On December 29, 2023, the 7th meeting of the Standing Committee of the 14th National People's Congress deliberated and passed the newly revised Company Law of the People's Republic of China (hereinafter referred to as the "New Company Law"). Articles 51, 52 and 107 of the new Company Law respectively stipulate the system of loss of rights of limited companies and joint-stock companies, that is, if a shareholder fails to pay the capital contribution in full on the date of capital contribution stipulated in the articles of association of the company, and fails to pay it after being urged by the company, the company may issue a notice of loss of rights to the shareholder after the board of directors makes a resolution, and the shareholder loses his equity in the unpaid capital contribution from the date of issuance of the notice.
1. The progress of the shareholder loss system
Article 17 of the current Interpretation III of the Company Law also provides for a similar system, i.e., the shareholder removal system. Compared with the delisting system, the shareholder loss system stipulated in the new Company Law has been improved in many aspects and reflects progress, as follows:
(1) Expand the scope of application of the shareholder loss system
1. Apply the shareholder loss system to a company limited by shares
The existing shareholder removal system only stipulates that a limited liability company may remove shareholders who have not contributed capital by resolution of the shareholders' meeting, and this rule does not apply to a company limited by shares. However, in practice, in terms of enriching the company's capital and strengthening the shareholders' fulfillment of their capital contribution obligations, a limited liability company is no different from a company limited by shares. Therefore, Article 107 of the new Company Law also stipulates that the shareholder loss rule shall also apply to a company limited by shares, making up for the shortcomings of the delisting system.
2. Partial loss of rights can be carried out
The existing delisting rule refers to the removal of shareholder qualifications, which only applies to the two situations of "failure to make capital contributions" and "withdrawal of capital contributions", where non-capital contribution refers to the failure to perform any capital contribution, and withdrawal of capital contribution refers to the withdrawal of all capital contributions, so that the scope of application of the delisting rules is too narrow, and shareholders can easily circumvent the application of the rules by paying a small part of the capital contribution.
The new Company Law changes the removal of shareholders to the loss of rights of shareholders, and changes the applicable conditions from "no capital contribution" to "insufficient capital contribution", so as to realize that the proportion of unfunded capital and the proportion of lost rights correspond to the proportion of unfunded shareholders, and only the part of shareholders that have not contributed capital can be lost, so as to be more accurate and expand the scope of application of the default rule.
(2) Improve the procedures for shareholders to lose their rights
The procedure for shareholders to lose their rights as stipulated in Interpretation III of the Company Law is as follows: if the company fails to perform the payment within a reasonable period of time after the call, the shareholders' meeting shall resolve to disqualify the shareholder. But what kind of internal organization of the company is responsible for the collection? Is a reminder a necessary pre-process? Is a verbal reminder possible? What is the reasonable period of time for a reminder? None of these issues are clear in the current law.
On the basis of considering the above issues, the new Company Law has improved the procedures for shareholders to lose their rights. The new Company Law imposes on directors the obligation to verify and call for the payment of shareholders' capital contributions, and directly stipulates that "after the establishment of a limited liability company, the board of directors shall verify the capital contributions of shareholders." "If the company fails to perform the obligations specified in the preceding paragraph in a timely manner and causes losses to the company, the responsible director shall be liable for compensation. According to the provisions of the new Company Law, the board of directors is the executing entity of the collection and shall bear the corresponding responsibility for the failure to execute. If the call is a necessary pre-procedure for the loss of rights, the company shall issue a written notice of call and set a grace period of not less than 60 days. This provision improves the procedures for shareholders to lose their rights.
(3) The decision-making body that has lost its power shall be changed from the shareholders' meeting to the board of directors
Article 17 of Interpretation III of the Company Law stipulates that the resolution of delisting shall be made by the shareholders' meeting, which takes into account the importance of the impact of the resolution on the rights and qualifications of shareholders, but does not consider the efficiency and practical feasibility of making the resolution of the shareholders' meeting. Because for a large limited company with diversified shareholdings, it may not be easy to convene a shareholders' meeting for delisting. And if the shareholders will be controlled by the major shareholders and the actual controller, how to vote on the resolutions of the shareholders' meeting is also a problem.
Here, the new Company Law clearly stipulates that a notice of loss of rights may be issued to shareholders after a resolution of the board of directors, and shareholders will lose their unpaid equity contributions from the date of issuance of the notice, which is also consistent with the obligation of the board of directors to verify and collect capital contributions.
(4) Clarify the obligation of other shareholders to claim the lost equity
The existing delisting rules stipulate that after a shareholder is removed, the company shall reduce its capital or dispose of its equity as soon as possible, but there is no mandatory provision for the ultimate recipient of the capital reduction and the equity cannot be disposed of, which makes the company's equity disposal of the delisted shareholder ineffective and operational, and it is difficult to truly realize the legislative value behind the delisting rules.
