China’s SPC finalises fourth judicial interpretation on the PRC Company Law
On 1 September 2017, the Supreme People’s Court ("SPC")’s fourth judicial interpretation of certain provisions ("Fourth Interpretation") of the PRC Company Law came into effect. The Fourth Interpretation has been timed to follow the major reforms of the foreign investment approval system between September 2016 and July 2017, and is intended to (amongst other things) use legal reform to make it more attractive for foreign investors to invest in PRC companies. In this alert, we consider the potential impact of the Fourth Interpretation on Chinese company law and practice, focusing on the significant changes from the April 2016 consultation draft.
Validity of corporate resolutions
A decision taken by unanimous written resolution of the directors or shareholders in lieu of a meeting (in accordance with the articles) must be supported by unanimous written consent of the shareholders (which is signed and sealed) and may be struck down by the court on application of shareholders/directors/other interested parties if this has not been done.
The Fourth Interpretation strengthens shareholders’ statutory information rights by the remedy of specific performance to compel the company to make information available at a specific time and location. It also clarifies the circumstances in which a limited liability company may withhold provision of information.
The Fourth Interpretation makes remedies available to shareholders of limited liability companies where dividend distributions have, when the company is profitable, been withheld to the detriment of the shareholders as a whole.
Statutory right of first refusal
Shareholders of limited liability companies have additional safeguards against being deprived of the opportunity to exercise their rights of first refusal.
The transferor can also prevent the other shareholders’ exercise of the right of first refusal by discontinuing the sale, provided that it remains liable to compensate the rights holder for losses reasonably incurred, and its liability to the buyer under the relevant sale agreement is unaffected.
Shareholders’ representative lawsuits
In an action brought by shareholders, directors or supervisors on behalf of the company, the benefits resulting from the action accrue to the company and not the shareholders. The shareholders are entitled to recover the reasonable expenses of a successful lawsuit.