Comments on a Shareholder’s Qualification Case Arising out of Technology Investments
(Steven Wang) Recently, the author has represented parties in a shareholder’s lawsuit, with the dispute centering on IPR investment. The court has already heard the case. The property value involved in the lawsuit totaled as high as RMB 300 million Yuan, and the laws applied in its hearing involved IPR law, contract law, and corporate law. The focus of the dispute referred to the patent, exclusive technology, contribution, revocation of shareholder qualification and the application of law when a number of conflicts arise among these different areas of the law. These conflicts have caused a lot of discussion regarding these legal conflicts, and several conclusions have been reached regarding issues presented in the case.
I. A Summary of the Case and the Court’s Judgment
(I) The Case Summary
Wang was the major shareholder, founder, and legal representative of a company registered in Nanjing (the “Nanjing Company”). The Company had two other major shareholders, whom shall be referred to as B and C. To enlarge the scale of the Company, Wang made a decision with B and C that to jointly invest with a listed company (the “Listed Company”) holding patents and exclusive technology valued at tens of millions of Yuan in B’s name. Following this, the new company was registered in Shanghai (the “Shanghai Company”). As for B and C, they were registered as the apparent shareholders, while Wang agreed with B and C for the share option distribution. In terms of this agreement, the Shanghai Company and the Listed Company were both made aware of these facts.
After the establishment of Shanghai Company, Wang took the position of the board president and legal representative. After almost ten years hard work and effort, Wang developed the Shanghai Company from one originally having investments of 30 million Yuan to more than 300 million Yuan. Wang then concluded an agreement with B and C that B’s holding of the share options would become Wang’s property, and subsequently transferred to Wang. The Shanghai Company and all the shareholders agreed that transaction and the shareholder’s meeting and the board decision were concluded.
When Wang felt joyful for his achievement after ten years’ effort, the Listed Company, at that time the main investor in the new company, was confronted with a new controller. The new controller tried every method possible to attempt to drive away Wang, and considered him disloyal to the company. At the same time, Wang demanded the Shanghai Company and B handle the property change procedures, but his demands were all denied or delayed with no certain timeframe.
With no alternatives available to him, Wang entrusted the author to act on his behalf and represent his interests, and subsequently charged the Shanghai Company and B in court.
(II) The Progress of the Lawsuit
In the course of the lawsuit, the Shanghai Company assembled a temporary shareholder’s meeting through publication in the newspaper. At the meeting, Shareholder B had his shareholder qualification revoked on account of his failure to make proper investments, and this decision made at the impromptu meeting was then submitted to the court as evidence.
As for our side, we maintained that the assembly of and actions taken at the impromptu shareholder’s meeting of the Shanghai Company were in violation of the relevant procedural regulations, and with this line of reasoning we filed another lawsuit with the court demanding the revocation of any decisions made at the aforementioned meeting. After the hearing, the court supported our claims and canceled the decision made by the Shanghai Company.
The Shanghai Company was unhappy with that decision, and held a second shareholder’s meeting, and at that meeting the shareholders against made the decision to revoke Wang’s shareholder qualification. What was difficult for us to comprehend was why B and C, who originally shared the same interests with Wang, would make an about-face and support the major shareholder and the Shanghai Company – this conundrum all but affirmed that B’s capital was falsified.
Therefore, it was not difficult to conclude that the major shareholder of Shanghai Company had plotted against Wang to claim he had made false contributions, accompanied with other shareholders. Nevertheless, whether the investment had been fully made is a factual question, and one that would not be changed by any confessions made in conclusion.
As to this question, we provided several pieces of evidence demonstrating B’s full investment when he received share options in the Shanghai Company. By doing this, we refused the Shanghai Company’s incorrect views on the issues concerning the technology investment or qualification of the shareholder, or any statements that would have misled the judge in any confessions.
(III) The Court’s Judgment
After a hearing that lasted nearly one year, the court finally ruled that the Shanghai Company’s cancellation of Wang’s shareholder qualification lacked a factual basis; that the capital put up by B had been transferred to the Listed Company, and this had nothing to do with Wang; that in terms of the technology investment’s patent, it had been transferred pursuant to the proper legal procedures, and that the exclusive technology had been transferred to the company. For these reasons, Wang had fulfilled his duty to make the investment, and Wang’s claims on the share options were all supported.
II. The main legal issues involved in technology investment
What the case above shows is that technology investments can easily be linked with shareholder qualifications, and as for the technology investment itself, whether it has been fully made is also a question deserving of discussion and research.
(I) The technology investment dispute and the removal of shareholder qualification
Those who may encounter a dispute over investment and then file a lawsuit could be a company, shareholder, or the creditor of a company.
For the creditors, their main claims would generally be supplementary compensation liability taken for the unpaid debt of the company within the capital withdrawn. For the company and other shareholders, they may request the shareholder to repay the capital and interests to the company, and moreover those who aiding the capital withdrawal shall also assume joint liability.
