholders’ meeting in which the mediation agreement is approved. Where a limited liability company fails to submit such resolution of the shareholders' meeting (“Resolution”), all shareholders shall deliver their signatures and/or seals on the mediation agreement or submit to the court a written opinion approving the mediation agreement.

Comments:

It is suggested that the voting regarding the Resolution shall be refined. For instance, provided that the defendant is the director (or the senior management personnel or the supervisor) or the shareholder, such defendant will cause the interest conflict when voting on the mediation agreement. Therefore, it shall be further discussed whether the challenge system of the associated shareholder shall be applied to the voting regarding the Resolution.

2.6 Disposal of the Interest after Winning a Litigation

Subject to Article 35 of the Provisions, during a Shareholder Representative Litigation, where a shareholder requests the defendant other than the company to directly bear the civil liability, such claim shall not be supported by the court.

Where a shareholder files the Litigations regarding the damage of interests of the company's wholly-owned subsidiaries and requests the defendant to directly bear the liability to such wholly-owned subsidiaries, the claim shall be supported by the court. The claim requesting the defendant to directly bear the liability to the company shall not be supported.

If a shareholder winning the litigation requests the company to cover reasonable legal fees as well as the investigation expenses, assessment fees, notary fees and other reasonable expenses spent for the litigation, such claims shall be supported.

Comments:

Article 35 indicates that the essence of the Shareholder Representative Litigation aims to maintain the benefit and interests of the company. However, the company shall pay reasonable expenses for relevant shareholders.



Reference:

Paragraph 1 of Article 151 of the Company Law: In the event of circumstances stipulated in Article 149 (see the content below) involving a director or senior management personnel, a shareholder or a group of shareholders of a limited liability company or a company limited by shares holding 1% or more of the shares in the company for 180 days consecutively may submit a written request to the board of supervisors or the supervisor (in the case of a limited liability company which has not established a board of supervisors) to file a lawsuit with a court; If the circumstance stipulated in Article 149 involves a supervisor, the aforesaid shareholder(s) may submit a written request to the board of directors or the executive director (in the case of a limited liability company which has not established a board of directors) to file a lawsuit with a court.

Article 149 of the Company Law: A director, supervisor or senior management personnel who violates the provisions of laws, administrative regulations or the articles of association of the company in his/her performance of duties and powers and causing damages to the company shall bear compensation liability.

Paragraphs 2 and 3 of Article 151 of the Company Law:

Where the board of supervisors or the supervisor or the board of directors or the executive director refuses to file a lawsuit pursuant to the aforesaid written request of the shareholder(s) or fails to file a lawsuit within 30 days from receipt of such request, or where there are urgent circumstances which will cause irrecoverable losses to the company if the lawsuit couldn’t be filed timely, the aforesaid shareholder(s) shall have the right to file a lawsuit with a court directly in their own name to protect the interests of the company.

In the event of an infringement of the legal interests of the company by others which causes damages to the company, shareholders mentioned in the first paragraph of this Article may file a lawsuit with a court in accordance with the provisions of the aforesaid paragraphs.