2024-08-06

Five ways for minority shareholders to withdraw from the company under the new “Company Law”

On December 29, 2023, the Company Law of the People's Republic of China (2023 Amendment) (hereinafter referred to as the “New Company Law”) was formally adopted and officially implemented on July 1, 2024. Based on the new Company Law, this paper mainly discusses how to break the dilemma of “easy investment and difficult exit” for minority shareholders, and seeks exit path for minority shareholders and analyzes practical points.

Equity transfer

Original Company Law

Article 71

The shareholders of a limited liability company may transfer all or part of their equity to each other. The transfer of shares by a shareholder to a person other than a shareholder shall be subject to the consent of more than half of the other shareholders. The shareholders shall notify other shareholders in writing of the transfer of their shares for consent. If the other shareholders fail to reply within 30 days from the date of receiving the written notice, they shall be deemed to have consented to the transfer. If more than half of the other shareholders do not agree to the transfer, the shareholders who do not agree shall purchase the transferred equity. Failure to purchase shall be deemed as consent to the transfer. If the equity is transferred with the consent of the shareholder, other shareholders shall have the right of preemption under the same conditions. If two or more shareholders claim to exercise the preemptive right, the respective purchase ratio shall be determined through consultation; If no agreement can be reached through negotiation, the pre-emptive right shall be exercised according to the respective proportion of investment at the time of transfer. Where the articles of association provide otherwise for the transfer of equity, such provisions shall prevail.

New Company Law

Article 84 Shareholders of a limited liability company may transfer all or part of their equity to each other. Where a shareholder transfers the equity to a person other than a shareholder, it shall notify the other shareholders in writing of such matters as the quantity, price, payment method and time limit of the equity transfer, and other shareholders shall have the right of preemption under the same conditions. If the shareholder fails to reply within 30 days from the date of receipt of the written notice, it shall be deemed to have waived the preemptive right. If two or more shareholders exercise the preemptive right, the respective purchase ratio shall be determined through consultation; If no agreement can be reached through negotiation, the pre-emptive right shall be exercised according to the respective proportion of investment at the time of transfer. Where the articles of association provide otherwise for the transfer of equity, such provisions shall prevail.

Original Company Law

Article 137 Shares held by shareholders may be transferred according to law.

New Company Law

Article 157 The shares held by a shareholder of a joint stock limited company may be transferred to other shareholders or to persons other than shareholders. Where the articles of association restrict the transfer of shares, the transfer shall be carried out in accordance with the provisions of the articles of association.

Equity transfer, as a direct and convenient way for shareholders to withdraw from the company, involves two situations: internal transfer and external transfer.

I. Transfer of equity to other shareholders within the company

In a limited company or a joint stock company, there are no special restrictions on the transfer of equity between shareholders, and it is allowed to proceed freely. This provision reflects the respect and flexibility of the Company Law for the internal transfer of equity by shareholders, and aims to promote the internal capital circulation and equity structure optimization of the company.

2. Transfer of equity to a third party outside the company

1. Special Provisions for limited companies: In a limited company, when a shareholder transfers equity to a third party other than the shareholder, the other shareholders enjoy the right of preemption under the same conditions. The purpose of this provision is to maintain the compatibility of the limited company and ensure that the basis of trust and cooperation between the shareholders of the company is not subject to external interference.

2. Characteristics of joint stock companies: Compared with limited companies, joint stock companies emphasize more on joint stock and openness, so when their shareholders transfer equity to the outside, other shareholders do not enjoy the right of preemption. This regulation reflects the openness and liquidity of the shareholding structure of the joint stock company, which is conducive to attracting more investors and promoting the healthy development of the capital market.

Third, the new “Company Law” on the optimization of shareholders' foreign equity transfer

1. Preconditions for cancellation of shareholders' consent: The original Company Law stipulates that the transfer of equity by shareholders of a limited company to a third party requires the written consent of more than half of other shareholders. In the practice of equity transfer, the process of consultation and seeking consent between the shareholders to be transferred and other shareholders is actually added, which makes it difficult for the shareholders to withdraw from the company (especially the minority shareholders). According to the provisions of Article 84 of the new Company Law, when a shareholder transfers an equity to a person other than a shareholder, it is no longer necessary to obtain the consent of more than half of the other shareholders in advance. This reform simplifies the procedure for shareholders to transfer their equity to other countries, reduces the difficulty for minority shareholders to quit the company, and better protects the freedom of shareholders to transfer their shares.

