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Abstract

This article focuses on the issue of shareholders' request for repurchase of shareholdings, and analyses the legal conditions for shareholders to exercise the right to request for repurchase of shareholdings, including the cases of the company's continuous profitability without distributing profits for a long period of time, the company's merger, separation and transfer of major properties, and the company's resolution of continuation after the emergence of specific dissolution events in the company's articles of incorporation. Meanwhile, the new provisions on the abuse of shareholders' rights by controlling shareholders, resulting in the right of other shareholders to request for the repurchase of shareholdings, are discussed to clarify the identification criteria and practical significance. The legal remedies available to shareholders in the event of a blocked share repurchase are elaborated in detail, covering the procedures of repurchase by agreement and repurchase by litigation, the plaintiff's eligibility in litigation, the duration of the litigation, the determination of the price of repurchase, and the handling of the repurchase after the repurchase.

In the operation of a company, the relationship between shareholders and the company is affected by a variety of factors. When the interests of shareholders diverge significantly from the company's decision-making or the company's decision-making may be detrimental to the shareholders‘ rights and interests, the shareholders’ exercise of the right to request for share repurchase enables them to withdraw from the company at a reasonable price and to avoid damage to their interests. Equity repurchase has become an important way for shareholders to safeguard their own interests and exit the company. As an important remedy for shareholders in specific circumstances, the right to request share buyback is of great significance in balancing the interests of shareholders and maintaining the stable operation of the company. Equity repurchase is not only related to shareholders' personal property rights and interests, but also has a far-reaching impact on the company's capital structure, operational stability and the interests of other shareholders.

China's company law has made clear provisions on the conditions and legal remedies for shareholders to request the company to repurchase their shares, and an in-depth study of these provisions is of great theoretical and practical significance in resolving internal disputes, safeguarding the lawful rights and interests of shareholders, and promoting the healthy development of the company.

I. Legal conditions for shareholders to exercise the right to request for equity repurchase

Shareholders to exercise the right of equity repurchase request to meet the subject, the legal cause and procedures and other conditions, these conditions are interrelated, mutual constraints, together constitute the legal framework for shareholders to exercise the right. Only in the case of the simultaneous fulfilment of these conditions, the shareholders of the right to request the repurchase of equity to get the support and protection of the law.

(i) Subject condition

According to the provisions of the Company Law, whether it is a limited liability company shareholders, or shareholders of a joint stock limited company, are qualified to become the subject of the right to request the repurchase of equity, the law does not make special restrictions on the identity of shareholders. This means that shareholders of listed companies or non-listed companies, major shareholders or minor shareholders, as long as they meet the legal conditions, they are entitled to exercise the right to request for share repurchase. In a limited liability company, the shareholders enjoy the rights of shareholders based on their capital contribution, and their rights and interests as shareholders may be affected when the company is in a particular situation, and then they may exercise the right to request for share repurchase in accordance with the provisions of the law. Similarly, shareholders of a joint-stock limited company, by virtue of the shares they hold, can also exercise this right when they fulfil the conditions. This broad provision on subject qualification aims to fully protect the legitimate rights and interests of all types of shareholders, and to ensure that when the reasonable interests of shareholders are harmed in the course of the company's operation, they can safeguard their own rights and interests through the remedies of the right to request for equity repurchase and realise fairness and justice.

(ii) Statutory grounds

The exercise of the right of shareholders to request the repurchase of equity must be based on statutory grounds. These statutory causes are specific circumstances clearly stipulated by the law for the protection of shareholders' rights and interests, and shareholders are entitled to exercise the right only when these circumstances occur in the company. Specifically include the following situations:

1. The company makes continuous profits but does not distribute them

The Company Law provides that if a company fails to distribute profits to shareholders for five consecutive years and has been continuously profitable for those five years and meets the conditions for distributing profits as stipulated in the Law, shareholders who voted against the resolution at the shareholders' meeting may request the company to acquire their shareholdings at a reasonable price. This provision is designed to prevent the controlling shareholders or management of a company from abusing their power and harming the interests of small and medium-sized shareholders by not distributing profits. For example, in the past five years, the financial statements of a certain company showed considerable net profits every year, and after deducting all costs, taxes and fees and withdrawing the statutory provident fund, there was still a large amount of distributable profits. However, the controlling shareholder of the company, out of its own interests, has put forward a proposal of not distributing profits at the shareholders' meeting for five consecutive years, and the proposal has been passed by virtue of its majority voting rights. Although the small and medium-sized shareholders expressed strong opposition to the proposal, they were unable to change the outcome of the resolution due to insufficient voting rights. Under such circumstances, these small and medium-sized shareholders who voted against the proposal may request the Company to acquire their shares at a reasonable price in accordance with the Company Law in order to safeguard their legitimate rights and interests.

