Author: Zhou Xiangen December 28, 2016

Improving the stock system and ensuring shareholder rights and interests is an important aspect of company legislation. This article starts with the theory of shareholder litigation rights, and based on reference to foreign legislation, points out the shortcomings of legislation on shareholder litigation rights in limited liability companies in China's company law. It also analyzes and studies how shareholders exercise their litigation rights in current shareholder equity disputes, and proposes legislative suggestions to improve shareholder litigation rights, which is conducive to the healthy and stable development of limited liability companies.

Key Words: Shareholders' Litigation Rights Shareholders' Direct Litigation Rights Shareholders' Derivative Litigation Rights Judicial Remedies

With the establishment of China's modern enterprise system and the continuous deepening of the reform of the enterprise share system, there is an increasing number of cases in which shareholders sue shareholders and companies to protect their legitimate rights and interests in the implementation of corporate enterprises. Due to the shortcomings and gaps in the legal provisions on the exercise of shareholder litigation rights in China's company law, especially in the legislation on limited liability companies, lawyers encounter many legal obstacles when engaging in this litigation industry. In July 1998, Company A was established as a limited liability company consisting of three natural persons: Party B, Party C, and Party D. The registered capital of the company was RMB 5 million, and the proportion of shares held by Party B, Party C, and Party D was 4:2:4. Among them, 20% of Party D was invested in cash, while the other 20% was invested in intangible assets of proprietary technology. In the company's operation, due to the inability of Party D's proprietary technology to play its due role, the company suffered losses. Party B and Party C consulted with relevant departments, It was found that Ding's technology has serious defects and cannot produce the products agreed upon by the three parties. At the same time, Ding's intangible assets were negotiated and invested by the three parties when establishing the company, and no legal valuation evaluation was conducted. Therefore, Party B, Party C, and Party D negotiated the dissolution of the company. However, due to Party D's opposition and failure to reach the consent of more than two-thirds of the voting shareholders as stipulated in the articles of association, Party B and Party C filed a lawsuit with the court, demanding: 1. Dissolve Company A; 2. Due to Party D's intangible assets being untrue, Party D is required to subscribe to a registered capital of 1 million yuan; 3. The losses of the company shall be borne by the three parties in proportion. In this case, do shareholders have the right to request the dissolution of the company? Can shareholders directly exercise their litigation rights against shareholders who have not made capital contributions or whose capital contributions are untrue? Legislation does not provide for it. This article attempts to explore the issue of litigation rights for shareholders of limited liability companies, in order to seek advice from colleagues.

1、 Theoretical research on shareholder litigation rights and foreign legislation on shareholder litigation are institutional arrangements in modern corporate governance structures aimed at protecting shareholders' legitimate rights and interests and regulating company behavior. Implementing protection of shareholder litigation rights is conducive to strengthening and improving the internal business mechanism of the company, supervising and restricting the company's management personnel to act in accordance with regulations, and preventing them from abusing the company's power. How can shareholders exercise their right to sue when their legitimate rights and interests are harmed? In the 19th century, British and American countries pioneered the creation of shareholder derivative litigation in equity. Shareholder litigation has become one of the main means for shareholders of companies in various countries to seek legal remedies when their interests are infringed upon. According to the different basis of shareholder litigation, shareholder litigation can be divided into direct litigation and derivative litigation. Direct litigation refers to a lawsuit filed by shareholders as shareholders against the company or other rights infringers for their own interests. Therefore, the interests that shareholders need to protect in direct litigation are their own interests, not the overall interests of the company; The object of prosecution can be the company or other shareholders, directors, managers, supervisors, etc. of the company; The interests of the litigation result belong to the shareholders themselves, not to the company. As stipulated in Article 247 (1) of the Japanese Commercial Code, shareholders may request the revocation of a plenary meeting resolution through litigation in the following circumstances: 1. When the convening procedure or voting violates laws, regulations or articles of association, or is significantly unfair; 2. When the content of the resolution violates the articles of association; 3. The exercise of voting rights by individuals with special interests in the resolution results in significant loss of time. The commercial and company laws of the United States, Germany, and South Korea have made clear provisions in law regarding direct litigation by shareholders, while Japanese commercial law stipulates that shareholders are directly subject to litigation for their own interests. Derivative litigation refers to when the legitimate rights and interests of a company are infringed upon by others, especially by controlling shareholders. If the company neglects to take action or file a lawsuit, shareholders with legal conditions can represent the company to file a lawsuit against the infringer. As stipulated in Article 267 of the Japanese Commercial Code: 1. Shareholders who have continuously accumulated shares since 6 months ago may request in writing that the company file a lawsuit to hold directors accountable; 2. If the company does not file a lawsuit within 30 days from the date of the request mentioned in the preceding paragraph, the shareholders mentioned in the preceding paragraph may file a lawsuit on behalf of the company; 3. If, after the period specified in the preceding paragraph, it is difficult for the company to recover losses, the shareholders mentioned in the first paragraph may, without prejudice to the provisions of the first two paragraphs, directly file a lawsuit in accordance with the preceding paragraph; 4. When a shareholder brings a lawsuit in the first two paragraphs, the court may, at the request of the defendant, order the shareholder to provide a guarantee. The US company law also provides for five situations of derivative litigation. It can be seen that shareholder litigation in derivative litigation is for the benefit of the company. The prerequisite for filing a lawsuit is to submit a written request to the company for litigation, and to exert internal remedies within the company. Only when the company is negligent in exercising its litigation rights can shareholders sue in their own name. At the same time, the sued shareholders must comply with the "principle of ownership of shares at that time" and should act in good faith, fairly, and fairly for the interests of the company, rather than for personal gain.

