Highlights of the Company Code amendment project

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JThe latest Companies Act Amendment Bill was debated and opened for public comment on December 24, 2021, adding and substantially revising approximately 70 articles of the current Companies Law comprising 13 chapters and 218 articles.

Broaden the scope of the right to know of the shareholders of the public limited company. Articles 33 and 97 of the Company Law provide for the same by listing the documents that shareholders can consult and take copies of. However, from the very beginning, the arbitration criteria used by the courts to determine whether original accounting vouchers, which entered the accounts for inspection, should be made available to shareholders for review, have been inconsistent.

Li Weiming
Partner
Tiantai Law Firm

In Fuba Investments vs. Hairong Boxin International Financial Leasing (2019), a retrial of a shareholder right-to-know dispute, the Supreme People’s Court held that Section 33 of the Companies Act expressly provides that the examination and taking of copies of the company’s articles of association, minutes of general meetings, resolutions of board meetings, resolutions of supervisory board meetings and financial and accounting reports are shareholders’ rights, but the examination by shareholders of the books of accounts of the company is based on the fact that they have a legitimate purpose and that it does not harm the legitimate interests of the company. Fuba Investments was a shareholder of Hairong Boxin and as such had the right to know the operational status of the company and the right to review relevant documentation.

Furthermore, article 13 of the accounting law specifies that: “Accounting documents, account books, financial and accounting reports and other accounting documents must comply with the provisions of the uniform national accounting system. Article 14 specifies: “The accounting documents include the original documents and the accounting documents.

It is noted that the books of account do not include original supporting documents or accounting documents. The Companies Act stipulates that shareholders may examine only financial and accounting reports and books of accounts, omitting original supporting documents, therefore, the aforementioned judgment regarding Fuba Investments based on the previous provision was untenable.

According to article 51 of the draft, the shareholders of limited liability companies have the right to consult and take copies of the “register of shareholders”, and to consult but not to take copies of the “accounting documents”. If this section of the draft is adopted, there is hope for a unification of award criteria on the review of original supporting documents in shareholder right-to-know disputes.

Optimization of the procedure for registering changes of legal representatives. The draft provides for a new chapter on company registration, clarifying the related issues and registration procedures of company establishment, change registration and deregistration and further optimizing the registrar and procedure, thus improving the recording efficiency and convenience level.

In particular, Article 28 of the draft expressly provides that “when there is a change in the legal representative of a company, the application for registration of this change is signed by the new legal representative”.

In Song vs. Beijing Yugao Investment Fund Management et al (2020)an appeal in a dispute over an application for a change of company registration, the Third Intermediate People’s Court of Beijing Municipality ruled that: “According to the Company Law and the Jinchifei Articles of Association, a change of legal representative of the company requires the adoption of a resolution by its general meeting and its board of directors, and the completion of the procedure required to register the change with the administration of industry and commerce. Accordingly, the change of legal representative is a matter of self-governance of Jinchifei, so the court cannot compel Jinchifei to pass a resolution to change the legal representative or directly change the legal representative of Jinchifei on its behalf. As a result, the court rejected Song’s appeal request.

This case shows obliquely that the internal decision-making procedure of a company is the prerequisite for a legal action concerning a change of legal representative. In a traditional corporate control dispute, the party seeking control cannot obtain the official corporate seal, business license or cooperation of the former legal representative to sign the application for registration of the change after adopting a resolution of the shareholders’ meeting to change the candidates for the positions of legal representative, directors, etc. of the target company.

It will therefore often have to take legal action to register the changes in the company or to return the company’s licenses and authorizations after the completion of the internal decision-making procedures. Legal actions tend to take a long time to resolve, which runs the risk of losing control of the target company. The new provision of Article 28 of the draft will be beneficial in resolving these impasses.

Provision to accelerate the period for payment of capital contributions by shareholders whose capital contributions are not yet due. Under the current legal framework, it is not possible to require shareholders whose capital contributions have not yet expired to fulfill their capital contribution obligations in advance in order to protect the interests of creditors.

Notwithstanding that applicable laws and judicial interpretations impose additional liability on such shareholders, for them to be deemed enforceable in enforcement proceedings, unless the company becomes bankrupt or satisfies the bankruptcy conditions but has not yet declared bankruptcy, creditors can only assert their rights against these shareholders.

In Li vs. Yang and Zhongqing Huili Asset Management (Beijing) (2020), In a compulsory execution objection case, the Supreme People’s Court ruled that since “debtor shareholders’ deadline for their subscribed capital contributions is January 1, 2044, this did not constitute a default on their part of pay their capital contributions in full and on time”. Accordingly, it did not apply Article 17 of the Rules of the Supreme People’s Court on several matters concerning the change and addition of parties in civil executions to add them as subject to execution.

On the other hand, article 48 of the draft directly grants creditors the right to demand from shareholders whose capital contribution deadlines have not yet expired the advance payment of these capital contributions. If passed, this amendment will provide great convenience and protection to creditors, ease the burden of proof for creditors, and further strengthen the protection of creditors’ interests.

Li Weiming is a partner at Tiantai Law Firm

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