Cao Lu Pu FaAuthor of the fifty-fifth issue: Cao Huicong.
Company A was established in 2010 and its shareholders are Company S (15%), Company B (40%) and Company Y (45%).
In September 2018, Company S transferred its 15% equity interest to Company M, and Company M paid the equity transfer money.
In February 2019, Company B and Company Y issued letters of commitment, both promising to "agree that Company S will transfer 15% of its equity in Company A to Company M, and agree to waive the exercise of the right of first refusal and the right to follow".
In May 2019, Company A held a board meeting, and the board of directors deliberated on the work proposal related to the change of shareholders, and two of the seven directors did not vote in favor.
Subsequently, since Company A did not go through the procedures for the change of equity for Company S and Company M, Company S sued the court.
The court held that this case was a dispute over a request to change the company's registration. Since Company M was an enterprise registered in the Hong Kong Special Administrative Region, this case was a Hong Kong-related case.
Article 14 of the Law of the People's Republic of China on the Application of Laws to Foreign-Related Civil Relations stipulates that the law of the place of registration shall apply to matters such as the capacity for civil rights, civil conduct, organizational structure, and rights and obligations of shareholders of legal persons and their branches.
The subject company of this case, Company A, is registered in the mainland of the People's Republic of China, so the laws of the mainland of the People's Republic of China should be applied to the trial of this case.
Company S, as the first party to the equity transfer contract, based on the requirements of performing its contractual obligations, asserted that Company A's cooperation with the registration procedures for equity change was a manifestation of safeguarding its own rights, and it was not improper to sue as a plaintiff.
The main legal issues in this case are:1. Does the transfer of equity from Company S to Company M infringe on Company B's "right to follow"? 2. Is the transfer of the company's equity by any party subject to the unanimous consent of all incumbent directors before the transfer of the company's equity stipulated in the articles of association of company A is invalid because it violates the prohibitions of the Company Law?
1. Did the signing of the equity transfer agreement between Company S and Company M to transfer all the equity of the defendant in Company S infringe on the "right of follow-up" of Company B?
First of all, China's law does not clearly stipulate the "right to follow" or "right to follow" of shareholders, that is, the right to follow is not a shareholder's right under the law. "** right to follow" is an equity disposal arrangement made by the shareholders of the company based on the consideration of the company's operation and their own interests when the shareholders are replaced due to equity transfer, and it is an agreement reached by all shareholders through consensus. The defendant's articles of association define the "right of follow-up" as if, during the exercise period of rights, if the non-transferee shareholder does not agree to the transferor's equity transfer and expressly states in writing that it does not accept the plan transferee as the transferee of the equity to be transferred and the successor to the joint venture contract, the non-transferable shareholder may choose to make an accompanying offer to the transferor shareholder or the plan transferee, requiring the latter to purchase all or part of the equity of the joint venture held by the non-transferee shareholder in accordance with the terms and conditions of the equity transfer. The transferring shareholder shall not transfer any equity interest in the company held by the transferor to the scheme transferee if the transferor or scheme transferee expressly refuses, or if the parties and the scheme transferee are unable to agree on the proposed transfer and the accompanying offer within 90 days after the non-transferor shareholder makes the said accompanying offer. Judging from the foregoing agreement,The "right to follow" is the result of the consensus of all shareholders of the defendant, and the content does not violate the mandatory provisions of the law and should be valid.
Second, a limited liability company has the characteristics of both "capital cooperation" and "personal compatibility", so the transfer of equity by the shareholders of a limited liability company is not a completely free act, and the company laws of various countries usually set certain restrictions on the transfer of equity by shareholders based on the characteristics of the company's human compatibility. China's company law stipulates that when shareholders transfer equity to the outside world, other shareholders have the right of consent and the right of first refusal. Although the "right to follow" is not expressly stipulated by law, it is also a right agreed upon by the shareholders of the company based on the compatibility of the company, and there are commonalities with the shareholders' right of first refusalThe court held that it could be handled with reference to the provisions on the right of first refusal in the Company Law.
Finally, whether the plaintiff's transfer of equity infringes on Company B's "right to follow" should be examined in accordance with the provisions of the Company Law and the articles of association. The transfer of equity by a shareholder to a person other than the shareholder shall be subject to the consent of more than half of the other shareholders. If more than half of the other shareholders do not agree to the transfer, the shareholders who do not agree shall purchase the transferred equity; If you do not purchase it, you will be deemed to have agreed to the transfer. For the equity transferred with the consent of the shareholders, under the same conditions, other shareholders have the right of first refusal. When judging the same conditions, the people's court should consider factors such as the number of equity transferred, the method of payment and the time limit. Company B argued that the equity transfer between Company S and Company M was a share exchange transaction, and the plaintiff did not inform it in writing of the conditions for the equity transfer, but only informed the transferee of the name, the type and quantity of the equity transferred, and did not inform the core requirements such as **, performance period, and method, so it infringed on Company B's "right to follow". In this regard, the court held that Company S clarified the key terms in the equity transfer agreement, such as the amount of equity transferred, the equity transfer**, and the payment method of the transferee**. Company B, after promising to give up the exercise of the right of first refusal and the right of follow-up, did not agree to the plaintiff's transfer of equity on the grounds that the right of follow-up had been infringed, and this opinion had no factual and legal basis and was not adopted by this court.
