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.
2 Keywords Civil Corporate Dissolution Serious Difficulty in Operation or Management Corporate Deadlock Main Points of the Adjudication Article 183 of the Company Law makes serious difficulty in operation or management of the company one of the conditions under which shareholders can lodge a corporate dissolution suit. To determine whether there is serious difficulty in operation or management of the company, the operational state of the company s organizational structure should be comprehensively analyzed. Although a company may be in a profitable state, if it has long-term failure in its shareholder meeting mechanism and serious impediments in its internal management, plunging it into a state of deadlock, it can be identified as having serious difficulty in operation or management. If other conditions prescribed by the Company Law and relevant judicial interpretations are conformed with, a people s court may decide to dissolve a company according to 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: Changshu Kailai Industry Co., Ltd. ( 常熟市凯莱实业有限公司 ) (hereinafter referred to as Kailai Company ) had serious difficulty in operation or management and had plunged into corporate deadlock which could not be resolved through other means, causing significant 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: Kailai Company and its subsidiaries were in good operational state, and did not meet the conditions for corporate dissolution. 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.
3 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 legal 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 stipulated: Shareholder meeting resolutions must be passed by shareholders representing more than one-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 shareholder 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 that a shareholder meeting would be held. Because DAI Xiaoming believed that LIN Fangqing did not have the right to convene a shareholder 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 shareholder rights and interests had been seriously infringed, LIN Fangqing, as a shareholder enjoying half of the voting rights at the company s shareholder meetings, had voted and passed a resolution dissolving Kailai Company in accordance with the process stipulated 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 shareholder meeting resolution 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 stipulated 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 duties;
4 (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 shareholder meetings. From June 1, 2006 to date, 2 Kailai Company has yet to hold a shareholder 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, Kailai Company already had serious difficulty in its operation or management. 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) ), to determine whether or not there was serious difficulty in operation or management of a company, the operational state of the company s shareholder meetings, board of directors or executive directors, and board of supervisors or supervisors should be comprehensively analyzed. The focus of serious difficulty in the operation or management of a company was on the existence of serious internal impediments in the company s management, such as the failure of the shareholder meeting mechanism and an inability to make decisions regarding the company s operation or management. It should not be understood in a one-sided way 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.
5 Fangqing, each owning 50% of the shares. Kailai Company s articles of association stipulated that shareholder meeting resolutions 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, an effective vote could not be formed, and [this] clearly affected the company s operations. Kailai Company had not held a shareholder meeting for four consecutive years; it was unable to form an effective shareholder meeting resolution. The company could not be managed by means of shareholder meeting resolutions, and the shareholder meeting mechanism had failed. The management acts of Executive Director DAI Xiaoming, who was one of the two shareholders in conflict with each other, were unable to implement shareholder meeting resolutions. LIN Fangqing, as the supervisor of the company, was unable to normally exercise the powers of a supervisor and was unable to play a supervisory role. As Kailai Company s internal mechanisms could not function normally and could not make decisions on the company s operations, even though the company was not yet in a loss position, this did not change the fact that serious difficulties in operation or management of the company had occurred. Next, as Kailai Company s internal operational mechanism had already failed [and] LIN Fangqing s shareholder 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 seriously damaged. 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 stipulated 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 lodging the corporate dissolution suit, 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 articulated in the Company Law that a shareholder who lodged a corporate dissolution suit had to hold more than 10% of the company s shares. In conclusion, Kailai Company had already met the conditions concerning shareholders lodging of corporate dissolution suits prescribed by the Company Law and the Company Law Interpretation (II). The second instance court, 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, made the above judgment according to law.