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Abstract

The company establishment agreement and the articles of association are the important basis for regulating the establishment and operation of the company, but they are often in conflict with each other, which brings a lot of difficulties to the corporate governance and the protection of shareholders' rights and interests. This article is intended to discuss the manifestation of the conflict, combine legal theory and practice cases, and propose practical principles and paths to solve the conflict based on the latest regulations, with a view to providing references to the practice of company law.

The company establishment agreement is the process of company establishment, between the promoters of the establishment of the company on matters related to the agreement, which specifies the promoters in the establishment of the company's rights and obligations, covering such as the establishment of the company's purpose, scope of business, distribution of shareholdings, capital contribution and duration of the important content of the company's establishment of the basis and prerequisite. The Articles of Association is a written document formulated by the company in accordance with the law, stipulating the basic rules of the company's organisation and activities, which not only makes detailed provisions on the company's organisational structure, governance model, operation and management, but also serves as an important basis for the company to display its image and regulate its own behaviour externally, which is open and open to the world.

However, in the actual operation of the company, due to the differences in the time, background, purpose and considerations between the company establishment agreement and the articles of association, there are often conflicts between the two. For example, the equity distribution method agreed in the company establishment agreement may be inconsistent with the rules for the exercise of equity stipulated in the company's articles of association; the provisions of the establishment agreement on the mechanism for the withdrawal of shareholders are in conflict with the relevant provisions of the company's articles of association, and so on. The emergence of these conflicts often leads to confusion in decision-making within the company, disputes among shareholders, and even affects the normal operation and development of the company, damaging the legitimate rights and interests of creditors and other stakeholders.

Therefore, an in-depth study of the resolution path of the conflict between the company's establishment agreement and the company's articles of association is of great practical significance. On the one hand, it helps to provide clear legal guidelines for the company in the face of the conflict between the two, standardise the internal governance of the company, avoid confusion and disputes caused by unclear rules, and safeguard the stable operation of the company; on the other hand, by reasonably resolving the conflict, it can effectively balance the interests between the shareholders, between the shareholders and the company as well as between the company and the external stakeholders, safeguard the stability of the market economic order, and Promote the healthy development of market economy.

I. Forms of conflict between the company establishment agreement and the articles of association

(A) inconsistent content terms

The company may set up the agreement on the shareholders' capital contribution time, proportion of detailed agreement, such as the agreement of a shareholder in a specific time node before the completion of the capital contribution in instalments, in order to protect the company's early capital flow. The articles of association, on the other hand, for reasons of publicity and simplicity, only provide for the total amount of shareholders' capital contribution and the approximate period of capital contribution, e.g., stipulating that the shareholders shall complete the capital contribution within two years after the establishment of the company. This difference between the level of detail and the level of generality can easily lead to disputes over the fulfilment of shareholders' capital contribution obligations. For example, in the process of the establishment of a technology company, the establishment of the agreement clearly shareholder A in the company within one month after the registration of 20% of the capital contribution, 50% within six months, within one year to complete all the capital contribution, for the company's product research and development and market promotion of the stage of the capital needs. However, the company's articles of association only states that shareholder A should complete the capital contribution within one year after the establishment of the company. When the company operates half a year, due to financial constraints need to shareholders A phase of capital, shareholder A to the articles of association does not specify the phasing of the reason for the refusal to contribute, resulting in the company's project progress is impeded, triggering conflicts between shareholders.

(ii) Differences in the allocation of rights and obligations

In the establishment agreement, in order to balance the interests among the promoters, some of the promoters may be given special rights and interests, such as additional voting rights at the decision-making level of the company to compensate for the technology and resources invested in the early stage. However, the articles of association follow the principle of equality of shareholdings and allocate voting rights according to the proportion of capital contribution. When the company faces a major decision, the decision-making mechanism stipulated in the two documents is contrary to each other, leading to a decision-making deadlock. B new energy company as an example, the establishment of the agreement stipulates that shareholder B because of the provision of core battery technology, in the company's shareholders' meeting involving technology research and development, product upgrading and other matters of decision-making, with double voting rights. However, the company's articles of association provide for voting in accordance with the proportion of capital contribution. The company decided whether to invest a large amount of funds for a new generation of battery research and development, shareholder B based on the establishment of the agreement to claim double voting rights, other shareholders in accordance with the articles of association against, the two sides stalemate, resulting in the major decision-making delay can not be promoted, missed the market opportunity.