In this regard, the new Company Law clearly stipulates that if the company fails to realize the transfer or capital reduction for more than six months, the other shareholders of the company shall pay the corresponding capital contribution in full according to the proportion of their capital contributions. The new Company Law makes the company's handling of shareholders after the loss of rights more operable by imposing the obligation on other shareholders to "forcibly claim" equity contributions. The establishment of the final back-up party for the loss of equity is also more comprehensive for the company's capital adequacy and the protection of the interests of creditors.
(5) Clarify the remedies for shareholders who have lost their rights
The new Company Law adds new litigation remedies for shareholders who have lost their rights. Paragraph 3 of Article 52 of the new Company Law stipulates that "if a shareholder has an objection to the loss of rights, he shall file a lawsuit with the people's court within 30 days from the date of receipt of the notice of the loss of rights". At the same time, in order to avoid long-term uncertainty about the validity of the decision to lose rights, the legislation stipulates that the time limit for initiating relief is "30 days", so as to prompt the shareholders who have lost their rights to take litigation relief measures in a timely manner.
2. Clarification of the shareholder loss system
Compared with the shareholder removal system in the current Company Law, the shareholder deregistration system in the new Company Law has indeed been improved and supplemented in many aspects, but there are still some doubts and uncertainties in the shareholder disenfranchisement system itself:
(1) Whether it is applicable to the withdrawal of capital contributions and the falsification of non-monetary capital contributions
The new Company Law stipulates that the shareholder loss system applies to the situation where "the shareholder fails to pay the capital contribution in accordance with the date of capital contribution stipulated in the articles of association". From the literal meaning of the law, it does not include the withdrawal of capital contributions, nor does it seem to include the falsification of non-monetary contributions. In our view, although the literal meaning of the shareholder loss system does not include the withdrawal of capital contributions and the untruthfulness of non-monetary capital contributions, from the perspective of the legislative intent and the nature of the acts, the non-implementation of the withdrawal of capital contributions and non-monetary capital contributions should also be applicable to the shareholder loss system.
1. Withdrawal of capital contributions
From the perspective of the legislative thrust of the shareholder loss system, the purpose of this provision is to strengthen the shareholders' performance of capital contribution obligations, so as to maintain the company's capital adequacy and protect the interests of creditors. Then, first of all, from the perspective of the interests of the violation, the withdrawal of capital contributions and the delay in the payment of monetary contributions both violate the principle of capital adequacy and damage the property rights of the company. Secondly, from the perspective of the nature of the act, the withdrawal of capital contribution is a tortious act, which is an infringement of the company's property rights, and it is more serious in terms of subjective fault and malignancy than the breach of contract of failing to make capital contribution on time. In terms of the scope of influence of the act, the withdrawal of capital contribution occurs after the establishment of the company, and the implementation of the act must require the assistance of other internal personnel of the company, such as directors and financial personnel.
Therefore, if a shareholder fails to pay the capital contribution on time, after the expiration of the grace period of the reminder, it may lead to the legal consequences of losing rights, and the withdrawal of capital contribution should also lead to the legal consequences of losing rights, so the withdrawal of capital contribution should also apply to the shareholder loss of rights system.
2. Non-monetary contributions are not implemented
Both the current Company Law and the new Company Law stipulate that shareholders may make capital contributions in monetary terms, as well as non-monetary assets that can be valued in monetary terms, such as physical objects, intellectual property rights, land use rights, equity rights, creditor's rights, etc., which can be valued in monetary terms and can be transferred in accordance with the law. The shareholder's failure to perform the non-monetary capital contribution obligation on the date specified in the articles of association and the shareholder's failure to perform the monetary capital contribution obligation on time constitute a breach of the capital adequacy obligation, and there is no difference in the essence of the violation.
In the case where a shareholder uses non-monetary property to make capital contributions on schedule, but a significant deficiency of non-monetary capital contribution is found at a later stage, if the significant deficiency is caused by market factors, force majeure or other non-shareholder faults, the capital reduction can be carried out in accordance with the law because the shareholder is not at fault, and the shareholder loss of rights rule does not apply. If the significant shortfall of non-monetary assets is caused by factors such as false or false appraisal by shareholders, and the shareholders are at fault for this, the act also damages the capital adequacy of the company, and the rules for shareholders' loss of rights can be applied to strengthen the shareholders' performance of their own capital contribution obligations and safeguard the company's property rights.
(2) How the board of directors makes the resolution to remove rights
Therefore, it is necessary to guide, restrict and standardize the decision-making of the board of directors to increase the rationality of its decision-making and conform to the interests of the company and the shareholders behind the company.
We know that the legislative purpose of the equity loss system is to maintain the company's capital adequacy, but behind the company are all shareholders, shareholders are always the most important subjects among the company's stakeholders, and directors are also elected by the shareholders' meeting, so the board of directors should safeguard the interests of all shareholders behind the company while safeguarding the interests of the company.
In particular, the new Company Law stipulates the compulsory claim obligation of other shareholders for the loss of rights, and the impact of the decision on the loss of rights of shareholders will be more significant on the interests of other shareholders, so the board of directors needs to fully consider whether the decision is beneficial to other shareholders when making the decision to ex-rights.
