The First Case on Foreign Shareholder Representative Litigation in China

In the Company Law amended in 2005, the shareholder representative lawsuit was established officially for the first time, which affected the company governance deeply in China. As an important part in modern company system, the shareholder representative litigation not only makes up for the defects of the company administration structure and other inefficient remedies, but also plays an important role in protecting interests and rights of the company as well as the shareholders, etc.

Since the new Company Law was put into effect, such new company cases based on the shareholder representative litigation have appeared successively. However, if the senior officers or others violate the company's legal rights and interests, whether the shareholders in foreign invested company could litigate according to the law had once been hot for foreign investors in China.

Fortunately, the question has its answer in practice now. Beijing No.2 Intermediate People's Court is hearing a typical foreign shareholder representative litigation, which is the first foreign shareholders representative litigation in this peoples' court, since the new Company Law has come into force. This case will be introduced generally as follows: 1

Hualian Shin Kong Department Store Co Ltd (hereinafter referred as Joint Venture Company) was built by Beijing Hualian Group Investment Holding Co Ltd (hereinafter referred as Beijing Hualian Group) and Shin Kong Department Store Investment Co Ltd (hereinafter referred as Hong Kong Shin Kong Company).

In this case, Hong Kong Shin Kong Company nominated Wu, the general manager of its parent company, for the general manager of Joint Venture Company, and then Wu named Gan to be the vice-general manager. Beijing Hualian Group believed that Wu and Gan colluded with Fuhui Network Technologies Company (hereinafter referred as Fuhui Company) maliciously, making Joint Venture Company write a contract on weak current project and weak current build project by illegal means, and the amount was more than RMB 27 Million. Furthermore, Fuhui Company did not have any legal qualification in this field.

Fuhui Company has received about RMB 22 Million illegally so far. Seen from the preliminary estimates of the audit institution employed by the Joint Venture Company, the false project price reported was up to RMB 5 Million.

Beijing Hualian Group pointed out that the behavior of Wu and Gan had caused detriment to the company and irrelevant shareholders. As one shareholder, Beijing Hualian Group had requested Joint Venture Company several times to file suit the related senior officers and Fuhui Company. However, the Joint Venture Company had not filed suit yet.  2

The Joint Venture Company, as the third side in this suit, was a foreign-invested company. In accordance with the Article 4 in Chinese-Foreign Joint Ventures Law: "A joint venture shall take the form of a limited liability company;" moreover, the Article 218 in amended Company Law regulates: "This Law shall be applicable to foreign-invested limited liability companies and joint stock limited companies," so the regulations of Company Law are available to foreign-invested company. Therefore, the complaint in this case----Beijing Hualian Group filed the shareholder representative suit, according to Article 152 in amended Company Law. 3

Above all, the relevant regulations and systems in amended Company Law are applicable to the foreign-funded limited liability companies and joint stock limited companies in order to prevent the companies and their shareholders from the detriment.

1. General introduction of the case is from: http://case.mylegist.com
2. According to the amended Company Law, requesting in writing company to file suit is the Pre-procedure of shareholder representative litigation.
3. Article 152 of Company Law : "where a director or senior officer is involved in the circumstance as described in Article 150, the shareholders of a limited liability company or a joint stock limited company that individually or jointly hold one percent (1%) of the total shares for consecutive 180 days may request in writing the board of supervisors or the supervisors of a limited liability company without a board of supervisors to file suit before a people's court.

Where a supervisor is involved in the circumstance as described in Article 150, previously mentioned shareholders may request in writing the board of directors or the executive director of a limited liability company without a board of directors to file suit before a people's court.
 
Where the board of supervisors or the supervisors of a limited liability company without a board of supervisors, or the board of directors or the executive director refuses to file suit after receipt of the written request mentioned above, or does not file suit within thirty days of the receipt of the same, or comes across an emergency where, if no immediate actions are taken, the company' s interests shall be incurably impaired, then the shareholders may, for the interest of the company and on their own behalf, directly file suit before a people's court.
 
Where the company's legal rights and interests are violated by others and in the event of any losses incurred, the shareholders defined in the first preceding paragraph may file suit before a people's court in accordance with the first two preceding paragraphs."