Provisions (V) of the Supreme People’s Court on Several Issues concerning the Application of the Company Law (“Provisions V”) has come into force on 29 Apr. 2019

Due to the lack of the laws and regulations on the protection of shareholders’ rights and interests, there are disputes in the judicial practice. In order to solve those disputes, on 22 Apr. 2019, the “Provisions V” was adopted at the 1,766th session of the Judicial Committee of the Supreme People’s Court, which has come into force on 29 Apr. 2019. The main contents are as follows.

1. Where a related party transaction compromises the interests of a company, even the required procedures have been conducted, the court could still require the relevant shareholders to undertake liabilities.

Article 1 of the “Provisions V” prescribes that where a related party transaction compromises the interests of a company, the company, could require its controlling shareholder(s), actual controlling party, director(s), supervisor(s) or senior management personnel to compensate the losses incurred by the company, and the defendant(s) assert(s) that the said transaction has gone through the procedures stipulated by laws, administrative regulations or the company’s articles of association on information disclosure and approval by a shareholders’ meeting or shareholder’s general meeting, the People’s Court shall not support the assertion.

In addition, if the company does not file a lawsuit, because such related party transaction is invalid or could be revoked, the “Provisions V” prescribes that the shareholders who satisfy the criteria may file a lawsuit, which has enlarged the scope of the lawsuit that the shareholders could represent a company to file.

2. A director could be removed from office prior to expiry of his/her tenure by a valid resolution

Article 3 of the “Provisions V” prescribes that where a director who is removed from office prior to expiry of his/her tenure by a valid resolution passed by a shareholders’ meeting or shareholders’ general meeting asserts that the removal has no legal effect, the People’s Court shall not support the assertion. Article 3 has listed the elements that the court shall take into consideration, while hearing the case related to the compensation disputes between the director who has been removed from office, and the company. This article has clarified the entrust relationship, and both parties could be entitled to dissolve the relationship at its own discretion. Such dissolution has no relationship with the tenure.

3. The time limit for profit distribution is 1 year.

In order to guarantee the shareholders’ right to enjoy profits, Article 4 of the “Provisions V” prescribes that upon passing of a resolution by a shareholders’ meeting or shareholders’ general meeting on profit distribution, the company shall complete profit distribution within the duration stated in the resolution. Where the resolution does not state the duration, the provisions of the company’s articles of association shall prevail. Where the resolution and the company’s articles of association do not stipulate the duration or the duration exceeds one year, the company shall complete profit distribution within one year from the date of passing of the resolution. In addition, where the duration for completion of profit distribution stated in the resolution exceeds 1 year, such resolution could be revoked.