2. Clarify the content of “notice” and “equal conditions” : The new Company Law further clarifies the notification obligations of shareholders of limited companies and the specific content of “equal conditions” when transferring equity. The shareholder to be transferred shall notify the other shareholders in writing of key information such as the quantity, price, payment method and term of the equity transfer to ensure that the other shareholders have the right of first refusal under the same conditions.

3. The articles of association of joint stock companies allow other provisions: The new Company Law adds a clause allowing the articles of association of joint stock companies to stipulate other restrictions on share transfer, which is in line with the current investment and financing practice, where investment agreements often stipulate that founding shareholders have the obligation to restrict equity transfer before the company goes public.

Iv. Practical suggestions

1. Special provisions of the Articles of Association: Although the law has made clear provisions on the transfer of equity by shareholders, the articles of association, as the basic document of the company's internal governance, can make more stringent special provisions on the transfer of equity. For example, the company's articles of association may set higher transfer thresholds or conditions, such as requiring shareholders to transfer equity to foreign shareholders representing more than two-thirds of the voting rights. These special provisions, while respecting the autonomy of the company's internal governance, also help to maintain the stability of the company and the interests of shareholders.

2. Minority shareholders agree on share repurchase: At present, minority shareholders, whether they are professional investment institutions or individuals, completely rely on the disclosure of the company to understand the company's operating conditions without participating in the company's operation. In order to avoid the situation of “not knowing anything” about the company's management after the investment, a right to know clause can be added to the investment agreement. Accordingly, in the buyback terms, the buyback event is comprehensively considered (it is suggested that the company violates the right to know and triggers the share buyback), so as to protect the rights and interests of minority shareholders to withdraw from the company as agreed.

3. Minority shareholders agree that the company shall cooperate with its equity transfer: Minority shareholders may consider adding relevant obligations of the company to cooperate with its equity transfer in the investment agreement. When the minority shareholder intends to transfer the equity to a third party, the company inevitably needs the cooperation of the company, such as the company's on-site reception of the intended transferee, the company's cooperation with the intended transferee to provide relevant materials, the company's cooperation in handling industrial and commercial changes and other matters.

Statutory share repurchase

Original Company Law

(1) where the company has not distributed profits to shareholders for five consecutive years, but the company has made profits for those five consecutive years, and the conditions for profit distribution prescribed in this Law are met; (2) Merger, division or transfer of the principal property of the company; (3) When the term of business stipulated in the articles of association expires or any other cause for dissolution stipulated in the articles of association occurs, the shareholders' meeting passes a resolution to amend the articles of association so that the company can survive. If a shareholder and the company fail to reach an equity purchase agreement within 60 days from the date of the adoption of the resolution at the shareholders' meeting, the shareholder may bring a lawsuit in the people's court within 90 days from the date of the adoption of the resolution at the shareholders' meeting.

New Company Law

(1) The company has not distributed profits to shareholders for five consecutive years, but the company has made profits for those five consecutive years, and the conditions for profit distribution stipulated in this Law are met; (2) Merger, division or transfer of major assets of the company; (3) When the term of operation stipulated in the articles of association expires or any other cause for dissolution stipulated in the articles of association occurs, the shareholders' meeting shall pass a resolution to amend the articles of association so that the company can survive. If a shareholder and the company fail to reach an equity purchase agreement within 60 days from the date of the resolution of the shareholders' meeting, the shareholder may bring a suit in a people's court within 90 days from the date of the resolution of the shareholders' meeting. If a controlling shareholder of a company abuses his rights as a shareholder and seriously damages the interests of the Company or other shareholders, the other shareholders shall have the right to request the Company to purchase his equity at a reasonable price. The shares of the company acquired by the company under the circumstances specified in the first and third paragraphs of this article shall be transferred or cancelled in accordance with the law within six months.

