China's Supreme Court Clarifies Shareholders' Rights to Know Under the PRC Company Law
This article looks at the recent Interpretation issued by China's Supreme Court, laying out comments on how Article 33 of the PRC Company Law should be applied to reviewing a shareholder's right to examine company documents and similar matters. This right is now confirmed as being one which can not be contracted out of by a company and its shareholders.
Being a shareholder, it is crucial to have the ability to assess the financial health of ones investments. The Chinese Company Law protects this interest by providing a right for shareholders of limited liability company to inspect and review corporate documents:
Article 33 of the Company Law states, that a shareholder shall have the right to inspect:
1. A company’s articles of association,
2. Minutes of the meeting of the shareholders assembly,
3. Resolutions of the board of directors,
4. Resolutions of the board of supervisors,
5. and Financial and accounting reports of the company
Besides this protection, the law also confirms in Article 97, that a shareholder has the right to examine the register of shareholders and counterfoil of corporate bonds, as well as give suggestions for or inquire about the operations of the company.
To secure this right effectively, the law stipulates a certain procedure for shareholders – Article 33 says:
“To do that, the shareholder shall submit a written request to the company and explain his purposes. Where the company deems, on reasonable grounds, that it is for illegitimate purposes that the shareholder requests to consult its accounting books, which may damage the lawful interests of the company, the company may refuse to provide its accounting books for the shareholder to consult, and shall, within 15 days from the date the shareholder submits the written request, give a written reply to the shareholder and state its reasons. Where the company refuses to provide its accounting books, the shareholder may request the people’s court to demand the company to provide such books.”
In this sense, a company may refuse the request, but the right for information will still be enforceable, pending on a court’s decision. The realization of this right however, poses some difficulties for the shareholders, especially for those, that are in the minority. Questions remain, concerning what scope of financial books should be allowed and whether a third party, such as law or accountant firms should be allowed to go through them. This would be the case if the shareholder hired an accountant firm to check the financial books.
To secure their right despite these uncertainties and to provide a protection for the “weaker” party, the Chinese Supreme Peoples’ Court has come up with a new obligation. On 28 August 2017, the court published an Interpretation of the “right to know”, which came into force on 1 September 2017. The Court has decided that this right to know is fundamental, and it has prohibited companies from limiting this right under the pretext of corporate charters or in agreements signed by shareholders.
The main aspects of the Interpretation of Articles 33 and 97 are:
1. The Confirmation of the shareholders’ right to initiate a law suit in a People’s Court and request the company to provide financial and accounting reports as well as other related documents. If a company has evidence to prove that a plaintiff does not have the qualifications of a shareholder at the time of the commencement of the litigation proceedings, a People’s Court is required to dismiss the prosecution; if the plaintiff, however, has preliminary evidence which shows that his/her legal rights and interests were damaged during the shareholding period, the action is to be supported. See Article 7 of Judicial Interpretation (IV) on Company Law.
2. Expansion of the scope of accessible accounting records by including vouchers and source documents. This is to especially enable minority shareholders to verify the accuracy of accounting records - See Article 10 of Judicial Interpretation (IV) on Company Law.
3. As there is a lot of variation between local courts’ interpretations on what a rejection because of an “unjustified purpose” means, the Interpretation gives some examples: (1) if the shareholder is running a business, competing with the companies’ business. (2) If the shareholder is to sell the obtained information - See Article 8 of Judicial Interpretation (IV) on Company Law.
4. Companies will not be allowed to deprive shareholders of their “right to know” under the pretext of corporate charters or agreements signed by shareholders - See Article 9 of Judicial Interpretation (IV) on Company Law.
The clarifications offered by this Interpretation has been welcomed in quite a positive manner. One of China’s major news outlets, the China Daily, has said that the Interpretation “will help coordinate relations between shareholders and companies, create a sound business environment and support mass entrepreneurship and innovation.”
We await the application of this Interpretation by local courts throughout China, with great interest.
ABOUT THE AUTHOR: Matthew Murphy and Katharina König
Matthew Murphy is a Partner in the MMLC Group. Katharina König is a law student at Heidelberg University, and working as an Intern in the China team at MMLC during Summer 2017.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.