2、 The Supreme People's Court issued the "Provisions on the Causes of Civil Cases (Trial)" on October 30, 2000, which includes provisions on disputes over shareholder rights and disputes over damages to company rights and interests. The cause of action is determined based on the petitions of the parties and the legal relationships that have occurred

of This provision provides necessary procedural basis for shareholders to seek judicial relief. Due to insufficient legislation on corporate entities, the judicial remedies for shareholders' litigation rights are not effectively protected. Based on the Company Law and the current main situations of shareholder equity disputes, the following analysis is made:

（1） Disputes over shareholders' failure to make capital contributions or false capital contributions. According to Articles 25 and 28 of the Company Law, if a shareholder fails to make a capital contribution, other shareholders may hold the non contributing shareholder liable for breach of contract; If the shareholder's capital contribution is false, other shareholders shall bear joint and several liability. In the above provisions on breach of contract and joint and several civil liability, who exercises the right of action to pursue their civil liability? How to exercise the right to sue? Legislation does not provide for it. The author believes that shareholders' lack of capital contribution and untrue capital contribution may result in different ways of exercising their litigation rights due to different occasions. If a shareholder fails to make a capital contribution, their exercise of the right of action is a direct right of action rather than a derivative right of action. The reason is that: 1. The shareholder's failure to make a capital contribution occurs during the company's establishment process, and the shareholder's failure to make a capital contribution may result in the inability to establish a limited liability company based on human rights cooperation, and at this time, the proposed company does not have legal civil subject qualifications. 2. The shareholder's failure to contribute capital violates the obligations stipulated in the company establishment agreement and the jointly formulated articles of association between the shareholders, and is an infringement of the rights and interests of other shareholders of the proposed company. 3. The liability for breach of contract stipulated in Article 25 of the Company Law refers to the liability for breach of contract borne by non contributing shareholders to fully paying shareholders, rather than the liability for breach of contract borne by non contributing shareholders to the company. Therefore, if there is a dispute over the shareholder's failure to contribute, the shareholder who fully contributes is the plaintiff in the case, and the shareholder who did not contribute is the defendant in the case. The company does not have the qualification of a litigant in the case. The right of action exercised by shareholders in disputes arising from false capital contributions is a derivative right of action. The reason is that 1. The shareholder's investment was not truthful, which occurred after the establishment of the company. Article 28 of the Company Law stipulates that if, after the establishment of a limited liability company, it is found that the actual value of the physical assets, industrial rights, etc. as capital contributions is significantly lower than the value specified in the company's articles of association, the capital contribution shareholder shall make up for the difference. At this time, the company has qualified as a civil litigation subject. 2. The shareholder's false investment affects the normal operation of the company, the integrity of the company's registration, and the company's ability to bear civil liability externally, damaging the company's property interests. 3. Article 28 of the Company Law stipulates that... when a company is established, other shareholders shall bear joint and several liability towards it, indicating that the subject of joint and several liability for shareholders shall be a third party other than the shareholders themselves, that is, the company itself. Therefore, if a shareholder's contribution is not made in real time, the company should hold the shareholder responsible for the untrue contribution. Only in cases where the company does not exercise the right to sue, the company's shareholders have the right to exercise the right to sue. It can be seen that in derivative litigation cases where shareholders make false contributions, shareholders who make false contributions are the defendants in the case. If the company is willing to participate in the litigation, they are the third party with independent claims in the case. If the company neglects to exercise its litigation rights, it constitutes an infringement of the rights and interests of the contributing shareholders, and they are the joint defendants in the case.