2. A. Does the articles of association of the company stipulate that the transfer of the company's equity by either party can only be made with the unanimous consent of all the incumbent directors, and is it invalid because it violates the mandatory provisions of the Company Law? Article 71 of the Company Law of the People's Republic of China stipulates that:"The shareholders of a limited liability company may transfer all or part of their equity to each other. The transfer of equity by a shareholder to a person other than the shareholder shall be subject to the consent of more than half of the other shareholders. Shareholders shall notify other shareholders in writing to solicit consent for their equity transfer, and if other shareholders do not reply within 30 days from the date of receipt of the written notice, they shall be deemed to have agreed to the transfer. If more than half of the other shareholders do not agree to the transfer, the shareholders who do not agree shall purchase the transferred equity; If you do not purchase it, you will be deemed to have agreed to the transfer. For the equity transferred with the consent of the shareholders, under the same conditions, other shareholders have the right of first refusal. If two or more shareholders claim to exercise the right of first refusal, they shall negotiate to determine their respective purchase ratios; If the negotiation fails, the right of first refusal shall be exercised in accordance with the proportion of their respective capital contributions at the time of transfer. Where the articles of association of the company have other provisions on the transfer of equity, such provisions shall prevail. ”
Judging from this provision, the articles of association, as a collection of shareholders' wills, can make stricter restrictive provisions on equity transfer than general provisions. The articles of association of the company are the resolutions formed by the expression of the will of all shareholders within the scope of the law, which is the basis for the internal management of the company and the autonomy rules on which the company relies to achieve corporate autonomy. However, the articles of association of the company shall not conflict with the mandatory norms of the Company Law and the basic spirit and principles of the Company Law.
In Guiding Case No. 96, Song Wenjun v. Xi'an E*** Shareholder Qualification Confirmation Dispute, the Supreme People's Court determined the following key points of the adjudication: "If a state-owned enterprise is restructured into a limited liability company, its initial articles of association restrict the transfer of equity and expressly stipulate the company's repurchase clause, which may be deemed valid as long as it does not violate the mandatory provisions of the Company Law and other laws." Judging from the main points of the adjudication of this Guiding Case, to determine whether the other provisions of the company's articles of association on equity transfer are valid, it is necessary to examine whether the other provisions violate the mandatory provisions of the Company Law. If it is not violated, it is valid, otherwise, it is invalid. In this case, it is to examine whether the articles of association of Company A stipulate that the transfer of the company's equity by any party must be subject to the unanimous consent of all the incumbent directors before the transfer violates the mandatory provisions of the Company Law.
First of all, in a limited liability company, since the shareholders often contribute capital to establish the company based on mutual trust, the change of shareholders means the rupture of the original trust relationship and the establishment of a new trust relationship, and if the equity transfer issue cannot be properly handled, the normal operation of the company will be affected in the future. Therefore, the Company Law gives the shareholders of the company the right to decide on the matters of equity transfer independently, that is, the shareholders of the company can impose certain restrictions on the equity transfer through the articles of association. However, restrictions are not the same as prohibitions, and restrictions must be consistent with the legislative purpose and do not violate the mandatory provisions of the law. The equity enjoyed by shareholders is a property right, and any property right has the power to dispose of it, and the restrictions on equity transfer in the articles of association of the company shall not violate the essence of property rights. If the articles of association of the company through the setting of other conditions and procedures, which actually make the transfer of shareholders' equity extremely difficult or impossible, it will be invalid because it violates the provisions of the company law. The articles of association of the defendant in this case stipulated that the transfer of equity by shareholders must be unanimously approved by the board of directors before the transfer, which is obviously more stringent than the provisions of the Company Law that require the consent of more than half of the other shareholders. At the same time, when the directors objected to the equity transfer, the defendant's articles of association did not stipulate the remedial procedures for the transferring shareholders, which frustrated the purpose of the equity transfer of the transferring shareholders, and in essence, it was impossible to withdraw from the company's operation through the transfer of equity, which obviously violated the provisions of the Company Law.
Secondly, Company A is a Sino-foreign joint venture, and its establishment and operation should not only comply with the special provisions of China's laws on Sino-foreign joint ventures, but also conform to the general provisions and basic spirit of China's Company Law. Judging from the relevant legal provisions, although Sino-foreign joint ventures have certain particularities, they should also comply with the relevant provisions of the Company Law and shall not contravene the provisions of the Company Law.
Finally, according to the articles of association of Company A, the board of directors of Company A consists of 7 directors, of which 2 are appointed by Company B, 1 by Company S, 3 by Company Y, and 1 jointly appointed by the three parties. Although directors perform their duties in accordance with the provisions of the law and the articles of association, the appointment process of directors shows that each director reflects the will of each shareholder in the process of performing his duties. In this case, after Company B agreed to the transfer of equity by Company S to Company M and promised in writing to waive the right of first refusal and the right to follow-up, it also disagreed with the "Proposal on the Follow-up Work on the Change of Foreign Shareholders of the Company" at the board meeting through two directors elected by itself, which led to a dispute in this case, which was obviously contrary to good faith.
To sum up,The court held that the provisions in the articles of association of company A stipulating that the transfer of the company's equity by either party must be subject to the unanimous consent of all the incumbent directors before the transfer could be made violated the mandatory provisions of the Company Law and should be invalid. The equity transfer agreement between Company S and Company M is legal and valid, and does not infringe on Company B's right of first refusal and "right of follow-up", and Company A shall register the change of 15% of the equity registered in the name of Company S to Company M. 
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Cao Huicong is a lawyer
Shanghai Landing Law Firm.
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