2. Merger, demerger, and transfer of major property of a company

When a company engages in a major event such as a merger, demerger or transfer of major property, it may have a significant impact on the rights and interests of shareholders. A company merger may result in significant changes to the company's shareholding structure, business direction, management mode, etc.; a company demerger may result in the re-division of the original company's assets, business, personnel, etc., and the shareholders‘ control over the company and the right to receive income may be changed; and the transfer of major property may affect the company's sustainable profitability and development prospects, which may in turn affect the shareholders’ return on their investment. Therefore, the law grants shareholders who vote against these resolutions the right to request for equity buyback.

For example, a company is mainly engaged in real estate development business and its core asset is a large piece of land located in the city centre. The controlling shareholder of the company decided to transfer this piece of land to other enterprises in order to realise business transformation and passed the resolution at the shareholders' meeting. Some shareholders voted against the resolution as they believed that the land was the Company's main property and that the transfer would seriously affect the Company's property development business and that their own investment interests would not be protected. These shareholders who voted against the resolution had the right to request the Company to acquire their equity interests at a reasonable price in order to avoid losses due to the transfer of the Company's major property.

3. When the business period stipulated in the company's articles of association expires or other causes for dissolution arise, the shareholders' meeting resolves to amend the articles of association to enable the company to survive

The articles of association are the company's rules of self-government. When the business period stipulated in the articles of association expires or other causes of dissolution arise, the company should have entered into liquidation and the shareholders can withdraw from the company accordingly. However, if the shareholders' meeting passes a resolution to amend the articles of association to enable the company to survive, this may go against the wishes of some shareholders, exposing them to the risk and uncertainty of continued investment. In order to protect the rights and interests of these shareholders, the law provides that they may exercise the right of claim for share buyback.

For example, the articles of association of a company stipulate that the business period is 20 years. Before the expiry of the term, the shareholders' meeting was held to discuss whether to amend the articles of association to enable the company to continue to exist. Some shareholders believe that the company has achieved certain results in the past operation, the expiry of the business term should be liquidated, the distribution of the company's remaining property. However, the controlling shareholder, in order to continue to control the company, passed a resolution at the shareholders' meeting to amend the articles of association to enable the company to continue to exist. The shareholders who voted against this resolution have the right to demand that the company acquire their shares at a reasonable price in order to achieve the purpose of withdrawing from the company.

4. Abuse of shareholders' rights by controlling shareholders, seriously damaging the interests of the company or other shareholders

Controlling shareholders often have greater control and decision-making power in the company, and if they abuse their shareholders' rights, they may cause serious damage to the interests of the company and other shareholders. The controlling shareholder transfers the company's assets to other enterprises under its control through connected transactions, resulting in a reduction of the company's assets and profitability; or at shareholders' meetings, it uses its majority voting rights to pass unreasonable resolutions, such as unreasonable remuneration packages, high-risk investment decisions, etc., to the detriment of the interests of the company and other shareholders. Under such circumstances, the injured shareholders may exercise the right of equity repurchase request to require the company to acquire their equity in order to get rid of the undue control of the controlling shareholders and to protect their own rights and interests.