In this regard, we suggest that shareholders can restrict and guide how the board of directors can make the decision to exclude their rights by setting in advance in the articles of association and the rules of procedure of the board of directors, such as the trigger conditions for shareholders' expulsion, the voting ratio of board meetings, and the restriction of the voting rights of affiliated directors, so as to avoid resolutions made by the board of directors that are not conducive to the interests of the company, shareholders, or used by individual major shareholders.
For example, it has been mentioned that whether a major shareholder uses the shareholder ex-rights mechanism to make an ex-rights decision for himself through the board of directors under his control, so as to transfer the capital contribution obligation to other shareholders, or to other shareholders who are unable to perform the capital contribution, so as to circumvent their own capital contribution obligations and harm the interests of creditors? In fact, in order to avoid such a situation, shareholders can directly pass the articles of association or the rules of procedure of the board of directors in advance to stipulate that directors who are related to the expulsion cannot participate in the voting of the board of directors. In addition, if the majority shareholder abuses the rights of shareholders and violates the duty of loyalty and diligence, other shareholders can also pursue the liability of the majority shareholder in accordance with the corresponding legal provisions. In short, the shareholder loss system can never become a tool for major shareholders to escape their own capital contribution obligations and harm the interests of other shareholders and creditors, which is not in line with the purpose of the legislation.
(3) The external transfer of the lost equity
The new Company Law stipulates that there are three ways to dispose of the lost equity, namely, transfer, capital reduction and cancellation, and other shareholders to pay the corresponding capital contribution. With regard to the latter two types of handling rules, there is basically no controversy in operation due to the clear provisions of the law. However, there are many uncertainties in the transfer rules for equity transfers, i.e., transfers to third parties.
For example, there must be two parties to the transferor in the equity transfer, so who is the transferor when the lost equity is transferred to the outside world? Is it a company or a losing shareholder? At this point, what is the relationship between the company and the shareholder who lost its rights? After the shareholder loses his rights, he can no longer exercise this part of the equity, and the company transfers the part of the equity on behalf of the shareholder for the convenience of transferring the equity to the outside world? Or is it that after the shareholder loses his rights, the company automatically obtains this part of the equity, which is equivalent to a statutory transfer, but does the company need to pay the transfer consideration and how to determine the consideration? When a company transfers equity to an external company, is it up to the shareholders' meeting or the board of directors to decide the transfer pricing? Who is entitled to the transfer proceeds obtained in excess of the capital contribution?
Here, we put forward our own opinion, we believe that the lost equity is not automatically transferred by the company, because if the company transfers the equity and the company is transferred to a third party, it needs to register the equity change twice in the industrial and commercial registration authority and the register of shareholders, one is the transfer of the lost shareholder to the company, and the other is the transfer of the company to a third party, and each time it involves the determination of the transfer consideration and other issues, there is no need to increase such troubles.
In order to facilitate the external disposal and transfer of such part of the equity, the legislation may stipulate that the company shall temporarily keep and hold the part of the equity, and the company may transfer the equity in its own name. At this time, the relationship between the company and the shareholders is not a silent agency relationship, and the company does not represent the interests of the shareholders who have lost their rights, but a special legal fiduciary relationship, and the company represents the interests of the company itself. Since the consideration for the transfer of the lost equity is used to enrich the company's capital, and the ultimate vesting entity of the company's capital is the shareholder, the price and payment method of the equity transfer and other relevant matters should be made by the shareholders' meeting through a resolution, and the part of the equity that has been lost shall not participate in the voting of the shareholders' meeting.
With regard to the enjoyment of the benefits of the transfer of lost shares, we believe that it is up to the shareholders to determine in advance who will enjoy the benefits through the articles of association and the rules on the loss of rights. If there is no agreement between the shareholders, the income from the excess capital contribution in the consideration for the equity transfer shall be enjoyed by the losing shareholder. Because the law stipulates that the part of the equity must be transferred within six months, and within the shorter period, the transfer proceeds generated by the lost equity are mainly generated in the period before the loss of rights, and during this period, the owner of the lost equity is the shareholder who lost his rights, so the excess part of the transfer consideration of the lost equity shall be attributed to the losing shareholders after making up the company's capital contribution.
The above are some of our analyses and reflections on the shareholder loss system in the new Company Law, and we look forward to further clarifying and improving the ambiguities of the shareholder loss system in subsequent legislation or judicial practice.
About the Author
Yu Xianzhen
Lawyer of Hiways Beijing Office
Ms. Yu Xianzhen holds a master's degree in civil and commercial law from China University of Political Science and Law, and is a member of the Hiways Yongtai Corporate and Commercial Business Committee.
Mr. Yu is proficient in corporate law, corporate investment and financing, and has provided litigation and non-litigation legal services for a number of state-owned enterprises, private enterprises and Hong Kong-funded enterprises.
Editor: Qin Zheng