The new Company Law considers that the controlling shareholder's procedural restrictions on the shareholder's application for the company's share buyback lead to the obstruction of the exercise of the right of minority shareholders. On the basis of the original dissident shareholder's share buyback right, the new Company Law innovatively adds another triggering situation for the right of buyback (buyback relief under the circumstance of shareholder suppression), that is, when the controlling shareholder abuses the shareholder's right, If the interests of the Company or other shareholders are seriously harmed, the other shareholders have the right to request the Company to purchase their equity at a reasonable price. This reform provides an effective exit mechanism for the minority shareholders when they suffer from improper control by the controlling shareholders, and significantly enhances the protection of their rights and interests.

1. Shareholders' suppressed right to claim repurchase

In the past practice, due to information asymmetry, limited participation in company management and other reasons, it was often difficult for minority shareholders to accurately evaluate the real financial situation of the company, and they faced the dilemma of obstructing profit distribution caused by controlling shareholders. According to the new Company Law, through the addition of a repurchase situation in which shareholders are suppressed, the formation of the right of claim needs to meet the substantive requirements of “abuse of shareholder rights by the controlling shareholder” and “serious damage to the rights of the company or other shareholders” at the same time, and the procedure is not restricted, and the premise is not that there is a company resolution and shareholders raise objections. The following will introduce in detail the identification of “controlling shareholder” and “abuse of shareholder rights” in judicial practice.

2. Double standards identified by controlling shareholders

In order to ensure the accurate application of the right to repurchase, Article 265 of the new Company Law specifies two criteria for determining “controlling shareholders” : first, a substantial number of criteria, that is, shareholders whose contribution accounts for more than 50% of the total capital of a limited company or whose shares account for more than 50% of the total capital of a joint stock company; The so-called “control” refers to the shareholders who have the power to direct or control and influence the direction of the company's management and policies, that is, although the amount of capital contribution or the proportion of shares held is less than 50%, the voting rights that they enjoy according to the amount of capital contribution or the shares held are enough to have a significant impact on the resolutions of the shareholders' meeting.

Third, the specific circumstances and judicial reference of “abuse of shareholder rights”

Although the new Company Law does not directly list the specific manifestations of “abuse of shareholders' rights”, combined with the judicial interpretation and judicial practice of the Supreme People's Court, several typical cases can be summarized, such as: paying excessive salaries to active shareholders or their affiliates, purchasing non-operational assets or services for shareholders' consumption, concealing or transferring company profits to avoid profit distribution, etc. In addition, the interpretation of the “Nine People's Records” and the relevant judges of the Supreme Court further enriched the connotation of abuse, including personality 6 confusion, excessive dominance and control, and significant lack of capital, etc., providing an important reference for identifying abuse of shareholder rights in judicial practice.

Iv. Practical suggestions

1. After the implementation of the new Company Law, the buyback relief for shareholders under oppression still needs to be further clarified and referenced by practical cases.

2. The minority shareholders have the burden of proof for “the controlling shareholders abuse the rights of shareholders and seriously damage the interests of the company or other shareholders”, and need to collect sufficient evidence to obtain a favorable judgment.

Targeted capital reduction

Original Company Law

Article 177 When a company needs to reduce its registered capital, it must prepare a balance sheet and an inventory of its assets. The company shall notify the creditors within 10 days from the date of making the resolution to reduce the registered capital, and make a public announcement in a newspaper within 30 days. The creditor shall, within 30 days from the date of receipt of the notice, or within 45 days from the date of public announcement if it has not received the notice, have the right to require the company to pay off its debts or provide corresponding security.

New Company Law

Article 224 Where a company reduces its registered capital, it shall prepare a balance sheet and a list of its assets. The company shall notify the creditors within 10 days after the shareholders' meeting makes a resolution to reduce the registered capital, and make a public announcement in the newspaper or the national enterprise credit information publicity system within 30 days. The creditor shall, within 30 days from the date of receipt of the notice, or within 45 days from the date of public announcement if it has not received the notice, have the right to require the company to pay off its debts or provide corresponding security. Where a company reduces its registered capital, it shall reduce the amount of capital contribution or shares according to the proportion of capital contribution or shares held by the shareholders, except as otherwise provided by law, otherwise agreed upon by all the shareholders of a limited liability company or otherwise provided by the articles of association of a joint stock limited company.