(iii) Differences in the provisions of the corporate governance structure

The establishment of the agreement on the company's management of the selection of the way, the term of office may have a unique arrangement, based on the promoters of the trust in a particular person, agreed that the first manager appointed by a promoter and a term of five years. The articles of association, however, provide for the appointment and dismissal of the manager by the board of directors for a term of three years in accordance with the relevant provisions of the Companies Act, which may cause confusion in the day-to-day operation of the company in terms of management authority and appointment and dismissal of personnel. Such as C media company, the establishment of the agreement states that the first general manager recommended by the shareholders of the C industry veterans as a term of five years, to ensure that the company was founded in the early years of professional management to quickly open up the market. However, the company's articles of association stipulate that the general manager shall be appointed by the board of directors for a term of three years. After two years of operation, some shareholders believe that the performance of the current general manager did not meet expectations, and want to start the termination process in accordance with the company's articles of association, Shareholder C was firmly opposed to the establishment of the agreement on the grounds that the management of the company was in turmoil, and the development of the business suffered a serious blow.

Second, the causes of conflict analysis

(i) Different time and purpose

The establishment agreement was signed in the early stage of the preparation of the company, aimed at clarifying the details of the cooperation between the promoters, to ensure the establishment of a smooth, more concerned about the balance of interests in the establishment process. The articles of association are formulated at the completion of the establishment of the company, focusing on the construction of the basic framework for the long-term operation of the company, and the rules of corporate governance are disclosed to both inside and outside the company to meet the needs of statutory filing and access by the counterparties to the transaction.

(ii) Changes in the meaning of the parties

From the preparation to the operation of the company, the co-operation expectations and commercial considerations among the shareholders will change with the market changes. When the establishment agreement was signed, the shareholders were optimistic about a certain business direction, which gave the relevant shareholders the dominant power; after the operation, they found new business opportunities and wished to equitably distribute the decision-making power according to the shareholding, which was reflected in the modification of the articles of association, which was in conflict with the original establishment agreement.

(iii) Differences in legal normative requirements

The establishment of the agreement follows the principle of civil law autonomy, as long as it does not violate the mandatory provisions of laws and regulations, the parties may freely agree. The articles of association in addition to the consent of the parties, but also must strictly comply with the mandatory provisions of the company law, such as shareholders' meeting voting procedures statutory minimum requirements, when the establishment of the agreement with the bottom line conflict with the company law, the articles of association shall prevail, triggered by the inconsistency between the two. According to ‘company law’ article 5: ‘the establishment of the company shall formulate articles of association. The articles of association shall be binding on the company, shareholders, directors, supervisors and senior management.’ This reflects the mandatory requirements of the articles of association at the level of legal norms.

Third, the basic principles of conflict resolution

(A) respect for autonomy of meaning

On the premise of not violating the mandatory provisions of laws and regulations, respect for the parties to the initial establishment of the company's consent. If the conflict clause involves purely private interest arrangements between shareholders, such as the establishment of the agreement agreed upon within the shareholders of the profit distribution incentive mechanism, did not affect the external creditors, the company's public interests, the establishment of the agreement shall prevail, and safeguard the shareholders' right to independently plan business co-operation.

In practice, some of the company's establishment agreement will explicitly introduce the ‘subsequent company for industrial and commercial filing of the company's articles of association and this agreement is inconsistent with this agreement, to prevail in this agreement’ or similar provisions, clearly agree on the agreement and the statute of the validity of the hierarchy, the court at this time will be inclined to respect the agreement of the agreement to the agreement, based on the terms of the resolution of the relevant conflict.

In the case of Huayu Xintian (Beijing) Cultural Development Co., Ltd. and Chen Haibin Shareholder Eligibility Confirmation Dispute [(2018) No. 80447 of the Beijing 0105 Minchu], the shareholders of Huayu Xintian formed three documents on the issue of capital contribution, which were the Promoter Agreement of 8 February 2018, the Articles of Association of the Company of 14 March 2018, and the Promoter Agreement of 4 April 2018, which were the three documents that agreed on the period of capital contribution of the shareholders. These three documents did not have the same agreement on the duration of the shareholders‘ contribution.The Promoters’ Agreement dated 4 April 2018 expressly provided that ‘in case of conflict between the agreement and the Articles, the agreement shall prevail.’ Accordingly, the Court held that ‘as there is now no effective decision confirming that the Promoter Agreement dated 4 April 2018 is invalid, when a dispute arose within the shareholders of Huayu Xintian over the issue of capital contribution, Chen Haibin's assertion that the agreement should be used to determine the term of his capital contribution is consistent with the contractual agreement and should be upheld.’

