CHINA Law and Practice Contributed by: Kevin Wang, Global Law Office
The Validity of Guarantees by the Company When Legal Representatives Violate Internal Procedures Article 7 of the Interpretation of the Supreme People’s Court of the Application of the Relevant Guarantee System of the Civil Code of the Peo- ple’s Republic of China stipulates that if the legal representative violates the legal procedure of the company providing the external guarantee and exceeds their empowerment to conclude a guar - antee contract with the counterpart on behalf of the company, the validity of the guarantee con - tract shall be determined in accordance with the following criteria: • if the counterpart is in good faith, the guar - antee contract shall be effective for the company; externally, the company shall bear guarantee liability; internally, the company may claim indemnification against the legal representative at fault; and • if the counterpart is not in good faith, the guarantee contract is not effective for the company. The counterpart has the obligation to reasonably examine the validity of the company’s resolu - tions. If the counterpart has evidence of its rea - sonable examination, the people’s court shall determine that it acts in good faith, unless the company has evidence showing that the oppo - site party knows or should know that the resolu - tion is forged or altered. The criterion for judging the good faith of the counterpart, for a case involving a publicly trad - ed company, is whether the counterpart enters into the guarantee contract based on the infor - mation publicly disclosed by the listed company.
company and a bona fide counterpart based on the resolution shall not be affected. • The company cannot use the company regis - tration matter without formal registrations or modifications as an excuse against the bona fide counterpart. The above provisions mean that, if the bona fide counterpart has justifiable reasons to believe that the company is properly empowered and acts based on such belief, the court shall assume that the actions between the company and the bona fide counterpart are valid. Protection of Stakeholders’ Interests For the protection of stakeholders’ interests, the Company Law stipulates special procedural requirements as a precondition for the follow - ing activities of the company, which essentially reflects the multiple layers of competition among the interests of shareholders and external credi - tors, and those of majority shareholders and minority ones: • if a company invests in other enterprises or provides guarantees for other external par - ties, the decision shall be made by the share - holders’ meeting or board meeting, per the articles of association of the company; and • if a company provides a guarantee for its shareholders or actual control persons, the decision shall be made by the shareholders’ meeting; the aforesaid shareholders or the shareholders under the control of the afore - said actual control persons shall not vote on the aforesaid matters; the decision shall be passed by more than half of the voting rights held by the other shareholders present at the meeting.
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