In addition to the above two ways, shareholders can also withdraw through the company's capital reduction, which means that the company reduces the total registered capital in accordance with legal procedures during its existence. By reducing the registered capital to achieve the withdrawal of shareholders, this process can be regarded as the company by reducing its own capital to “buy back” the share of the investment of a specific shareholder, so as to achieve the investment withdrawal of the shareholder.

I. Principle and exception of equal proportional capital reduction

According to the new Company Law, the reduction of registered capital of the company follows the basic principle of equal proportional capital reduction, that is, in principle, all shareholders reduce their capital contribution according to their proportion of investment or the same proportion of shareholding. However, this principle is not absolute, and the law gives companies and shareholders flexibility in certain circumstances. Specifically, all shareholders of a limited company may, on the basis of unanimous consent, or a joint stock company may, in accordance with special provisions of its articles of association, adopt non-proportional capital reduction in order to meet the needs of specific shareholders for directional exit.

Second, the way of notifying creditors is more flexible

The new “Company Law” on the procedure of notifying creditors, in addition to the original way of publication, adds the announcement option of the national enterprise credit information publicity system, which makes the way of notifying creditors more flexible, and facilitates the company to carry out capital reduction procedures to a certain extent.

3. Legal liability for illegal capital reduction

Article 226 of the new Company Law imposes more severe legal consequences on illegal capital reduction. If the company does not follow the legal procedures in the process of capital reduction, resulting in the actual withdrawal of shareholders but does not fulfill the corresponding legal obligations, it is not only necessary to return the reduced capital and restore the original state, but also may be liable for compensation for losses caused to the company. In addition, responsible directors, supervisors and senior management may also face personal liability. Therefore, when choosing targeted capital reduction as an exit method, shareholders must ensure strict compliance with laws and regulations and the provisions of the company's articles of association, so as to avoid unnecessary legal disputes and liability.

Iv. Practical suggestions

1. In order to achieve such withdrawal, the minority shareholders usually need to “have prior agreement”, that is, to prestipulate the relevant buyback terms in the investment agreement, agree in writing that the company is the buyback obligor (one of them), and agree that all shareholders will cooperate with the company to buy back the minority shareholders' equity by means of targeted capital reduction, including but not limited to cooperating with the issuance of corresponding shareholders' meeting resolutions. The joint stock company shall take care to presuppose the corresponding articles of association.

2. In order to promote the smooth implementation of targeted capital reduction, the minority shareholders may set a reasonable time limit in the investment agreement for “the Company shall prepare the balance sheet and property list” after the occurrence of the buyback event, so as to urge the Company to complete the aforementioned obligations in accordance with the agreement.

3. Notwithstanding the foregoing written agreement, if the shareholders of the limited company fail to agree on targeted capital reduction, or the articles of association of the joint stock company does not agree on the path of targeted capital reduction, or the joint stock company does not realize the path of targeted capital reduction stipulated in the articles of association, it is still difficult for the minority shareholders to withdraw in this way, but the relevant shareholders can be held liable for breach of contract.

Dissolution of company

Original Company Law

(1) The term of operation prescribed by the articles of association expires or any other cause for dissolution prescribed by the articles of association occurs; (2) dissolution by resolution of the shareholders' meeting or the shareholders' general meeting; (3) The company needs to be dissolved due to merger or division; (4) The business license is revoked, the business is ordered to close down or the business is revoked according to law; (5) The people's court shall dissolve it in accordance with the provisions of Article 182 of this Law. (1) The term of operation prescribed by the articles of association expires or any other cause for dissolution prescribed by the articles of association occurs; (2) dissolution by resolution of the shareholders' meeting; (3) The company needs to be dissolved due to merger or division; (4) The business license is revoked, the business is ordered to close down or the business is revoked according to law; (5) The people's court shall dissolve it in accordance with the provisions of Article 231 of this Law. If the company has any cause for dissolution specified in the preceding paragraph, it shall publicize the cause of dissolution through the national enterprise credit information publicity system within 10 days.

New Company Law

Article 182 In case of serious difficulties in the operation and management of a company, the continued existence of which would cause heavy losses to the interests of the shareholders and which cannot be resolved through other means, the shareholders holding more than 10 percent of the voting rights of all the shareholders of the company may request the people's court to dissolve the company. Article 231 In case of serious difficulties in the operation and management of a company, the continued existence of which would cause heavy losses to the interests of the shareholders and which cannot be resolved through other means, the shareholders holding more than 10 percent of the voting rights of the company may request the people's court to dissolve the company.

