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  • The Shareholder’s Right to Know V.S. The Company’s Trade Secrets Protection

    The Shareholder’s Right to Know V.S. The Company’s Trade Secrets Protection

    In order to protect the shareholder’s right to know (‘SRK’), Article 33 of the ‘Company Law ‘has stipulated that a shareholder may request to examine the articles of association, the meeting minutes of the shareholders’ meeting, the resolution of the board of directors, the resolutions of the board of supervisors, the financial reports, and accounting books. However, such documents may state the information which may be deemed as trade secrets as stipulated in the ‘Anti-Unfair Competition law’, e.g. the business plan, production management, purchase and sale information. If there is no restriction on ‘SRK’, then such right might be abused by those shareholders who intend to compete with the company in the same industry, or seek for some illegitimate interests.

    Article 33 of ‘Company Law’ has not stipulated any procedures for the above said documents, except the accounting books. It requires the shareholder to fill a written request to the company, and such written request shall illustrate the purpose. In addition, if the company has a reasonable reason to prove that the shareholder has any improper purpose, which might affect the legitimate interests of the company, then the company shall be entitled to refuse such request.

    Thus, the majority cases related to ‘SRK’, shall focus on whether the purpose of the shareholder is fair. Currently, there are no laws or judicial interpretations which have prescribed the elements or standards in identifying the fairness of the purpose. The typical opinion of the judicial departments is that ‘‘SRK’ shall be restricted by the principal of good faith. The judge shall identify the justice of the purpose case by case.’ (See the 2005 Shanghai High People’s Court “Reply on the Relevant Issues related to ‘SRK’Disputes’).

    In practice, according to the ‘Record of the Symposium on the Difficult Cases Related to the Company Law by the Courts of Jiangsu Province, 2006’, normally, in view of the burden of proof on the defense …… the company shall prove that the purpose is unfair. In the previous rulings, a company would provide evidence on the following 2 aspects: (1) the shareholder has established a new company, or participated in the management of another company, either of the new company or the other company is the competitor of the company. Such as the business scopes are highly similar; (2) the shareholder requires to review some documents, but the information in these documents are trade secrets, if the competitor obtains such information, the consequences would be severe.

    In fact, while a court is hearing an individual case, other elements may be taken into consideration. Such as the shareholder’s position, the establishment time of the relevant companies, the competition situation of the specific product, and etc.. For example, [2014] No.1633 HU YI ZHONG MIN SI (SHANG) ZHONG, the court held that Wang was the shareholder of Company D, and he used to be the legal representative of both companies. Company D and the company were competitors. The court decided that it was reasonable to prove that Wang hold the injustice purpose to check the accounting books of the company. [2008] No. 14819 ER ZHONG MIN ZHONG, the court held that although the business scope of Company T and Company Z were the same, Company T was established earlier than Company Z, and Company T had been producing and selling water treatment equipment till now. In addition, while establishing Company Z, the other shareholders of Company Z knew that Zhang was the shareholder and legal representative of Company T. In view of these, Company Z failed to prove that Zhang had unfair purpose. In order to prove the purpose of the shareholder is unfair, the company could take the above elements into consideration.

    For some special occasions, the court may support the shareholder to check part of the accounting books.The 2005 Shanghai High People’s Court “Reply on the Relevant Issues related to ‘SRK’Disputes’ has prescribed, if the plaintiff used to undertake the relevant management duties before he has resigned, such as the general manager shall sign contracts on behalf of the company. Then the trade secrets shall not be a barrier in preventing the shareholder to check the relevant documents. But the information produced after the plaintiff’s resignation should be protected as the company’s secrets, because the plaintiff is the shareholder of a competitor. Under such circumstance, the documents shall be divided into two categories. Those documents which produced before the plaintiff’s resignation should be provided to the plaintiff, and the rest which are produced after the plaintiff’s resignation should not be provided to the plaintiff. [2013] No. 9866 YI ZHONG MIN ZHONG ZI, the Beijing No.1 Intermediate Court holds the similar opinion, which says, the plaintiff has established a new company which is the competitor of the defendant; the plaintiff fails to prove the purpose is fair and reasonable; so the plaintiff shall not examine the accounting books which are produced after the plaintiff’s resignation. In view of these, the shareholder shall choose the scope of the accounting books based on the actual situation flexibly and reasonably.