For the definition of the identity of controlling shareholders, according to Article 265 of the Company Law, it refers to shareholders whose capital contribution accounts for more than 50 per cent of the total capital of a limited liability company or whose shareholdings account for more than 50 per cent of the total share capital of a joint stock limited company; shareholders whose capital contribution or shareholdings are less than 50 per cent but whose voting rights based on the capital contribution or shareholdings are sufficient to exert significant influence over the resolution of the shareholders' meeting. shareholders whose capital contribution or shareholding ratio is less than fifty per cent, but whose voting rights based on their capital contribution or shareholding are sufficient to exert significant influence on the resolution of the shareholders' meeting. For example, the controlling shareholder of a company took advantage of its control over the company and transferred the company's high-quality assets to its affiliated enterprises at a low price without the consent of the shareholders' meeting, resulting in a substantial shrinkage of the company's assets and a serious decline in its performance, and the rights and interests of the other shareholders were greatly harmed. The injured shareholders filed a lawsuit with the court, requesting the company to buy back their equity. After hearing the case, the court held that the controlling shareholder's behaviour constituted an abuse of shareholders‘ rights and seriously damaged the interests of other shareholders, and supported the shareholders’ request for share buyback.

(iii) Procedural conditions for exercising the right of request

The exercise of the shareholders' right to request for share buyback not only has to meet the main conditions and legal reasons, but also needs to follow certain procedural conditions to ensure the legal and effective exercise of the right.

II. Legal remedies in the event of shareholders' equity repurchase being blocked

(I) Agreement repurchase

1. Exercise Procedures

When a shareholders' meeting of a limited liability company is convened to consider matters relating to the resolution on equity repurchase as provided for in the Company Law, shareholders voting negatively on such matters may exercise the right of request for equity repurchase, requesting the Company to acquire their shareholdings at a reasonable price. Within sixty days after the adoption of the resolution at the shareholders' meeting, the dissenting shareholders negotiated with the Company in an attempt to reach an equity repurchase agreement. This process fully embodies the principle of party autonomy, and there is no restriction on the number and duration of shareholders' equity holdings. As long as both parties can agree on the repurchase price, payment method and other key terms, a written agreement can be entered into, and the company will acquire the equity in accordance with the reasonable price agreed upon in the agreement.

2. Advantages and limitations

The advantages of the agreement repurchase lie in the simple and efficient procedure, which can fully respect the wishes of both parties and reduce the occurrence of disputes. Through negotiation, both parties can flexibly determine the repurchase price and other terms according to the actual situation of the company and the needs of shareholders. However, agreement repurchase also has certain limitations. When there is a big difference between the company and the shareholders, it may be difficult to reach an agreement on the repurchase price and other key issues, resulting in the agreement repurchase not being successful.

(ii) Litigation repurchase

1. Preceding procedure of litigation repurchase

Litigation repurchase can only be initiated under the premise that the agreement repurchase fails, i.e., the agreement repurchase is the antecedent procedure of litigation repurchase. The purpose of this provision is to prompt shareholders and the company to resolve the issue of equity repurchase through negotiation in the first place, to avoid easily entering into litigation proceedings and to save judicial resources. If the shareholders fail to reach an agreement on share repurchase with the company within sixty days after the shareholders‘ meeting resolution is made, then the shareholders may file a lawsuit with the People's Court within ninety days from the date of the shareholders’ meeting resolution.

2. Key issues in litigation repurchase

(1) Plaintiff's qualification: the dissenting shareholder is the plaintiff and the company is the defendant in the litigation, and the dissenting shareholder is filing a claim for payment. The law does not require that the dissenting shareholders hold the time and quantity of equity when filing the lawsuit, but the plaintiff must be the dissenting shareholders who have actually contributed and held the equity. Dry shareholders or titular shareholders due to not actually funded, should not be entitled to litigation rights, otherwise it may produce unjust enrichment.

In the case of Zhang Luping, Huangshan Juxin Investment Company Limited requesting the company to acquire the shares dispute [(2017) Anhui 10 Civil Final No. 652], Hangzhou Juiyi Company carried out a capital increase, and Zhang Luping invested 880,000 , and Hangzhou Juiyi Company issued Zhang Luping a Certificate of Capital Contribution, which was not documented in the Articles of Association, nor was it registered with the company's registration authority. Thereafter, Hangzhou Joy Company merged with Huangshan Juxin Company without notifying Zhang Luping, and Hangzhou Joy Company was cancelled as a result of the merger. Zhang Luping accordingly considered that Hangzhou Juyi Company had harmed his legitimate rights and interests, and since Hangzhou Juyi Company had been cancelled, Huangshan Juxin Company, which survived the merger, should buy back Zhang Luping's shareholdings.