Original Company Law

Article 183 Where a company is dissolved as a result of items (1), (2), (4) or (5) of Article 180 of this Law, a liquidation group shall be established within 15 days from the date of occurrence of the cause of dissolution to begin liquidation. The liquidation group of a limited liability company shall be composed of the shareholders, and the liquidation group of a joint stock limited company shall be composed of the directors or other personnel determined by the shareholders' meeting. If a liquidation group is not established within the time limit, the creditor may apply to the people's court to appoint relevant personnel to form a liquidation group to conduct liquidation. The people's court shall accept the application and organize the liquidation team to carry out liquidation in a timely manner.

New Company Law

Article 232 Where a company is dissolved as a result of the provisions of subparagraphs 1, 2, 4 and 5 of Paragraph 1 of Article 229 of this Law, it shall be liquidated. The directors, who are the liquidation obligors of the company, shall form a liquidation team to carry out liquidation within 15 days from the date of occurrence of the cause of dissolution. The liquidation group shall be composed of directors, except as otherwise provided in the articles of association of the company or unless the shareholders' meeting decides to elect others. If the liquidation obligor fails to perform the liquidation obligation in time and causes losses to the company or creditors, it shall be liable for compensation.

The dissolution of a company, as the end stage of the company's life cycle, refers to the process in which the company stops all business activities based on specific legal or agreed reasons, and starts the liquidation procedure, and finally completes the deregistration, so that the company's legal personality is extinguished. In this process, shareholders naturally withdraw with the elimination of corporate legal personality. According to Article 229 of the new Company Law, the reasons for company dissolution can be summarized into two categories: self-dissolution and compulsory dissolution, and the latter is further subdivided into administrative dissolution and judicial dissolution.

1. Judicial dissolution: judicial remedies for shareholders' active withdrawal

As a special means of legal relief, judicial dissolution gives a specific shareholder the right to request the court to dissolve the company under certain conditions. The so-called judicial dissolution, specifically refers to the people's court based on the suit of qualified shareholders to dissolve the deadlock of the company. Article 231 of the new Company Law provides in this regard: “If a company suffers from serious difficulties in its operation and management, its continued existence will cause significant losses to the interests of the shareholders, and it cannot be resolved through other means, the shareholders holding more than 10 percent of the voting rights of the company may request the people's court to dissolve the company.” This regulation reflects the law's interference in the failure of corporate internal governance, and aims to protect the legitimate rights and interests of shareholders, especially minority shareholders.

2. Application conditions and practical challenges of judicial dissolution

In practice, the key points of judicial dissolution are to determine whether the plaintiff has the qualification of litigation subject and whether the company has a deadlock. First of all, the plaintiff shareholders must have the qualification of the subject of the lawsuit, that is, hold more than 10% of the voting rights of the company alone or in total, but there is no special requirement for the shareholding period. Secondly, shareholders should first seek internal ways to solve the problem, such as requesting or convening and presiding over the shareholders' meeting to discuss relevant major matters, the shareholders' meeting can also replace or remove the directors, supervisors and other personnel that lead to the deadlock of the company according to law. In addition, when shareholders file a lawsuit to dissolve the company, they need to prove that the company has fallen into a deadlock in operation and management, which usually requires the submission of preliminary evidence such as the company's inability to make effective shareholders' meeting resolutions for more than two consecutive years. However, in practice, the controlling shareholder's control of the company often makes it difficult for minority shareholders to meet this standard of proof. In addition, when dealing with such cases, the judiciary will also consider the value of the company's survival, and tend to resolve the conflict between shareholders through the dispersion of shareholders rather than the dissolution of the company as far as possible if there are other ways to resolve the conflict.

3. Practical suggestions

The minority shareholders request the people's court to dissolve the company will have the corresponding economic costs, and the whole litigation cycle, the company liquidation and cancellation process will take a long time. In practice, the minority shareholders not only have to bear the litigation costs, lawyers' fees (if they appoint a lawyer), and the expenses of the liquidation team, in order to achieve the purpose of the cancellation of the company, the minority shareholders may also bear the administrative fines and other expenses that the company has not paid. Therefore, this path is usually a helpless move when the controlling shareholder and the minority shareholder are in a deadlock, and the minority shareholder cannot withdraw by other flexible ways such as equity transfer.

