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1.Overview

The right to request for share repurchase of dissenting shareholders refers to the right of the company's shareholders meeting to resolve major actions of the company based on the majority vote of the capital, and the dissenting minority shareholders have the right to request the company to purchase their shares at a fair price. The system design of the right of request for share repurchase of dissenting shareholders is designed to give dissenting shareholders the right to request the company to repurchase their shares at a fair price when the company makes a decision that affects the major interests of shareholders. The original intention of the system is to protect the interests of small and medium shareholders. Statutory rights will not be excluded by company resolutions or special provisions of the company’s articles of association.

(1)  Basis of claim

The exercise of the right to request for share repurchase by dissenting shareholders must meet the conditions stipulated by the law. It is not that shareholders can exercise the right to request for share repurchase when they disagree with any company resolution. Otherwise, it will cause instability within the company and violate the company’s capital maintenance in principle.

01 Limited Liability Company

(1) The company has not distributed profits to shareholders for five consecutive years, and the company has been profitable for five consecutive years, and meets the conditions for distribution of profits as stipulated in this law. (Article 74, Paragraph 1, Item 1 of the Company Law)

(2) The company merges, splits, or transfers its main assets. (Article 74, Paragraph 1, Item 2 of the Company Law)

(3) The business period specified in the company's articles of association expires or other reasons for dissolution specified in the articles of association occur, and the shareholders' meeting passes a resolution to amend the articles of association to allow the company to survive. (Article 74, Paragraph 1, Item 3 of the Company Law)

02 Company limited by shares

The company’s merger and division resolutions made by the general meeting of shareholders objected to the company’s purchase of its shares (Article 142, Paragraph 1, Item 4 of the Company Law)

(2) Requirements for the exercise of the right of repurchase request

01 Exercise Subject

The subject of the repurchase request should be the registered shareholder. Although our country’s law recognizes the method and effectiveness of the equity holding by prominent shareholders and dormant shareholders, the effect of external creditor’s rights based on the repurchase request should be based on equity. Appearance doctrine review of registered shareholders, and the dormant shareholders will still exercise the repurchase request rights through the obvious shareholders before the effective legal documents are recognized or the industrial and commercial changes.

 Or if they instruct the disposal of the equity they hold, the dormant shareholder can pursue the liability for breach of contract based on the entrusted-agent contract relationship (this article will not be continued…).

02 Shareholders disagree with the resolutions passed by the shareholders (general) meeting

The resolutions of the shareholders (general) meeting will be made in accordance with the capital majority decision or the voting method stipulated in the company's articles of association. The resolutions of the shareholder (general) meeting reflect the opinions of the majority of shareholders, mainly the opinions of the company’s controlling shareholders. In this case, the interests of small and medium shareholders may not be protected because of the protection of those who are at a disadvantage under the company’s voting rights system. For the interests of small and medium shareholders, the law grants them the right to request share repurchase. Therefore, the basis for the exercise of this right is to require objections to the voting results of the shareholder (general) meeting.

03 Make a statement of intent within the statutory time limit

Limited liability company: The understanding of Article 74 of the Company Law should be combined with the full text of the two paragraphs of this article. The dissenting shareholder’s repurchase request will be exercised with the company first, and the share repurchase contract will be determined through negotiation with the company. When the repurchase contract fails to reach an agreement, or the company fails to perform the agreement after the agreement, the dissenting shares request the court to initiate judicial procedures to protect their rights and interests within the statutory time limit.

2.Judging opinions and practice disputes

 We searched through the search function of the "Wolters Kluwer" database and searched the trial date from January 7, 2015 to October 13, 2021. The full text contains the case of the "repurchase request right of dissenting shareholders", and a total of 25 cases were retrieved. There are 3 cases at the high court level, 10 at the middle court level, and 12 at the grassroots level. After studying all the judgment documents and excluding irrelevant cases, a total of 20 typical sample cases were selected. After systematic review, we have noticed that in practice, there are not many disputes concerning the “repurchase rights of dissenting shareholders”, and the winning rate is not high.

Controversial question 1: Since the legal provisions do not clearly define what is "main property", under what circumstances can dissenting shareholders exercise the right to request equity repurchase on the grounds that the company transfers the "main property"?

The focus of the dispute in the Civil Judgment (2021) Hu 02 Min Zhong 7883 issued by the Shanghai Second Intermediate People’s Court is: Pandi Company’s transfer of 1% of the equity in Company A and the repurchase of the Pandi Company held by Beijing Company B .. Whether the equity of the concluding company  of Group A belongs to the transfer of the main property specified in Article 74, Paragraph 1, Item 2 of the "Company Law of the People's Republic of China", and whether Yang Keyi can request Pandi to purchase its equity accordingly. The opinion of the Civil Ruling (2018) EMinShen No. 1907 issued by the Higher People's Court of Hubei Province is also about whether the determination of the company's "main property" can file an objection to the shareholder's repurchase request. According to the content of the above two judgment documents, the determination of whether the transfer of "main property" in the company should be a matter of whether the transfer involves the main material basis for the company's existence and development continues to exist. The company’s transfer of its main assets will bring about a major transition in the company’s existence and development, and the rights of shareholders will also undergo a fundamental change. According to the literary interpretation, "main property" should refer to the company's "decisive role" or "affecting the basis of the company's existence" property. The criteria for determining "main property" can be judged from both quantitative and qualitative aspects: in terms of quantity, the ratio of the value of the transferred property to the company's total assets is the standard. Qualitatively, whether the transfer of the property will have a significant impact on the company’s production and operation, such as the company’s inability to maintain business due to the property transfer or having to significantly reduce its business scale.

