Guiding Cases in Perspective TM 指导性案例透视. Guiding Case No. 10: CGCP Annotations. April 30, 2016 Edition

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1 Guiding Cases in Perspective TM TM 指导性案例透视 Dr. Mei Gechlik Founder and Director, China Guiding Cases Project Lear Liu and XIAO Qin Editors, China Guiding Cases Project Guiding Case No. 10: CGCP Annotations April 30, 2016 Edition The citation of this piece is: Mei Gechlik, Lear Liu, & XIAO Qin, Guiding Case No. 10: CGCP Annotations, STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, Guiding Cases in Perspective TM, Apr. 30, 2016, The authors thank Thomas Rimmer for assisting in the translation of the Chinese version of this piece into English and Jordan Corrente Beck for editing the English version. Guiding Cases in Perspective TM is a unique serial publication of the China Guiding Cases Project that identifies the original judgments selected by the Supreme People s Court, examines their transformation into Guiding Cases, and explores the treatment of the Guiding Cases in subsequent cases.

2 2 I. The Process of Selecting Guiding Case No. 10 LI Jianjun v. Shanghai Jiapower Environment Protection Science and Technology Co., Ltd., A Corporate Resolution Revocation Dispute ( Guiding Case No. 10 or GC10 ) is one of the guiding cases ( GCs ) included in the third batch of GCs released by the Supreme People s Court ( SPC ) on September 18, Its original judgments are the (2009) Huang Min Er (Shang) Chu Zi No Civil Judgment rendered by the Huangpu District People s Court of Shanghai Municipality 2 and the (2010) Hu Er Zhong Min Si (Shang) Zhong Zi No. 436 Civil Judgment rendered by the No. 2 Intermediate People s Court of Shanghai Municipality. 3 This case was selected as a GC through the following process (see Chart 1): 4 1. On April 19, 2012, the Adjudication Committee of the Higher People s Court of Shanghai Municipality decided to recommend this case to the SPC for confirmation as a GC. 2. After research and discussion, the Office for the Work on Case Guidance of the SPC sent this case to the Second Civil Tribunal of the SPC for review and comment. The Second Civil Tribunal determined that this case could provide guidance in the adjudication of similar cases. On July 23, 2012, the Adjudication Committee of the SPC agreed to confirm this case as a GC. The SPC released the GC on September 李建军诉上海佳动力环保科技有限公司公司决议撤销纠纷案 (LI Jianjun v. Shanghai Jiapower Environment Protection Science and Technology Co., Ltd., A Corporate Resolution Revocation Dispute), STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, English Guiding Case (EGC10), Nov. 9, 2012 Edition, 2 The first-instance judgment has not been found and may have been excluded from publication. Accordingly, these annotations focus on a comparison of GC10 and the second-instance judgment of the underlying case. 3 上海佳动力环保科技有限公司与李某某董事会决议撤销纠纷上诉案 (2010) 沪二中民四 ( 商 ) 终字第 436 号 (Shanghai Jiapower Environment Protection Science and Technology Co., Ltd. and a certain LI, An Appeal Case on a Board of Directors Resolution Revocation Dispute,(2010) Hu Er Zhong Min Si (Shang) Zhong Zi No. 436), STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, Guiding Cases in Perspective TM, Guiding Case No. 10 Original Second-Instance Judgment, Apr. 30, 2016, 4 See 最高人民法院案例指导工作办公室 (The Office for the Work on Case Guidance of the Supreme People s Court), 指导案例 10 号 李建军诉上海佳动力环保科技有限公司公司决议撤销纠纷案 的理解与参照 (Understanding and Referring to Guiding Case No. 10, LI Jianjun v. Shanghai Jiapower Environment Protection Science and Technology Co., Ltd., A Corporate Resolution Revocation Dispute), 人民司法 应用 (THE PEOPLE S JUDICATURE APPLICATION), Issue No. 3 (2013). For the process of selecting Guiding Cases, see 最高人民法院关于案例指导工作的规定 (Provisions of the Supreme People s Court Concerning Work on Case Guidance), passed by the Adjudication Committee of the Supreme People s Court on Nov. 15, 2010, issued on and effective as of Nov. 26, 2010, STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, English Guiding Cases Rules, June 12, 2015 Edition,