After hearing the case, the court held that: ‘Hangzhou Joy Investment Co., Ltd. issued a certificate of capital contribution to Zhang Luping before the merger, but it was not recorded in the articles of association and was not registered with the company's registration authority, and after Hangzhou Joy Investment Co., Ltd. was merged by Huangshan Juxin Company, Zhang Luping was not recorded in the articles of association and was not registered with the company's registration authority either. According to Article 32(2) of the Company Law, ‘shareholders recorded in the register of shareholders may claim to exercise their rights as shareholders in accordance with the register of shareholders’, Zhang Luping, who was the actual capital contributor of the Company, had no evidence to prove that he was in the register of shareholders, and there was no other evidence to prove that Zhang Luping enjoyed the rights of shareholders, and he did not meet the conditions of the request for the Company to acquire the shares. ’

(2) Litigation period: the new Company Law provides for a litigation period of ninety days, which is an exclusionary period and is not suspended, interrupted or extended by any matter. If a shareholder fails to file a lawsuit within ninety days, his or her legal right to request a repurchase is extinguished and may not be claimed again. With respect to the starting point of the ninety days, it is generally counted from the date of adoption of the shareholders‘ meeting resolution. However, if the shareholders are unaware of the adoption of the shareholders’ meeting resolution due to the lack of effective notification by the Company, the period may be counted from the date when they become aware of the content of the shareholders' meeting resolution.

In the case of Xia Lijun and Jiangsu Jiayuan Real Estate Development Co. requesting the company to acquire shares dispute [(2019) Su Min Shen No. 8122], the court held that: ‘Within sixty days from the date of adoption of the resolution of the shareholders’ meeting, the shareholders and the company fails to reach an agreement on the acquisition of equity, the shareholders may file a lawsuit with the People's Court within ninety days from the date of the adoption of the resolution at the shareholders' meeting.’ Article 3 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (I) provides that ‘If the plaintiff files a lawsuit with the People's Court on the basis of the causes stipulated in Article 22(2) and Article 74(2) of the Company Law beyond the period of time stipulated in the Company Law, the People's Court shall not accept the lawsuit.’ According to the above provisions, the statutory period for shareholders to exercise their right to sue for the repurchase of equity shares is ‘within ninety days from the date of adoption of the resolution at the shareholders’ meeting‘, of which “the date of adoption of the resolution at the shareholders” meeting’ is the starting point of the determination of invariance, and ‘ninety days’ is the starting point of the determination of invariance. The ‘ninety days’ is the unchanged period, and since the law does not provide for any exceptions, the plaintiff loses the right to request the People's Court to accept his right to file a lawsuit for the repurchase of his shareholdings after the statutory period has been exceeded, and the People's Court will no longer file a case to accept the shareholders' claim for the repurchase of their shareholdings by the company.’

(3) Determination of repurchase price: The Company Law provides for repurchase at a reasonable price, but does not specify what constitutes a ‘reasonable price’. Generally speaking, the price should be based on the agreed price. If the court to determine the price, should be reasonable and lawful. Usually, it can be determined by the production value of the proportion of the company's net assets represented by the repurchased equity at the time of the cause of action; if the company's assets are impaired due to the transfer of property or profits by the majority shareholder, then the purchase price should be calculated in accordance with the company's net assets before the impairment; if it is difficult to calculate the company's net assets, it can be determined by reference to the shareholders‘ cost of acquiring the equity (i.e., the shareholders’ capital contribution or price of the transferee's equity).

(4) Treatment after repurchase: the limited liability company shall make the corresponding change of registration in a timely manner after the repurchase of equity. The law provides that the company should be in the event of repurchase within ten days after the cancellation of registration, for can not be cancelled should be transferred in the way, if within three months can not be dealt with should be cancelled registration, cancellation should also be re-capitalisation, and industrial and commercial registration for the record. This series of provisions are designed to ensure the authenticity and stability of the company's capital and to protect the interests of the company's creditors.

III. Issues related to the right to request for equity repurchase that should be attended to

(I) Issues to which shareholders should pay attention

Before investing in a company, shareholders should have a comprehensive and in-depth understanding of the company's operating conditions, financial conditions and development prospects, and conduct detailed analyses of the company's profitability, market competitiveness and industry development trends. Carefully read the articles of association of the company to clarify the key provisions on share buyback, shareholders' rights and obligations, and the company's decision-making procedures, etc., to ensure that their rights and interests are clearly protected in the articles of association. In the course of the company's operation, pay close attention to the company's major decisions, such as profit distribution plan, merger and demerger, transfer of major properties, etc., and keep abreast of the company's operation dynamics. Actively exercising shareholders‘ rights when there are circumstances that may damage their rights and interests, such as voting against relevant resolutions at shareholders’ meetings and keeping evidence such as voting vouchers and minutes of meetings. When exercising the right to request for share repurchase, it is preferable to negotiate with the Company, fully communicate the demands and ideas of both parties, and seek a reasonable solution. If the negotiation fails, file a lawsuit or choose other appropriate remedies in a timely manner, paying attention to the statute of limitations and relevant procedural requirements to avoid the loss of rights due to missed deadlines or improper procedures.

(ii) Issues to which the Company should pay attention

The Company shall establish a sound and standardised governance structure, clarify the duties and powers of the shareholders' meeting, board of directors, supervisory board and other governance bodies, and ensure the scientific and fair nature of decision-making . It should improve its internal decision-making procedures and make decisions on major matters in strict accordance with the Articles of Association and laws and regulations, so as to safeguard shareholders' rights to information, participation and voting. When shareholders make a request for share buyback, the Company shall respond positively, communicate with shareholders in a sincere and effective manner, and respect the legitimate rights and interests of shareholders . During the negotiation process, the Company shall provide true and accurate financial information and operating data of the Company to provide a basis for determining a reasonable repurchase price. If both parties fail to reach a consensus, the Company shall actively respond to the litigation, co-operate with the court proceedings and comply with the results of the court's judgement.

(III) Issues of concern in judicial practice

The relevant authorities should further refine the statutory conditions for the right to request for equity repurchase, and clarify the specific judgement criteria for ‘five consecutive years of profit’, including the method of calculating the profit, whether to deduct special items, etc.; clearly define the scope and judgement criteria of ‘major property’ The Company has also clearly defined the scope and judgement criteria of ‘major property’, taking into account factors such as the proportion of the value of the assets and the importance of the assets to the operation of the Company; and clarified the specific circumstances and determination criteria of abuse of rights by controlling shareholders, so as to provide clearer legal guidelines for shareholders to exercise their rights. Improve the relevant procedural provisions for equity repurchase, such as simplifying litigation procedures, improving judicial efficiency and reducing the cost of shareholders' rights; clarify the scope of application and procedural rules of arbitration in equity repurchase disputes, and give full play to the advantages of arbitration.

The judiciary should unify the adjudication standards when hearing equity repurchase cases, so as to avoid inconsistent adjudication results due to differences in the understanding of different regions and judges . Strengthen case studies on equity repurchase cases, and provide reference for judges by issuing guiding cases, etc., to improve the quality of trials . Focusing on the protection of shareholders‘ rights and interests, and on the basis of balancing the interests of the company and the shareholders, the cases will be tried in a fair manner according to the law, so as to ensure that the shareholders’ legitimate rights and interests will be effectively safeguarded.

In summary, the conditions and legal remedies for shareholders to request the company to repurchase their shareholdings is an important institutional arrangement for the protection of shareholders' rights and interests in the company law. The clear repurchase conditions provide a legal way for shareholders to withdraw from the company under certain circumstances, while the perfect legal remedies ensure that shareholders can safeguard their own rights and interests through legal means when the repurchase of equity is blocked. The traditional statutory circumstances and the new circumstances added by the new Company Law together constitute a more comprehensive system of repurchase conditions, adapting to the complexity of the company's operations. As legal remedies, agreement repurchase and litigation repurchase each have their own characteristics and scope of application, and should be reasonably applied in practice according to the specific circumstances. With the continuous development of corporate governance practice and the improvement of the legal system, the theory and practice in this field will be enriched and deepened, providing stronger support for the healthy development of the company and the protection of shareholders' rights and interests.