LIN Fangqing V. Changshu Kailai Industry Co., Ltd. and DAI Xiaoming, a Corporate Dissolution Dispute

LIN Fangqing v. Changshu Kailai Industry Co., Ltd. and DAI Xiaoming, A Corporate Dissolution Dispute

Guiding Case No. 8 (Discussed and Passed by the Adjudication Committee of the Supreme People’s Court Released on April 9, 2012 )

CHINA GUIDING CASES PROJECT English Guiding Case (EGC8) * May 2, 2012 Edition

* The citation of this translation of the Guiding Case is: 《林方清诉常熟市凯莱实业有限公司、戴小明公司解散纠纷案》(LIN Fangqing v. Changshu Kailai Industry Co., Ltd. and DAI Xiaoming, A Corporate Dissolution Dispute ), CHINA GUIDING CASES PROJECT , English Guiding Case (EGC8), May 2, 2012 Edition , available at http://cgc.law.stanford.edu/guiding -cases/guiding -case -8. This document was primarily prepared by Richard Jiang, Oma Lee, Christine Qingyu Liu, MA Jing, Sylvia Hsin -Ling Tsai, Randy Wu, and XIA Linfei. The document was finalized by Jennifer Ingram, Dimitri Phillips, and Dr. Mei Gechlik. Minor editing, such as splitting long paragraphs, adding a few words included in square brackets, and boldfacing the headings to correspond with those boldfaced in the original Chinese version, was done to make the piece more comprehensible to readers. The following text, otherwise, is a direct translation of the original text and reflects formatting of the Chinese document released by the Supreme People’s Court. The following Guiding Case was discussed and passed by the Adjudication Committee of the Supreme People’s Court of the People’s Republic of China and was released on April 9, 2012, available at http://rmfyb.chinacourt.org/paper/html/2012-04/14/content_43324.htm?div=-1. See also 《最高人民法院关于发布第二批指导性案例的通知》 (The Supreme People’s Court’s Notice Concerning the Release of the Second Batch of Guiding Cases ), Apr. 9, 2012, available at http://tjjnfy.chinacourt.org/article/detail/2014/05/id/1298622.shtml.

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Keywords

Civil Corporate Dissolution

Serious Difficulty in Operation and Management Corporate Deadlock

Main Points of the Adjudication

Article 183 of the Company Law makes “serious difficulty occurs in the operation and management of a company” one of the conditions under which shareholders may initiate a corporate dissolution suit. To decide “whether serious difficulty occurs in the operation and management of a company”, the operational state of the company’s organizational structure should be comprehensively analyzed. Although a company may be in a profitable state, it can be determined that serious difficulty occurs in the operation and management of the company if it has long -term failure in its shareholders’ meeting mechanism and serious impediments in its internal management, plunging [the company] into a state of deadlock. If other conditions stated in the Company Law and relevant judicial interpretations are conformed with, a people’s court may decide to dissolve a company in accordance with law.

Related Legal Rule(s)

Article 183 of the Company Law of the People’s Republic of China

Basic Facts of the Case

Plaintiff LIN Fangqing ( 林方清 ) claimed: Serious difficulty occurred in the operation and management of Changshu Kailai Industry Co., Ltd. ( 常熟市凯莱实业有限公司 ) (hereinafter referred to as “Kailai Company”). It had plunged into corporate deadlock which could not be resolved through other means, causing substantial harm to his 1 rights and interests. He requested dissolution of Kailai Company.

Defendants Kailai Company and DAI Xiaoming ( 戴小明 ) defended their positions, claiming: The state of the business operation of Kailai Company and its subsidiaries was good. The conditions for corporate dissolution were not met. The conflict between DAI Xiaoming and LIN Fangqing could be resolved through other means and the company should not be compulsorily dissolved through judicial process .

1 Translators’ note: “he” and “his” as used herein are gender -neutral terms that also refer to “she” and “her”.

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The court handled the case and ascertained: Kailai Company was established in January 2002; LIN Fangqing and DAI Xiaoming were the company’s shareholders, each owning 50% of the shares. DAI Xiaoming was the statutory representative and executive director of the company while LIN Fangqing was the general manager and supervisor of the company. Kailai Company’s articles of association clearly stated:

Resolutions of shareholders’ meetings must be passed by shareholders representing more than half of the voting rights. However, any resolution concerning an increase or a decrease of the registered capital, merger, dissolution, change of corporate form, or amendment to the articles of association must be passed by shareholders representing more than two -thirds of the voting rights.

Voting rights at shareholders’ meetings were exercised by shareholders in proportion to their capital contributions. Beginning in 2006, the conflict between LIN Fangqing and DAI Xiaoming had become increasingly apparent. On May 9 of the same year, LIN Fangqing proposed and gave notice to hold a shareholders’ meeting. Because DAI Xiaoming believed that LIN Fangqing did not have the right to convene a shareholders’ meeting, the meeting could not be held. On June 6, August 8, September 16, October 10, and October 17 of the same year, LIN Fangqing entrusted a lawyer to send Kailai Company and DAI Xiaoming a letter, claiming that because shareholders’ rights and interests had been seriously harmed, LIN Fangqing, as a shareholder enjoying half of the voting rights at the shareholders’ meetings of the company, had voted and passed a resolution dissolving Kailai Company in accordance with the process stated in the articles of association. [In the letter, LIN Fangqing also] required DAI Xiaoming to provide such information as Kailai Company’s financial books and required liquidation of Kailai Company. On June 17, September 7, and October 13 of the same year, DAI Xiaoming wrote back, stating that the resolution of the shareholders’ meeting made by LIN Fangqing did not have a legal basis and that DAI Xiaoming disagreed on corporate dissolution and required LIN Fangqing to hand over the company’s financial information. On November 15 and 25 of the same year, LIN Fangqing again sent Kailai Company and DAI Xiaoming a letter, requesting that Kailai Company and DAI Xiaoming provide the company’s financial books, etc. for his inspection, distribute corporate revenues, and dissolve the company.