(ii) The principle of publicity and public trust of the articles of association

The articles of association of the company has publicity, transaction counterparty based on the articles of association of trust with the company transactions. When the conflict is related to the effectiveness of the company's external transactions, the third party reliance on the protection of interests, such as the charter of the legal representative of the terms of reference, even if the establishment of the agreement has a different agreement, in order to protect the security of the transaction, should be determined in accordance with the statute of the priority of the company's behaviour has predictability. According to the relevant provisions of the Company Law, the Articles of Association is an important document for the company to demonstrate its governance structure and operation rules to the outside world, and its publicity and credibility effect aims to maintain the stability of the market transaction order.

In the case of Confirmation of the Effectiveness of Corporate Resolutions Dispute [(2020) Beijing 04 Minchu No. 642] between Pacific Holdings Limited and Beijing Taiyun Building Company Limited, Taiyun challenged the procedure for the creation of the chairman of the board of directors, claiming that there was an inconsistency between the provisions of the joint venture contract and the articles of association of the company, with the contract agreeing that the chairman of the board of directors should be appointed by one of the shareholders of the joint venture while the articles of association stipulated that the chairman of the board of directors should be elected by the directors, and accordingly, Taiyun went on The court held that ‘the chairman of the board should be appointed by one of the joint venture shareholders, while the articles of association stipulate that the chairman of the board should be elected by the directors’.

The court held that ‘the articles of association should be the basic basis for the decision in this case, specifically for the following reasons: the contract is to adjust the rights and obligations between the shareholders of the basic legal documents, while the articles of association is to determine the form of organisation of the company and the rules of the basic legal documents of the company's activities, the two in the scope of the adjustment and the direction of the application of the obvious difference. For the company, the articles of association is the company's constitutional documents, in the company has the highest effect, the company, the shareholders and the company's senior management are bound by the articles of association. The board of directors of the joint venture company belongs to the highest authority of the company in accordance with the law, and the chairman of the board is responsible for organising and convening the board of directors' meetings, etc. How the board of directors is formed and how the chairman of the board of directors is formed are matters of the company's internal governance, which are related to the influence of the shareholders on the company but do not directly involve the rights and obligations of the shareholders to each other, therefore, the relevant agreements of the joint venture contract do not have a direct binding effect on the procedure for the generation of the chairman of the joint venture company. Therefore, the relevant agreement of the joint venture contract is not directly binding on the procedure of the chairman of the joint venture company. [...]

(iii) Preference for later-formed documents over earlier-formed documents

In view of the dynamic nature of the company's operations, the articles of association are usually formulated or amended after the establishment agreement. If the articles of association formed after the new provisions of the same matters, as shareholders of the original agreement to change, in the case of not violating the mandatory provisions of laws and regulations, not to the detriment of the legitimate rights and interests of others under the premise of the application of the articles of association of the new provisions of the new requirements of the company's development and change.

In the case of Xie Tianlai, Shenzhen Qianhai Huineng Financial Holding Group Co., Ltd. shareholder capital contribution dispute [(2019) Guangdong 03min final 12430], on 26 January 2015, Xie Tianlai (Party B) and Huineng Group (Party A) signed a ‘Shareholder Co-operation Agreement’, which stipulates that: ‘1. The two sides jointly invested in the establishment of the Shenzhen Qianhai Huineng Internet Financial Service Ltd. (hereinafter referred to as Huineng Internet Company), in which Xie Tianlai holds 15% of the shares and Huineng Group holds 85% of the shares. The registered capital of Huineng Internet Company is RMB10 million, which will be fully funded in cash by Huineng Group within 12 months from its establishment.’ On 12 February 2015, Huineng Internet Company was approved for establishment by the Shenzhen Municipal Market Supervision Administration. The articles of association provided that ‘the registered capital of the company is 10 million yuan, with a contribution system, with Huineng Group contributing 8.5 million yuan and Xie Tianlai contributing 1.5 million yuan, to be paid in full by 25 January 2025, and the shareholders are all contributing in monetary funds.’ Xie Tianlai sued the Court of First Instance to request that Huineng Group be ordered to fulfil its obligation to make contributions as agreed in the Shareholders' Co-operation Agreement. The focus of the case was whether Huineng Group should fulfil its capital contribution obligations as agreed in the Shareholders' Cooperation Agreement.

