A three-year lasting dispute between shareholders of a property management company (the “Company”) was finally settled in recent, with the infringing shareholder judged to compensate the Company. Commencing from 15th October 2008, the case was adjudicated on 20th January 2012 at last after the arbitration of 3 years and 3 months, and with its complex plotting, the dispute could be a lesson to the shareholders of Chine enterprises.
In 2008, after years of operation, the Company has come into a stable and fast development, and its major shareholder Zhang, also the legal representative and chief director of the Company planned to introduce the strategic investment to expand the scale of the company. In June of that year, Shi, who once studied abroad and got in touch with Zhang on the beginning of the same year, purchased 23% of the company share on the approval by other shareholders, and took the post of deputy general manager in the company afterwards, which led to the separation of the Company power that Zhang took charge of the clients exploration and relationship while Shi was responsible for inner management. On 29th August, the new Legal Director appointed by Shi adjusted the Articles of the Association, and by the new regulations the supervisor has the right to dismiss the legal representative and director of the Company. And that lay the powder hose to the future conflict in the Company.
On 15th October, 2008, when Zhang was on the business trip, Shi announced to all the staffs of the Company that Zhang was removed from his post for his power abuse, and all the company documents and seals shall be taken over by Shi from the day. Zhang offered to negotiate but only got a tough response from Shi, who at that time also sent a written legal opinion through law firm A to all the staffs to endorse his decision. With no other way out, Zhang assembled the shareholder meeting on 21st October and announced the dismissal of Shi’s post in the company and dissolution of the company, also the decision to take back all the documents and seals. Many employees left the company during that November and December, and meanwhile Zhang took back the seal of the company again through loss reporting to the police department as well as the seal and administrative power of the company. Afterwards, Shi filed the lawsuit for the cancellation of the company decision and the liquidation of the company, which was respectively decided by the Shanghai No.1 Intermediate People’s Court the cancellation of the decision and refused by the Shanghai No.2 Intermediate People’s Court the claim of the company liquidation.
During Shi’s administration over the Company in October to December of 2008, Shi remitted out four million yuan fund of the company in different names, while no specific receiver is detected. The Company entrusted DeBund in October 2009 to file the lawsuit for the interest damages suffered by the controlling shareholder, actual controller, director, supervisor and senior manager, which was finally filed in the court where the residence of Shi is situated for the Company could not operate well at the original address. During the lawsuit, Shi pleaded that most fund were paid to law firm A as the guarantee of the non-performing asset purchase. Therefore law firm A was added as the joint tortfeasor, who defended that the planned guarantee was actually paid to staffs as the severance packages and no interests of the Company are damaged thereby. The focus of the case lies on: 1) Shall Shi be entitled to use the fund of the company with no approval from the shareholders of the Company when he took the administrative power; 2) Did such using damage the interests of the Company; 3) Is law firm A the joint tortfeasor with Shi? The case was finally judged after two instances.
By the judgment of Shanghai No.1 Intermediate People’s Court, Shi shall has no power to decide, implement operational plan or investment program of the Company by the Articles of Association of the Company, though he was the director, therefore even Zhang was recalled the Chairman of the company, Shi shall by no means to take the administrative power, and the fund using then against the willingness of the Company is kind of interests damaging. Law Firm A, as a professional unit, shall be fully aware of the relief of such misconducts, while it took nothing but to aid such fund using and therefore it shall take the joint liability. The case was ended in the joint liability of compensation between Shi and law firm A.
After acting in the case, the following opinions may be to your consideration:
1. Where’s the boundary of discretional clauses in the Articles of Association of the company as provided in Company Law? In the case, the company’s regulations adjusted the provision of Article 54 of the Company Law and to grant the right to dismiss the legal representative and the director. And shall this be included in the “other rights” in Article 54 of the company law? Different conclusions have been made on that. In the adjudication by the Shanghai Higher People’s Court for the rehearing of the case, the regulations were not deemed illegal, and it’s only appointed out that the dismissal of the legal representative of director shall not mean the granting of the administrative power. By Article 38 of the company law, the director, supervisor should be elected and changed by the shareholder meeting, which makes some court hold the invalidity of the aforesaid regulations of the company for it’s against the laws. Therefore no specific conclusion has been made on the issue.
2. Where’s the boundary of a good faith actual controller of the company? In the case, if Shi only exercises the power of recall in the Articles of Association, makes no private interests in the case, transfers no asset of the company, and waits the shareholder to made a final decision of his proposed recall, then he shall be deemed make no damage to the interest of the company. But as to the disposal of the company asset during his controlling over the company, it remained argued. Whether the conduct shall be judged by its motive or the result? No easy way to get the answer.
3. Shall the actual controller take the liability when he pays the fund of the company to the staffs as the severance package with no or surpassing the decision of the shareholder meeting or board meeting? In the case, as plead by Shi and Law Firm A, all the fund is paid to the staffs as the severance package, once it did pay so, shall the actual controller take the liability or exempted?
4. The cause of action is the dispute of the damages suffered by company’s controlling shareholder, actual controller, director, supervisor, senior manager, while the law firm was also judged to take the liability. It’s pleaded in the case by Shi and law firm A that the law firm shall not be the proper object heard in the case, and shall not take the joint liability. But the court did not explain the issue and made little interpretation in the judgment, which with deficits in statements and needs further discussion in law theory.
Despite the final win in the case, the victory is almost lost. The company loses its clients and its team, and Shi also suffered from the case. Zhang, after the lawsuit, has become fully aware of his fault in the omission of due diligence investigation and hasty adjustment of the share option structure of the company, and his delayed countermeasure when Shi damaged the interests of the company, all these led to a victory with much disappointment. For lawyers, when clients trapped in such deadlock, it demands overall strategy and plan in advance to protect the client’s interests to the utmost extend as well as in the shortest time, which values the experience, wit and guts of the professionals.
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Author: Lear Gong
Partner & Attorney-at-law of DeBund Law Offices
Bridge IP Law Commentary is a website focus on the introduction of commercial laws in China, especially the intellectual property laws. All the posts here are our original works. And all news or cases referred here are from public reports, and our comments or analysis are of due diligence, neutrality and impartiality, representing our own opinions only and are our original works. You may contact us shall you have any opinions or suggestions.