（2） Disputes over equity transfer. Article 35 of the current Company Law provides corresponding provisions for the transfer of equity of shareholders of limited liability companies, which clearly requires shareholders to obtain the consent of a majority of all shareholders when transferring equity to someone other than shareholders; Meanwhile, Article 38, Paragraph 10 of the Company Law stipulates that it is the authority of the shareholders' meeting to make resolutions on the transfer of capital contributions by shareholders to persons other than shareholders. At present, some shareholders privately transfer their equity to a third party other than shareholders without a resolution of the shareholders' meeting. There are different opinions in practice on whether the company exercises the right to sue or whether the shareholder exercises the right to sue directly. The author believes that the infringement behavior of the shareholder should be directly exercised by other shareholders of the company against the shareholder who transferred the capital contribution. The main reasons are: 1. The rights and obligations generated by the company's shareholders during the capital transfer process are the rights and obligations enjoyed and assumed by the shareholders towards the shareholders. Therefore, the provisions of Article 35 and Article 38 (10) of the Company Law are also provisions on the rights and obligations of the company's shareholders. 2. When shareholders of the company transfer their capital contributions to someone other than shareholders, without the consent of other shareholders, they directly infringe on the preemptive right of other shareholders, and also violate the provisions of the articles of association expressed by all shareholders. 3. According to Article 35, Paragraph 2, and Article 38, Paragraph 10 of the Company Law, if a shareholder transfers its capital contribution to a person other than a shareholder, the effectiveness of the transfer of capital contribution agreement depends on the expression of intention by other shareholders and is not related to the company's expression of intention.

（3） Disputes over job infringement by company management personnel. Article 59 of the Company Law stipulates that directors, supervisors, and managers shall comply with the provisions of the articles of association, faithfully perform their duties, and safeguard the interests of the company; Article 63 stipulates that if a director, supervisor, or manager violates laws, administrative regulations, or the company's articles of association while performing their duties and causes damage to the company, they shall be liable for compensation. Therefore, as directors, managers, supervisors, and other management personnel of the company, they have the obligation of integrity and loyalty to the company. When performing their duties, they should exercise them in accordance with the law and regulations. If they fail to perform their duties or illegally exercise their duties, causing damage to the company, who will exercise the right of action and hold them accountable for civil liability, and the above provisions do not provide further provisions. The author believes that the civil liability for the infringement of duties by company management personnel should be exercised by the company as the plaintiff, as their failure to perform their duties or illegal or irregular exercise of power harms the interests of the company. If the company fails to exercise its litigation rights or neglects to exercise its litigation rights, shareholders have the right to represent the company in litigation for the benefit of the company

The company's litigation status is the third party in the case.

（4） Dispute over infringement of shareholder rights by company resolution. Article 111 of the Company Law stipulates that if a resolution of the shareholders' meeting or the board of directors violates laws or administrative regulations, or infringes on the legitimate rights and interests of shareholders, shareholders have the right to file a lawsuit with the people's court to demand the cessation of the illegal or infringing act. This provision only applies to shareholders of a limited liability company. Can the shareholders of a limited liability company, such as the board of directors and shareholders' meeting, be sued? There is a gap in the legislation of limited liability companies. Article 228, 229, 230, and 231 of the General Provisions of the Company Code of the Macao Commercial Code of China clearly state that shareholders have the right to file a lawsuit against illegal resolutions of the shareholders' meeting, and the object of the lawsuit is the company. Based on Article 111 of the Company Law of China and the legislative experience of Macau, the author believes that if the resolutions of the shareholders' meeting or the board of directors of a limited liability company are illegal and infringe on the legitimate rights and interests of shareholders, shareholders have the right to directly exercise their litigation rights against the company in their own name, which is conducive to the full and effective judicial protection of shareholders' rights and interests. However, in the actual operation of the company, the shareholders' meeting is convened by the board of directors and presided over by the chairman in accordance with the provisions of the company law. The board of directors is convened and presided over by the chairman. If the above resolutions are caused by the fault behavior of the directors or managers involved in specific operations, the directors or managers who are at fault are the third party in the case and shall bear corresponding civil liability for the actions that harm the interests of the company.