3 3 Chart 1: The Process of Selecting Guiding Case No. 10 II. Comparison Between Guiding Case No. 10 and Its Original Judgment 1. Basic Facts of the Case Based on the Basic Facts of the Case section of GC10, the following table compares the similarities and differences between GC105 and the original second-instance judgment: Guiding Case No Original Second-Instance Judgment The court heard the case and ascertained: 1 Plaintiff LI Jianjun was a shareholder of defendant Shanghai Jiapower Environment Protection Science and Technology Co., Ltd. ( Jiapower Company ) and served as general manager. 2 Jiapower Company s shareholding structure was: 40% of shares held by GE Yongle, 46% by LI Jianjun, and 14% by WANG Taisheng. The three shareholders 5 李建军诉上海佳动力环保科技有限公司公司决议撤销纠纷案 (LI Jianjun v. Shanghai Jiapower Environment Protection Science and Technology Co., Ltd., A Corporate Resolution Revocation Dispute), STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, Guiding Cases in PerspectiveTM, Guiding Case No. 10 Highlighted Edition, Apr. 30, 2016,

4 4 Guiding Case No. 10 together constituted the board of directors; GE Yongle served as the chairperson of the board of directors, and the other two were directors. (3)The articles of association stipulated: The board of directors exercises authorities including appointment and dismissal of the company s manager, etc.; board meetings shall be valid only when two-thirds or more of the directors are in attendance; decisions made at the board meeting on the matters discussed should be valid only when directors who constitute more than twothirds of all shareholders approve by voting. Original Second-Instance Judgment 2 3 (4)On July 18, 2009, GE Yongle, Chairperson of the Board of Directors, Jiapower Company, convened and presided over a board meeting, and the three directors were all in attendance. A resolution was made during the meeting, the contents of which stated in part: In view of the fact that General Manager LI Jianjun, without the board of directors consent, privately used company funds for stock speculation in the secondary market, resulting in a heavy loss, [the board] hereby dismisses him from the position of general manager, effective as of today. The resolution was signed by GE Yongle, WANG Taisheng, and the supervisor, while LI Jianjun did not sign. Plaintiff LI Jianjun claimed: The resolution that defendant Jiapower Company used to dismiss LI from his post as general manager was based on facts and reasons that could not stand, and the board of directors procedure for convening, its method of voting, as well as the contents of its resolution all violated the provisions of the Company Law. He requested that the court revoke the board of directors resolution in accordance with law. Defendant Jiapower Company defended its position, claiming: The board of directors procedure for convening, its method of voting, and the contents of its resolution all conform to the provisions of law and the articles of association, and therefore the board of directors resolution was valid. Overall, the Basic Facts of the Case section of GC10 is largely based on the original second-instance judgment. 2. Reasons for the Adjudication The Huangpu District People s Court of Shanghai Municipality rendered the first-

5 5 instance judgment: revoke the board of directors resolution made on July 18, 2009 by defendant Jiapower Company. Dissatisfied with the judgment, Jiapower Company appealed to the No. 2 Intermediate People s Court of Shanghai Municipality, which rendered a judgment: (1) repeal the above-mentioned civil judgment of the Huangpu District People s Court of Shanghai Municipality; (2) reject LI Jianjun s litigation claims. GC10 quite clearly provides the adjudication reasons of the No. 2 Intermediate People s Court of Shanghai Municipality, but there are still differences. Based on the Reasons for the Adjudication section of GC10, the following table compares the similarities and differences between GC10 and the original second-instance judgment: Guiding Case No. 10 In accordance with Article 22, Paragraph 2 of the Company Law of the People s Republic of China, reasons for which a board of directors resolution can be revoked include: (1) The procedure for convening violates laws, administrative regulations, or the articles of association; (2) the voting method violates laws, administrative regulations, or the articles of association; (3) the content of resolutions violates the articles of association. From the view of the procedure for convening, one could see that the board of directors meeting held by Jiapower Company on July 18, 2009 was convened by Chairperson GE Yongle, and all three directors were in attendance. The procedure of convening that board meeting did not violate the provisions of laws, administrative regulations, or the articles of association. From the view of the voting method, one could see that, according to the provisions of Jiapower Company s articles of association, decisions on the matters discussed should be valid only when directors who constitute more than two-thirds of all shareholders approve by voting. The aforementioned resolution of the board of directors meeting was approved by the votes of two of the three shareholders (and directors); therefore the voting method did not violate the provisions of laws, administrative regulations, or the articles of association. From the view of the contents of the resolution, one could see that Jiapower Company s articles of association provide that the board of directors has the right to dismiss the company s general manager. The contents of the board of directors resolution stating that General Manager LI Jianjun, without the board of directors consent, privately used company funds for Original Second-Instance Judgment Essentially the same, but merely states that the procedure used to convene the board meeting did not violate statutory procedures rather than provisions of laws, administrative regulations, or the articles of association. (emphasis added) Essentially the same, but merely states that the voting method did not violate articles of association rather than provisions of laws, administrative regulation, or articles of association.