Shareholder disownership system (passive withdrawal of shareholder)

Original Company Law

Article 35 After the establishment of a company, no shareholder may withdraw his capital contribution.

New Company Law

Article 51 After the establishment of a limited liability company, the board of directors shall verify the capital contribution of a shareholder, and if it is found that a shareholder fails to pay the capital contribution in full as stipulated in the articles of association, the company shall issue a written demand to the shareholder for the capital contribution. If the company suffers losses due to its failure to perform the obligations specified in the preceding paragraph in a timely manner, the responsible director shall be liable for compensation.

Article 52 If a shareholder fails to pay his capital contribution in accordance with the date specified in the articles of association of the company, and the company issues a written demand for capital contribution in accordance with the provisions of paragraph 1 of the preceding article, it may specify the grace period for the payment of capital contribution; The grace period shall not be less than 60 days from the date on which the Company issues the demand. If a shareholder still fails to fulfill his obligation to contribute capital upon expiration of the grace period, the company may, upon resolution of the Board of directors, issue a notice of loss of rights to the shareholder, which shall be issued in writing. As of the date of the notice, the shareholder loses the equity of his unpaid contribution. The equity lost in accordance with the provisions of the preceding paragraph shall be transferred according to law, or the registered capital shall be reduced accordingly and the equity shall be cancelled; If it is not transferred or cancelled within six months, the other shareholders of the company shall pay the corresponding capital contribution in full according to the proportion of their capital contribution. If a shareholder objects to the loss of his right, he shall, within 30 days from the date of receipt of the notice of the loss of his right, bring a suit in a people's court.

Article 53 After the establishment of a company, no shareholder may withdraw his capital contribution. In case of violation of the provisions of the preceding paragraph, the shareholder shall return the withdrawn capital contribution; Where losses are caused to the company, the directors, supervisors and senior managers who are responsible shall be jointly and severally liable for compensation with the shareholder. Article 107 The provisions of Article 44, paragraph 3 of Article 49, Articles 51, 52 and 53 of this Law shall apply to joint stock limited companies.

The system of shareholders' loss of rights is a highlight of the new Company Law, which specifically stipulates that if a shareholder fails to fulfill the obligation of capital contribution on time and is still not fulfilled after the company calls for payment, the shareholder shall lose the equity of the unpaid capital contribution after being notified by the resolution of the board of directors of the company. The delisting system of the original Company Law is aimed at the two situations of “no investment” and “withdrawal of investment”, and the situation of partial non-investment or withdrawal of partial investment is not further elaborated. The new “Company Law” loss of rights system changes the applicable conditions from “no investment” to “insufficient investment”, so as to achieve the proportion of non-investment and the proportion of loss of rights corresponding, can only for the shareholders of the non-investment part of the loss of rights, so as to be more accurate, but also expand the scope of application of the loss of rights rules.

1. Procedure steps for shareholders to lose their rights

1. Verification by the Board of directors and written call by the Company: the board of directors shall verify the shareholder's capital contribution and find that the shareholder fails to pay the capital contribution in full as stipulated in the articles of association of the company, the company shall issue a written call to the shareholder to call for capital contribution. The call may contain a grace period for the payment of capital contribution, which shall not be less than 60 days from the date of the call by the company;

2. The board of Directors makes a resolution of loss of rights: if the grace period expires and the shareholder still fails to fulfill the obligation of capital contribution, the board of directors may convene a meeting and make a resolution on the shareholder's loss of the equity of his unpaid capital contribution;

3. The Company shall issue a written notice of loss of rights: the Company may issue a notice of loss of rights to the shareholder by resolution of the Board of directors, and the notice of loss of rights shall be issued in written form. From the date of issuance of the notice, the shareholder shall lose the equity that has not paid the contribution.

(4) Relief measures for shareholders who have lost their rights: shareholders who have objections to the loss of rights shall file a lawsuit within 30 days from the date of receiving the notice of loss of rights.

Second, the system of shareholder loss of rights and the system of shareholder removal

The comparison between the shareholder disenfranchisement system and the shareholder removal system is shown in the following table: