On April 12, 2016, the Supreme People’s Court issued the Provisions of the Supreme People’s Court on Issues Relating to Application of Company Law of the People’s Republic of China (IV) (Draft for Public Comments) (“Provisions”).

The Provisions include 36 clauses covering five parts. Among others, three clauses relating to shareholders’ right to request the profit distribution will be discussed hereof.

1. Status of Involved Parties in Litigation
Subject to Article 19 of the Provisions, where a shareholder requests its company to distribute profits through the litigation (“Litigation”), the company shall be listed as the defendant.
Where other shareholders apply to attend the Litigation based on the same claim before the end of the debate stage during the first instance, they shall be listed as joint plaintiffs. Shareholders who don't agree to distribute profits shall be listed as the third party of the Litigation.

Comments:

Article 19 is the concrete application of Article 52 and Article 56 of the Civil Procedure Law of the People’s Republic of China (the “Law”).

For the Litigation, the plaintiff and other shareholders may not be the joint parties. However, the judgement of the Litigation will affect other shareholders of the company. If other shareholders hold the same opinion and bring a litigation with the same claim as the plaintiff, they shall be regarded as joint plaintiffs because the subject matters of two legal actions are identical. The essence of this provision is in conformity with Article 52 of the Law.

Meanwhile, the judgement of the Litigation will also affect the shareholders who do not agree on the claim of the plaintiff. According to Article 56 of the Law, the litigation status of such shareholders shall be the third party having no independent claim. However, it is not clear in the Provisions how to bear the responsibilities between the company and the shareholders who don’t agree to distribute profits (regarded as the third party) if the judgment accepts the claim of the plaintiff and requests the company to distribute the profit, as well as how this third party performs its obligations according to such judgment of profit distribution.

2. Distribution Plan in the Resolution of a Shareholders' Meeting /Assembly

Subject to Article 20 of the Provisions, where a shareholder submits a valid resolution of the shareholders’ meeting / assembly (the “Resolution”) specifying the distribution plan and thereby files the Litigation, the judgment shall be made for the company to pay dividends to the shareholder within a specified time limit according to the distribution plan determined in the Resolution. The judgment shall be legally binding to the shareholders who fail to participate in the Litigation but have the right to claim for the profits distribution.

Where a shareholder files the Litigation but fails to submit the Resolution specifying the distribution plan, the litigious claim shall be rejected, unless a shareholder of a limited liability company presents evidences showing that the abuse of shareholder’s rights by any other shareholder or the fraud committed by any director or senior executive has resulted in the failure of the company to distribute profits.

Comments:

This provision, to some extent, protects the profit distribution right of certain shareholders.

However, there still remains two ambiguous issues:

a. Subject to the Company Law of the People’s Republic of China, the resolution of profit distribution plan of the limited liability company shall be made by the board of directors (the “BOD”) and submitted to the shareholders’ meeting / assembly for voting. However, if the minority shareholders can’t exert the influence on the BOD, and the shareholders’ meeting / assembly doesn’t vote for such resolution, how could the profit distribution right of the minority shareholders be protected? Therefore, this provision is expected to be further specified or interpreted in future.

b. In legal practice, it is difficult for the shareholders to claim the abuse of shareholder’s rights of other shareholders. As a result, such claim may not be filed or supported by the court. Therefore, the abuse of shareholder’s rights shall be specified so that there will be clear guidance for the corresponding shareholder to collect evidences and it will be easy for the court to file such cases.

3. Right of the Shareholders Failing to participate in Litigation to Apply for Enforcement

Subject to Article 21 of the Provisions, after the court rejects the litigious claim of the shareholder for the profits distribution of the company, any shareholder who fails to participate in the Litigation files another lawsuit separately with the same claim, facts and reasons, such claim shall not be accepted by the court.

After the court makes the judgment requesting the company to distribute profits, the shareholders who fail to participate in the Litigation but have the right of profits distribution, may apply for the enforcement of profits distribution by the company based on the judgment.

Comments:

In general, for an ordinary payment claim, the court’s judgement is only binding on the involved parties. However, for the Litigation, as all shareholders have the right of profits distribution, if the judgment is not legally binding to other shareholders except the plaintiff, such shareholders may file other lawsuits against the company with the same claim. Such actions will certainly waste of the judicial resources. This provision may probably solve such problems.

However, for the shareholders who fail to attend the Litigation, if the judgement is adverse to them, their rights may not be protected. Therefore, it is suggested that such contents may l be added to the Provisions: if such shareholders have evidences to prove that the judgement is wrong, they can file a lawsuit of to revoke the previous judgment.

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Article 52 of the Civil Procedure Law of the People’s Republic of China: When one party or both parties consist of two or more than two persons, their subject matter of action being the same or of the same category and the people's court considers that, with the consent of the parties, the action can be tried combined, it is a joint action.
Article 52 of the Civil Procedure Law of the People’s Republic of China: Where the result of the litigation will affect a third party's legal interest, such party, though having no independent claim to the subject matter of the action of both parties, may file a request to participate in the proceedings or the people's court shall notify the third party to participate. A third party that is to bear civil liability in accordance with the judgment of the people's court shall be entitled to the rights and obligations of a party in litigation.