6 Guiding Case No. 10 stock speculation in the secondary market, resulting in a heavy loss were merely the reason for the board s dismissal of General Manager LI Jianjun, whereas the contents of the resolution themselves that General Manager LI Jianjun be dismissed did not violate the articles of association. Even if the reasons for the dismissal of General Manager LI Jianjun as stated in the board of directors resolution did not exist, this would not result in the revocation of the board of directors resolution. First, the Company Law respects corporate autonomy. Legal relations within companies, in principle, should be adjusted by corporate autonomy mechanisms and judicial organs, in principle, do not intervene in internal corporate affairs. Second, Jiapower Company s articles of association did not restrict the board of directors authority to dismiss the company s manager, and did not provide that the dismissal of the manager by the board must be based on particular reasons. The contents of the articles of association did not violate any compulsory provisions of the Company Law and should be regarded as valid; hence, Jiapower Company s board of directors could exercise the authority conferred by the articles of association to make the decision of dismissing the company s manager. Therefore, the court should respect corporate autonomy, and did not need to review whether or not there were reasons for which Jiapower Company s board of directors dismissed its general manager; this means that there was no need to review whether or not the facts on which the resolution was based were verified, and whether or not the reasons could stand. In summary, plaintiff LI Jianjun s litigation claims requesting revocation of the board of directors resolution could not stand and were rejected in accordance with law. Original Second-Instance Judgment Essentially the same meaning. Essentially the same, but without these expressions: respects ; Legal relations within companies, in principle, should be adjusted by corporate autonomy mechanisms and judicial organs ; and The contents of the articles of association did not violate any compulsory provisions of the Company Law and should be regarded as valid. Essentially the same, but without this expression: Therefore, the court should respect corporate autonomy. Overall, there are quite a few differences between the Reasons for the Adjudication section of GC10 and the original second-instance judgment. The analysis of these differences touches on the reasons for selecting the case as a GC, which are discussed below. III. Reasons for Selecting Guiding Case No. 10 In order to safeguard shareholders rights and interests, the provisions of the Company