The Jiangsu Changshu Garments Town Management Committee (hereinafter referred to as “Garments Town Management Committee”) proved that Kailai Company was still operating normally and was willing to organize LIN Fangqing and DAI Xiaoming to conduct mediation.

[The court] also ascertained that Kailai Company’s articles of association stated that the supervisor(s) of the company could exercise the following rights:

(1) Inspect the company’s finances;

(2) supervise those acts carried out in violation of laws, regulations, or the articles of association by executive directors and managers when they perform their corporate authority;

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(3) require directors and managers to make corrections when the acts of directors and managers are detrimental to the interests of the company; [and]

(4) propose holding interim shareholders’ meetings.

From June 1, 2006 to date, 2 Kailai Company had yet to hold a shareholders’ meeting. On December 15 and 16, 2009, the Mediation Committee of the Garments Town Management Committee twice tried to organize the two parties to conduct mediation, but it was unsuccessful.

Results of the Adjudication

On December 8, 2009, the Intermediate People’s Court of Suzhou Municipality, Jiangsu Province, by the (2006) Su Zhong Min Er Chu Zi No. 0277 Civil Judgment, rejected LIN Fangqing’s litigation claim. After the judgment was pronounced, LIN Fangqing appealed. On October 19, 2010, by the (2010) Su Shang Zhong Zi No. 0043 Civil Judgment, the Higher People’s Court of Jiangsu Province repealed the first instance judgment and amended the judgment according to law to dissolve Kailai Company.

Reasons for the Adjudication

In its effective judgment, the court opined: 3 First, serious difficulty had occurred in the operation and management of Kailai Company. According to Article 183 of the Company Law and Article 1 of the Provisions (II) of the Supreme People’s Court on Several Issues Concerning the Application of the “Company Law of the People’s Republic of China” (hereinafter referred to as “ Company Law Interpretation (II) ”), in order to decide whether serious difficulty occurs in the operation and management of a company, the operational state of the company’s shareholders’ meetings, board of directors or executive directors, and board of supervisors or supervisors should be comprehensively analyzed. The focus of “serious difficulty occurs in the operation and management of a company” was on the existence of serious internal impediments in the company’s management, such as the failure of the shareholders’ meeting mechanism and an inability to make decisions regarding the company’s operation and management. It should not be partially understood as operational difficulties, such as the company’s lack of capital and serious [financial] loss.

In this case, Kailai Company only had two shareholders, DAI Xiaoming and LIN

2 Translators’ note: The Chinese text has “至今 ” (“to now”). It is not clear from the context which date this refers to. 3 Translators’ note : The Chinese text does not specify which court opined. Given the context, this should be the Higher People’s Court of Jiangsu Province .

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Fangqing, each owning 50% of the shares. Kailai Company’s articles of association stipulated that “resolutions of shareholders’ meetings must be passed by shareholders representing more than half of the voting rights.” In addition, all the parties unanimously agreed that “more than half” was non -inclusive. Therefore, as long as the opinions of the two shareholders differed and they refused to cooperate, a valid vote could not be formed, and [this] clearly affected the operation of the company. Kailai Company had not held a shareholders’ meeting for four consecutive years; it was unable to form a valid resolution of shareholders’ meetings. The company could not be managed by means of resolutions of shareholders’ meetings, and the shareholders’ meeting mechanism had failed. Executive Director DAI Xiaoming was one of the two shareholders in conflict with each other. His acts of managing the company were unable to implement resolutions of shareholders’ meetings. LIN Fangqing, as the supervisor of the company, was unable to normally exercise the authority of a supervisor and was unable to play a supervisory role. As Kailai Company’s internal mechanisms could not operate normally and could not make decisions on the operation of the company, even though the company was not yet in a state of [financial] loss, this did not change the fact that serious difficulty in the operation and management of the company had occurred.

In addition, as Kailai Company’s internal operational mechanism had already failed [and] LIN Fangqing’s shareholders’ rights and supervisory rights had been in an inoperable state for a long time, his purpose of investing in Kailai Company could not be realized and his interests were substantially harmed. Moreover, Kailai Company’s deadlock was unable to be resolved by other means for a long time. Article 5 of the Company Law Interpretation (II) clearly stated that “if the parties cannot reach an agreement to keep the company in existence, the people’s court should make a decision in a timely manner.” In this case, prior to initiating the corporate dissolution lawsuit, LIN Fangqing had already tried to resolve the conflict with DAI Xiaoming through other means. The Garments Town Management Committee had also organized both parties to have mediation, but the parties could not reach any consensus. The courts of the two instances also actively carried out mediation based on the consideration that judicial measures to compulsorily dissolve a company should be used carefully, but neither court succeeded.

Furthermore, LIN Fangqing held 50% of Kailai Company’s shares, which met the condition stated in the Company Law that a shareholder who initiates a corporate dissolution lawsuit hold 10% or more of the company’s shares.

In conclusion, Kailai Company met the conditions concerning shareholders’ initiating of corporate dissolution lawsuits provided by the Company Law and the Company Law Interpretation (II) . From the point of view of adequately protecting the legal rights and interests of the shareholders, reasonably regulating the corporate governance structure, and promoting the healthy and orderly development of a market economy, the court of second instance rendered the above judgment in accordance with law.