（5） Request for compulsory dissolution of the company's equity disputes. The Company Law provides a common provision for the dissolution of limited liability companies and joint stock limited companies, which is Article 190 of the Company Law. The situations mentioned in this provision reflect the joint expression of shareholders' will, and there is no provision for dissolution due to other reasons. As a limited liability company formed on the basis of human cooperation, if shareholders have different opinions or certain conflicts of interest, and the company is unable to carry out regular business activities or cannot be dissolved by a resolution of the shareholders' meeting, can shareholders request judicial relief to demand the right to sue for the dissolution of the company? The answer should be affirmative because: 1. Article 38, Paragraph 11 of the Company Law stipulates that the dissolution of a company is a matter decided by the shareholders' meeting, and the proposed matters required by the shareholders' meeting are based on the shareholders' proposal to dissolve the company, indicating that under normal circumstances, the right to request the dissolution of the company is the right enjoyed by the shareholders. 2. If the shareholders' meeting does not convene a shareholders' meeting or make a resolution on a proposal for the dissolution of the company, it is actually an infringement of the rights of other shareholders requesting the dissolution of the company, and also an infringement of the property rights and interests of shareholders requesting the dissolution of the company. Because the company does not dissolve, the property rights and interests that shareholders should enjoy continue to be frozen and used by the company, and shareholders are unable to exercise their rights over the property. 3. From the perspective of foreign legislation, both Article 61 of the German Limited Company Law and Article 71 of the Japanese Limited Company Law stipulate that shareholders holding more than 10% of the shares have the right to request judicial authorities to dissolve the company. Due to the shareholder's request to dissolve the company, which is actually the termination of all the rights and obligations legal relationships between shareholders based on the articles of association in the company, the shareholder's request to dissolve the company is sued against other shareholders, which is a change of procedure lawsuit.

3、 Improve company legislation to ensure shareholder litigation rights

In the legislation of limited liability companies in China, due to the lack of detailed regulations on how to operate shareholders' litigation rights in the procedure, the provisions on holding others accountable in the company law have become a dead letter. Some shareholders lack sufficient and effective judicial protection for their own interests due to the lack of judicial remedies available. As a judicial authority, given the lack of substantive provisions on shareholder litigation rights in the Company Law, it is difficult to adjudicate cases filed by shareholders for the time being. Therefore, strengthening company legislation and improving the protection system of shareholder litigation rights is an important aspect of current company legislation. Therefore, the author suggests that the protection of shareholders' litigation rights in limited liability companies should be improved from the following aspects:

（1） Further clarify the direct litigation rights of shareholders. As long as shareholders' interests are infringed upon by the company or major shareholders during the operation of the company, they have the right to directly exercise their litigation rights. In the current company law, a special chapter on shareholders' rights and obligations should be added, and shareholders' litigation rights should be stipulated in this chapter to facilitate shareholders' exercise of litigation rights and the operation of judicial organs. For shareholders' direct litigation rights, the cause of action, type, object of action, and jurisdiction of the trial should be clearly defined. The specific legislative method can refer to the Contract Law on the legislative method of contract termination, which includes both specific provisions and general flexible provisions.

（2） Clarify the derivative litigation rights of shareholders. In the legislation of shareholder derivative litigation rights, it is necessary to clarify the situation of shareholder derivative litigation, the conditions for filing shareholder derivative litigation, such as whether there are restrictions on shareholding ratio and shareholding time, the ownership of shareholder derivative litigation results and interests, and the status of the company and other shareholders in derivative litigation.

（3） Grant shareholders the right to judicial remedies for forced dissolution and unfair treatment of the company. In the issue of compulsory dissolution of a company, the reasons for the compulsory dissolution of the company, the conditions proposed by shareholders, and the legal responsibilities of shareholders after the company is forcibly dissolved should be clarified. Due to unfair treatment of shareholders' litigation rights, such as insufficient consideration of minority shareholder opinions in major company decisions, and unreasonable restrictions on shareholder rights by individual shareholders, etc., should be reflected in legislation. There should be a time limit for prosecuting unfair treatment, otherwise it will affect the normal operation of the company.

Bibliography

1. Chinese Law, Issue 3, 2000, Issue 1, 2002

2. Zhejiang Trial, Issue 6, 2001

3. Law Application, Issue 5, 1999, Issue 7, 2001

4. Japanese Commercial Code, China Legal Publishing House, 1st edition, March 2000

5. Macau Commercial Code, Renmin University of China Press, November 1999, 1st edition

6. Contemporary American Law, Social Science Literature Press, February 2001, 1st edition

(This paper won the second prize at the 2002 Zhejiang Provincial Lawyer Theory and Practice Seminar)