7 7 Law of the People s Republic of China 6 (the Company Law ) concerning the means of remedy for corporate resolutions that violate laws, administrative regulations, or a company s articles of association have been gradually refined. Based on the different issues presented by corporate resolutions, Article 22 of the Company Law as amended in 2005 divided violative corporate resolutions into two types, namely those that are invalid and those that may be revoked. Paragraphs 1 and 2 of Article 22, which remain unchanged in the current version of the Company Law, state: Where the content of a resolution [passed at] a shareholders meeting, shareholders general meeting, or [by] the board of directors of a company violates laws or administrative regulations, the resolution shall be invalid. Where the procedure for convening a meeting or the method of voting [used in] a shareholders meeting, shareholders general meeting, or [by a] board of directors violate laws, administrative regulations, or the articles of association, or the content of a resolution [passed by the shareholders or the board] violates the articles of association, the shareholders may, within 60 days of the resolution s being made, request that the people s court revoke it. (emphasis added) Subsequently, on February 18, 2011, the SPC revised the Provisions on Causes of Action in Civil Cases to divide corporate resolution disputes into two types, namely corporate resolution validity confirmation disputes and corporate resolution revocation disputes. 7 With respect to corporate resolution revocation disputes, although Article 22, Paragraph 2 of the Company Law outlines the parameters of a courts review, there is still a certain amount of confusion in judicial practice. For example, GC10 involves the issue of how to conduct judicial review of the board of directors resolution dismissing the general manager. The SPC provides some clarification for the issue above through the Main Points of the Adjudication of GC10, 8 which read: A people s court, when handling a corporate resolution revocation dispute, should review: Whether or not the procedure for convening meetings and the method of voting violate laws, administrative regulations, or the articles of association, as well as whether or not the content of the resolution violates the articles of association. On the premise that the aforementioned provisions have not been violated, whether the facts on which the resolution dismissing 6 中华人民共和国公司法 (Company Law of the People s Republic of China), passed and issued on Dec. 29, 1992, effective as of July 1, 1994, amended three times, most recently on Dec. 28, 2013, effective as of Mar. 1, 2014, Article 22, Paragraphs 1 and 2 remain the same in the latest amendment to the Company Law. 7 民事案件案由规定 (Provisions on Causes of Action in Civil Cases), passed by the Adjudication Committee of the Supreme People s Court on Oct. 29, 2007, issued on and effective as of Feb. 4, 2008, amended on Feb. 18, 2011, effective as of Apr. 1, 2011, 8 See 最高人民法院案例指导工作办公室 (The Office for the Work on Case Guidance of the Supreme People s Court), supra note 4, at 49.

8 8 the general manager is based are verified and whether the reasons can stand are not within the scope of judicial review. According to the Office for the Work on Case Guidance of the SPC, GC10 has a strong guiding significance by clarifying the boundaries within which courts can conduct judicial review of corporate resolutions that may be revoked. 9 GC10 is also conducive to strengthening judges thinking on adjudication of commercial matters and encouraging companies to exercise autonomy in accordance with law under the conditions of the market economy. 10 Therefore, the case was selected as a guiding case. IV. Brief Comments With respect to the similarities and differences between GC10 and the original second-instance judgment and to the reasons for selecting the case as a GC, the authors have the following observations. 1. Guiding Case No. 10 Remedies the Shortcomings of the Original Second-Instance Judgment In this case, with respect to the procedure for convening meetings and the method of voting, although the court of second instance cited Article 22, Paragraph 2 of the Company Law to clearly point out that the court should review whether or not [they] violate laws, administrative regulations, or the articles of association, the original second-instance judgment, as analyzed above, only vaguely mentions that they did not violate statutory procedures or did not violate the articles of association, without any explicit reference to the requirement that laws or administrative regulations should not be violated. GC10 remedies this shortcoming by clearly stating in the relevant parts of the Reasons for the Adjudication section that [t]he procedure of convening that board meeting did not violate the provisions of laws, administrative regulations, or the articles of association and that the voting method did not violate the provisions of laws, administrative regulations, or the articles of association. In addition, the second-instance judgment does not explicitly mention that judicial organs or courts should respect corporate autonomy. GC10 makes improvement in the Reasons for the Adjudication section by using expressions like [l]egal relations within companies, in principle, should be adjusted by corporate autonomy mechanisms and [t]herefore, the court should respect corporate autonomy. The Office for the Work on Case Guidance of the SPC explains: The core of the spirit of corporate autonomy is respect for the business judgment of the company and respect for the autonomous choices made, in accordance with law, by the company, the shareholder(s), and the director(s) Id. at 48. Id. Id. at 49.

