--- Beijing Yingke Law Firm, Shi Weizhong.
On December 29, 2023, the Standing Committee of the National People's Congress deliberated and passed the revised Company Law, which will come into force on July 1, 2024. There are many highlights of this revision, one of the highlights is the establishment of the "shareholder loss system", the implementation of this system will help to remove the company's long-term occupancy of non-capital shareholders and zombie shareholders, and at the same time create conditions for the company to introduce new shareholders, enhance the vitality of the enterprise, the system will also play an immeasurable role in stimulating market vitality.
The shareholder loss system, also known as the forfeiture of shares, is known as the "shareholder removal" system in developed countries such as Japan and the United States and Taiwan, China, which refers to the system in which the company notifies the shareholder to pay the capital contribution and gives him a certain grace period when the shareholder fails to pay the capital contribution in accordance with the company's articles of association or fails to pay the capital contribution on time.
In China, the system of shareholders losing their rights was not born out of thin air, and the introduction of this system was also set up in response to the needs of this stage of China's social development. For example, Article 17 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) (2020 Amendment) (hereinafter referred to as the "Interpretation III of the Company Law") [i] only disqualify shareholders of a limited liability company if they completely fail to fulfill their capital contribution obligations or withdraw all their capital contributions. It does not apply to the situation where the shareholder fulfills part of the capital contribution obligation or withdraws part of the capital contribution. Although its scope of application is too strict, it provides a practical and legal basis for the improvement of today's shareholder disrights system.
The theoretical basis of the shareholder loss system is the theory of contract termination. The non-performance of one party to the contract is equivalent to a fundamental breach of contract, and the other party may obtain the right to terminate the contract, and with the exercise of the right to terminate the contract, the shareholder loses the basis for holding the shares as consideration for capital contribution, and the identity of the shareholder is extinguished. This theory is also cited in the current revision of the Company Law, and the core content of the new Company Law[ii] of the shareholder loss system includes the conditions and procedures for shareholders to call for the loss of rights, the follow-up treatment of the lost share, and the rights and remedies of the lost shareholders.
Applicable conditions: If the shareholder fails to pay the capital contribution within the time limit agreed by the shareholder and fails to pay it after being reminded, it includes all the capital contribution and part of the capital contribution that is not paid on time.
Applicable procedures: written reminder - board resolution - notification of loss of rights 3 links. That is, when the shareholder fails to pay the capital contribution on time, the company shall first make a written reminder, and the written reminder shall indicate the specific amount, grace period, etc. If the shareholder fails to make the payment in accordance with the written demand, the board of directors shall make a resolution. When the company sends a notice of default to the shareholder, the decision becomes effective.
The way to deal with the equity lost by the shareholder who lost his rights: one is transfer, and the other is capital reduction and cancellation. The time limit is to complete the transfer or cancellation within six months, if there is no transfer, and do not want to cancel due to various reasons, other shareholders should pay the corresponding capital contribution in full proportionally.
Remedies for shareholders who have lost their rights: They shall file a lawsuit with the people's court within 30 days from the date of receipt of the notice of loss of rights.
The technical level of legislation is closely related to the degree of development of a country, so legislation is also known as the art of regret, and the system of shareholder loss of rights needs to be further improved, such as:
1. Who (shareholders' meeting, board of directors, directors) should decide the appropriate grace period for calling? What is the reasonable scope of the grace period set out in the demand notice? Will the major shareholder use the rights in his hands to initiate the shareholder loss system to issue a reminder notice to him before the expiration of the subscription capital contribution period, but the written capital contribution reminder period is written as a number of years, which extends the obligation of the major shareholder to subscribe for capital contribution through this workaround. Should there be a provision that the subscription period a year + grace period n years does not exceed how many years in total. This is more conducive to implementation.
2. The shareholder who owes the capital contribution may also be a member of the board of directors, and when the company's shareholders' meeting or the board of directors discusses these events, should the shareholder who owes the capital contribution recuse himself? The new Company Law does not have a clear provision, and the author believes that it should be avoided.
3. Will there be a major shareholder who will lose his shareholder qualification through the "shareholder loss system", so as to achieve the purpose of withdrawing from the company and exempt himself from the obligation of subscribing and capital contribution, so as to achieve the purpose of evading debts?
4. Will the shareholder loss system also affect the interests of creditors to some extent? In the case of non-repayment of debts, whether the exercise of the shareholder default system also needs to obtain the consent of creditors or whether the protection of creditors' interests in this case needs to be more clearly defined. All of these need to be further innovated in judicial practice, so as to make further progress towards perfection.
i] Article 17 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) (2020 Amendment) (hereinafter referred to as the "Company Law Interpretation III") stipulates that: "If a shareholder of a limited liability company fails to perform its capital contribution obligation or withdraws all of its capital contribution, and fails to pay or return the capital contribution within a reasonable period of time after being urged to do so by the company, the company dissolves the shareholder's shareholder qualification by resolution of the shareholders' meeting, and the shareholder's request for confirmation that the termination is invalid, shall not be supported by the people's court." In the circumstances provided for in the preceding paragraph, the people's court shall explain at the time of judgment that the company shall promptly go through the statutory capital reduction procedures or have other shareholders or third parties pay the corresponding capital contributions. Where the company's creditors request the relevant parties to bear the corresponding liabilities in accordance with Articles 13 or 14 of these Provisions before going through the statutory capital reduction procedures or other shareholders or third parties pay the corresponding capital contributions, the people's court shall support it. ”
ii] Article 52 of the New Company Law [Shareholder Loss of Rights System] "If a shareholder fails to pay the capital contribution on the date of capital contribution stipulated in the articles of association of the company, and the company issues a written reminder to call for the payment of capital contribution in accordance with the provisions of the first paragraph of the preceding article, the grace period for payment of capital contribution may be specified; The grace period shall not be less than 60 days from the date on which the company issues the reminder. If the grace period expires and the shareholder still fails to fulfill the obligation to make capital contributions, the company may, by resolution of the board of directors, issue a notice of loss of rights to the shareholder, and the notice shall be issued in writing. From the date of issuance of the notice, the shareholder loses his equity in the unpaid capital contribution.
The equity lost in accordance with the provisions of the preceding paragraph shall be transferred in accordance with the law, or the registered capital shall be reduced accordingly and the equity shall be cancelled; If it is not transferred or cancelled within six months, the other shareholders of the company shall pay the corresponding capital contribution in full according to the proportion of their capital contribution.
If a shareholder has any objection to the loss of rights, he or she shall file a lawsuit with the people's court within 30 days from the date of receipt of the notice of loss of rights. ”