In judicial practice, how to define what belongs to the company's "main property" has been a persistent problem because of the long-term lack of clarity in legal regulations and the opinions of the relevant Supreme People's Court. "Main property", in addition to considering the proportion of the property in the company's assets, it must also consider the changes in the company's operating performance after the asset changes. However, how to quantify the aforementioned standards is still handled by the judicial authority in the individual case with comprehensive factors" considered and finalized.

Disputed question 2: Can the articles of association of a limited liability company provide for other reasons for share repurchase other than Article 74 of the "Company Law"?

The right to request shares repurchase of a limited liability company is stipulated in Article 74 of the "Company Law", which is an important tool for small and medium shareholders to balance the "capital majority decision". However, in practice it is quite controversial: except for the "Company Law" "In addition to the three situations stipulated in Article 74 that can be used for share repurchase, can the articles of association of the company independently stipulate the conditions for share repurchase?

In the 18th batch of guiding cases issued by the Supreme People’s Court on June 27, 2018, Case No. 96 "Song X v. Xi'an Dahua Catering Co., Ltd. Shareholder Qualification Confirmation Dispute" supported the "people's transfer of shares and retention" equity in the articles of association. The repurchase regulations lead to the following thinking: can the company’s articles of association arbitrarily stipulate the reasons for the company’s repurchase of shareholders’ equity?

Regarding whether the articles of association of a limited company can provide for the reasons for share repurchase in addition to Article 74 of the "Company Law", there are mainly the following views in practice:

The first view is that: The right to request repurchase by dissenting shareholders as stipulated in Article 74 of the "Company Law" is a mandatory standard, and the company's articles of association will not independently set the right to request repurchase by dissenting shareholders outside of the law.

The second point of view is that although the "Company Law" does not clearly stipulate that the company's articles of association may provide for other reasons for repurchase, the company law does not prohibit the company's articles of association from expanding the requirements for repurchase purposes. Article 74 of the "Company Law" does not belong to a prohibitive provision; in addition, the "Company Law" stipulates that the company can reduce the registered capital, so the company can repurchase shares and then perform the capital reduction procedure. Therefore, if the company’s articles of association of a limited liability company stipulate other repurchase situations in addition to Article 74 of the Company Law, the provisions of the articles of association will be effective if it does not violate the prohibitive provisions of the law.

The third point of view is that: in principle, the company’s articles of association should not be allowed to arbitrarily expand the circumstances in which dissenting shareholders request equity repurchase. However, with the development of the social economy, on the basis of summarizing judicial practice, the number of equity repurchases should be appropriately increased.

The author supports the second view. On April 15, 2016, the Hunan Provincial Higher People’s Court made (2016) XiangMinZai No. 1 complainant Deng Zhongsheng, the respondent Zhuzhou Architectural Design Institute Co., Ltd., and Xie Hui’s equity transfer dispute judgment opinion: The "Articles of Association" and "Equity Management Measures" of Architectural design Faculty and department limited liability company, were voted and approved by the shareholders' congress, which are legally binding on the architectural design institute and all shareholders. Article 74 of the "Company Law of the People's Republic of China" stipulates the right to request share repurchase of dissenting shareholders in a limited liability company. With one of the three statutory reasons stipulated in this article, the company is obliged to repurchase the shares of dissenting shareholders, and it is not a requirement that the company can only repurchase the shares of dissenting shareholders and otherwise cannot repurchase the shares of other shareholders of the company. The law does not prohibit limited liability companies from repurchasing shares. The “Articles of Association” of the Architectural Design Institute and the “Equity Management Measures” on the specific content of share repurchase do not violate the basic principles of the company law regarding the maintenance of registered capital, nor do they harm the legitimate rights and interests of third parties. They are valid clauses.

Through sorting out judicial cases, the author noticed that the company's share repurchase in judicial practice is not limited to the three situations stipulated in Article 74 of the "Company Law", but it should be noted that there are very few similar cases that can be retrieved. It has yet to be confirmed in judicial practice. In practice, we should still be cautious in designing equity repurchase clauses.

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Statement:

This article was originally created by the lawyers of JAVY Law Firm. It only represents the author's own views and should not be regarded as a formal legal opinion or suggestion issued by JAVY Law Firm or its lawyers. If you need to reprint or quote any content in this article, please indicate the source.