9 9 The appointment and dismissal of the general manager concern the core and key decisions of a company s daily business operations. The adjustment of senior management by the company s board of directors based on the needs of the company s development is an exercise of the right to autonomy. 12 The relationship between the board of directors and the manager is generally understood in the legal field as a principal-agent relationship based on a relationship of trust. According to the legal nature of the principal-agent relationship, the board of directors has the right to dismiss at will. [The board of directors] may dismiss the manager at any time and the court does not need to review the reasons for dismissal. If the dismissal causes losses to the manager, except for the grounds that cannot be attributed to the company, the manager may claim separately that the company is liable for compensation There is Room for Improvement in the Reasons for the Adjudication Section of Guiding Case No. 10 (1) Article 22, Paragraph 1 of the Company Law should be considered first Article 22, Paragraph 1 of the Company Law provides: Where the content of a resolution [passed at] a shareholders meeting, shareholders general meeting, or [by] the board of directors of a company violates laws or administrative regulations, the resolution shall be invalid. Regarding corporate resolution revocation lawsuits, GC10 is deficient because it only mentions Article 22, Paragraph 2 of the Company Law, but fails to notice the logical connection between Paragraph 1 and Paragraph 2 of the provision. In the authors opinion, before proceeding to the analysis of the board of directors resolution pursuant to Article 22, Paragraph 2 of the Company Law, courts need to first confirm whether the content of the resolution is in accord with the provisions of laws and administrative regulations based on Article 22, Paragraph 1. The reason is that if the content of a corporate resolution is in violation of the provisions of laws or administrative regulations, it is invalid and the court should directly confirm the invalidity of the corporate resolution. In this case, the court does not need to decide whether the resolution may be revoked in accordance with Paragraph 2. (2) The Legality of the Articles of Association Should be Considered First When Analyzing Article 22, Paragraph 2 of the Company Law Article 22, Paragraph 2 of the Company Law provides: Where the procedure for convening meetings and the method of voting [used Id. Id. at

10 10 in] a shareholders meeting, shareholders general meeting, or [by a] board of directors violate laws, administrative regulations, or the articles of association, or the content of a resolution [passed by the shareholders or the board] violates the articles of association, the shareholders may, within 60 days of the resolution s being made, request that the people s court revoke it. The Main Points of the Adjudication of the GC10 are: A people s court, when handling a corporate resolution revocation dispute, should review: Whether or not the procedure for convening meetings and the method of voting violate laws, administrative regulations, or the articles of association, as well as whether or not the content of the resolution violates the articles of association. On the premise that the aforementioned provisions have not been violated, whether the facts on which the resolution dismissing the general manager is based are verified and whether the reasons can stand are not within the scope of judicial review. In order words, on the premise that the content of the corporate resolution does not violate laws or administrative regulations (i.e., the requirements of Article 22, Paragraph 1 of the Company Law), courts need to review the following three aspects in reviewing whether the corporate resolution may be revoked: Whether or not the procedure for convening meetings violates laws, administrative regulations, or the articles of association; Whether or not the method of voting violates laws, administrative regulations, or the articles of association; Whether or not the content of the resolution violates the articles of association. Both the original second-instance judgment and GC10 include analysis of the above three aspects. A company s articles of association is an important point of reference when making a determination on the above three aspects. Based on the logic above, a court may revoke a corporate resolution if the procedure for convening meetings, the method of voting, and the content of the resolution all do not violate the provisions of laws and administrative regulations, yet one of these three items violates the articles of association. However, if the relevant sections of the articles of association are themselves unlawful, should the court still revoke the resolution? The authors believe that the answer should be no. As a matter of fact, the Reasons for the Adjudication section of GC10 also mentions that [t]he contents of the articles of association did not violate any compulsory provisions of the Company Law and should be regarded as valid; hence, Jiapower Company s board of directors could exercise the authority conferred by the articles of association to make the decision of dismissing the company s manager. The bolded section is the expression missing in the original second-instance judgment. This shows that the SPC, when preparing this guiding case, realized that the legality of the articles of association is a

11 11 prerequisite for analyzing whether the content of the resolution violates the articles of association. Therefore, the authors believe that courts should first review whether the provisions of the articles of association relevant to the resolution are lawful before conducting review of the above three aspects. The Reasons for the Adjudication section of GC10 only mentions consideration of whether the provisions of a company s articles of association violate the [ ] Company Law. This scope of review is too narrow. The authors believe that courts should still review whether the content of the articles of association violates any other relevant laws and administrative regulations. Further clarification is also needed to confirm whether the scope of review should include departmental rules and local regulations.