The court held that: ‘In this case, the Shareholders’ Co-operation Agreement was signed before the Articles of Association were concluded, and the Shareholders' Co-operation Agreement did not stipulate that when the Agreement conflicted with the Articles of Association, the Agreement would prevail. Therefore, if the content of the articles of association is inconsistent with the Shareholders‘ Co-operation Agreement, the parties are deemed to have made changes to the agreed content of the Shareholders’ Co-operation Agreement, and the newly concluded articles of association shall prevail.’

IV. Exploration of Specific Solution Paths to Resolve Conflicts

(I) Clearly agree on the applicable rules

Conflict resolution clauses are set up in advance in the company establishment agreement or articles of association, such as stipulating that ‘when the contents of this agreement and the articles of association are inconsistent, matters involving the establishment of the company shall be governed by this agreement, and matters involving the company's operation and external affairs shall be governed by the articles of association,’ to provide a clear guideline for future disputes and to avoid the uncertainty in the application of the law. For example, at the beginning of the establishment of Ding Electric Company, this provision was clarified in the establishment agreement and the articles of association at the same time, and although inconsistencies between the agreement and the articles of association arose subsequently in the time node of the shareholders' dividend, the dispute was resolved smoothly according to the agreement, and the company's operation was not subject to any major ups and downs.

(ii) Amendment by consensus of shareholders

After a conflict has arisen, shareholders shall uphold the principle of good faith and negotiate a resolution based on the Company's development strategy and the overall interests of shareholders. Through the resolution of the shareholders‘ meeting, the contradictions between the establishment agreement and the articles of association should be revised simultaneously to form a new consensus, ensure that the two documents regulate the operation of the company in a synergistic manner, and strengthen the foundation of shareholders’ co-operation. E Manufacturing Company had a conflict between the Articles of Association and the Establishment Agreement regarding the qualifications of directors, the shareholders held a shareholders' meeting in a timely manner, communicated frankly, weighed the pros and cons, and ultimately amended the two documents to unify the requirements of directorship, and the company's governance returned to the right track.

(iii) Request for judicial intervention

When the shareholders are unable to negotiate on their own and the dispute is brought to the court, the court shall, in accordance with the above principles and in light of the evidence of each case, carefully screen the nature and scope of the conflicting provisions. For major issues involving the foundation of the company's existence and the equal protection of shareholders, the court shall make a fair judgement in accordance with the spirit of the company law, correcting the corporate governance and safeguarding the legitimate rights and interests of the market players. In the case of a financial company, a shareholder lawsuit was triggered by the difference between the establishment agreement and the company's articles of association regarding the conditions for the repurchase of the company's shares. After hearing the case, the court ruled that the provisions of the articles of association, which were more in line with the principle of maintenance of the company's capital, should prevail in order to quell the dispute and safeguard the company's stable development.

(IV) Special Case Analysis

Taking a well-known Internet start-up company as an example, at the early stage of establishment, the establishment agreement stipulated that the core technical team members of the company would be granted a certain percentage of dry shares, and these dry shares would enjoy the right to preferential dividends within the first three years after the company made profits. However, when the company's articles of association were being drawn up, there was no clear mention of the dry shares and the right to preferential dividends. As the company developed and made profits, the core technical team members claimed priority dividends based on the establishment agreement, while the other shareholders objected based on the articles of association, and the two sides were at an impasse. In the end, the court held that although there was a stipulation in the establishment agreement, the stipulation was related to the company's shareholding structure and the distribution of profits, and the company's articles of association, as a public document, did not reflect the relevant content, which might affect the judgement of potential investors and creditors on the company. Based on the principle of publicity and credibility of the articles of association and the principle of maintenance of the company's capital, the final judgement was that the dividend distribution method stipulated in the articles of association should prevail, but at the same time, taking into account the contribution of the core technical team, it was suggested that the company should negotiate through the shareholders' meeting to compensate the technical team in other reasonable ways, so as to appropriately resolve the dispute.

In summary, the conflict between the company establishment agreement and the articles of association is a complex issue in the course of the company's development, the root cause of which involves various legal and commercial factors. By following the principles of autonomy of meaning, publicity and credibility, and the superiority of the subsequent law over the former law, and by applying the multiple paths of resolution, such as prior agreement, subsequent negotiation, and judicial remedies, the conflict can be effectively resolved to ensure the sound operation of the company and the realisation of shareholders' rights and interests, to promote the improvement of the legal system of the company under the market economy, and to help all kinds of companies to set sail on the track of the rule of law.