CHINA Trends and Developments Contributed by: Jiang Guoliang, Huang Jie, Xie Tingting and Lang Tao, T&C Law Firm
Despite the flexibility of electronic communication, procedural requirements remain critical. Companies must ensure compliance with statutory requirements and the articles of association governing notice, quo- rum, and voting procedures. Advance notice of the meeting and agenda must be served lawfully, and the process must ensure that all shareholders – espe- cially minorities – can effectively exercise their rights to information, questioning, and voting. The articles of association should specify acceptable electronic methods, verification procedures, and record-keeping requirements to minimise the risk of defective resolu- tions. Remedies available after rights have been infringed Improved mechanism for shareholders’ derivative action Paragraph 4 of Article 189 of the New Company Law introduces the double derivative action, allowing shareholders of a parent company to bring proceed- ings in their own name to protect the interests of a wholly owned subsidiary where the subsidiary’s board of directors or supervisory body refuses or fails to act. This mechanism is designed to counter a common tactic in practice whereby a controlling shareholder suppresses minority shareholders by transferring assets and diverting benefits through a wholly owned subsidiary. At the parent level, minority sharehold- ers may hold veto rights over major matters such as capital increases or reductions, making it difficult for the controlling shareholder to push through certain transactions. By establishing a wholly owned subsidi- ary, however, the controlling shareholder gains com- plete control over the subsidiary’s decision-making, free from minority oversight. With the introduction of the double derivative action, minority sharehold- ers who detect harm to the subsidiary’s interests can now “pierce” the corporate structure and seek relief directly. In practice, minority shareholders seeking to protect their rights should pay close attention to the following matters. • Scope of application – The remedy is strictly limited to wholly owned subsidiaries. Even where the parent company holds more than 99% of the equity, the statutory standing for a double deriva-
tive action is not satisfied unless the parent entirely owns the subsidiary. This narrow drafting is inten- tional: it focuses the remedy on structures most susceptible to abuse and least likely to be policed through internal governance mechanisms. • Standing and timing – Eligibility depends on a shareholder’s status at the time of filing, rather than when the alleged misconduct occurred. In other words, a plaintiff who acquires shares in the parent company after the harmful act took place may still bring a claim for conduct that damaged the sub- sidiary before they became a shareholder, provided that the harm continues or its consequences per- sist after they acquired shareholder status. • Litigation strategy – In court proceedings, disputes often centre on the evidentiary thresholds for establishing “continuing infringement” and proving a governance deadlock within the wholly owned subsidiary; thus, it would be beneficial to focus on securing evidence in three key areas: (a) a precise timeline of the impugned acts (eg, contract execution date, fund transfer date); (b) documentary proof that written requests for action were submitted to both the parent com- pany’s and subsidiary’s governance bodies; and (c) materials that establish the causal link between the subsidiary’s loss and the shareholder’s loss. Expanded right to exit Article 89 expands the right to exit for shareholders of limited liability companies by introducing an oppres- sion-based redemption mechanism alongside tradi- tional rights to exit. When a controlling shareholder misuses their rights in a way that seriously harms the company or other shareholders, an affected share- holder may demand that the company buy back their shares at a fair price. Judicial application remains cautious. Reported judg- ments expressly applying Article 89 are not yet avail- able, and courts are sensitive to the implications of a forced redemption for capital maintenance, internal shareholding balance and creditor protection. Early signals suggest that “abuse” will be confined to con- duct marked by bad faith, improper extraction of ben- efits or deprivation of basic shareholder rights, rather than ordinary business decisions taken with proce-
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