In addition to the return of capital and interests, the company could also remove the shareholder qualification of those that have failed in the investment payment or withdraw all the capital through the shareholder meeting. As to this issue, we would like to focus on the following two points:
- The removal of shareholder qualification requires factual evidence supporting such actions as a precondition. As regulated in the Corporate Interpretation III, if shareholder qualifications are to be removed, those involved shall first verify the factual precondition that the shareholder has failed in fulfilling investment duties or who have withdrawn all the capital. The “failed in fulfilling investment duties” mentioned here refers to the non-payment of any investment subscribed. That is to say, once the shareholder has made investment of even 1 cent in total, its qualification as a shareholder cannot be removed, but to chase its liability through the methods of press payment or right limits, etc. The status of the shareholder could not be determined for the investment made, but shall be the decided by the establishment of the investment or share option transfer contract. It shall first come up the shareholder status then follows the duty of investment payment. Otherwise, why would one make an investment once it is no longer considered a shareholder? For this point, it could be checked and verified in accordance with the Interpretation III of the Corporate Law, which has regulated the “to withdraw all the capital invested.” Since the regulation demands “full,” then when capital contributions are also involved, it shall also be “full.”
- The second is the removal of shareholder qualifications through legal procedures. When a company holding a meeting decides to remove shareholder qualifications, it shall observe the articles of association in the company, and then notify all shareholders in advance. But the question is what happens when the shareholder to be removed has not been informed? In our opinion, they should also be notified. The reason is since the meeting is to remove its shareholder qualification, then the precondition thereby shall be the company and other shareholders confirm its qualification as the shareholder, otherwise there would be no necessity to remove its qualification. Considering the fact that the decision to remove shareholder qualification can only be made effective after a signature made by the shareholder, then it follows that before effecting the decision, the qualification of the shareholder should still be confirmed. For these reasons, the shareholder should be notified before his qualifications are removed. As for the scheduling of the meeting, it shall be fulfilled as per the regulation in the articles of the association.
(II) The judicial determination of a complete technology investment
No matter what kind of contribution dispute concerning the shareholder is, the focus of the dispute shall all be upon whether the shareholder has made full investment of the capital subscribed. In terms of the investment method, the money investment could be checked by the accountant transfer record. As for the land use right, due to the feature of the real estate, it can also be easily checked. However, as for technology investments, due to the various methods involved, and most being intangible, one can easily discover whether an investment has been fully made. In IPR, some things demand registration, while others do not, and we would like to discuss some of these differences with our readers.
First, because both copyright and patents require registration, in order to determine whether their investment has been fully made, one shall consider whether the registration has been made. The question here is, if the transfer procedure could have been unfinished during the capital investment phase, then how does one decide whether an investment has been fully made? According to the Interpretation III of the Corporate Law, once a transfer has been made during the statutory period, there should be no issues. As apparently judged, the regulations grant a rather broad grace period, thus making it unlikely that there will be any questions regarding complete investments in capital contributions. However, in reality a delayed transfer may be caused by a number of reasons.
For those patent rights within their effective period, a transfer will almost always happen within the appointed period handed down by the court. With regard to the patent and other intellectual property rights that have been rendered invalid for other reasons, subjectively, a transfer could not continue. But neither the law nor judicial interpretations have regulated this aspect. In the opinions of the author, when in such a situation, the main reason for the cause of the failure of the transfer should be discovered, and the party who has influenced the delayed transfer shall assume the majority of liability for the delay, and face whatever adverse consequences may result in the likely event of a lawsuit.
Second, for those that do not require intellectual property registration, like exclusive technology, whether full investment has been made cannot be determined by registration alone. Thus, to consider its complete investment is comparatively complicated. In judicial practice, some argue that the standard of the investment is actual adoption by the company, and others advocate that it should be determined by whether the technology document has been transferred.
The author agrees with neither of the above opinions. Any investment, including those involving exclusive technology, cannot be determined simply by use alone. The main reason is that after the capital investment, the property serving as contribution has already transferred to the company, and the receiving company shall have the complete right of occupation, use, profit and disposal of such. In such situations, whether to use and how to sue shall be decided by the company, but it has no relation with the contributing shareholder. Otherwise, once a company does not use the property contributed as investment, would it decide a shareholder had not fulfilled his or her contribution obligations for 100 years?
The law has regulated no articles on what procedure shall be fulfilled for exclusive technology, and therefore the so-called transfer could not be exercised in practice. In fact, exclusive technology is intangible and confidential, and therefore it is not easy to make it a property or fixed. If there are demands that it shall be transferred through technology documents, the practicability of said technology will be influenced, and possibly even lead to a development where it is no longer used.
For all these, the judicial opinion of the Supreme Court also tends to take that the sign of technology transfer is neither the actual using of said technology nor the document hand over, but the determination of who actually owns the property. The author agrees with that opinion, and since exclusive technology is difficult to be fixed through tangible technology documents or other tangible products, then it requires the right concept with a higher level to make up or ensure. That is to say, once only the shareholder has agreed with the company who actually owns the rights, and thus decides the exclusive technology could be transferred to the company, then it shall decide the shareholder has finished his investment duty. In terms of whether the exclusive technology has been fully commanded by the company, and what detailed standard shall be judged, it shall be left to the company and other shareholders to supervise and decide.
Quoted from DeBund Newsletter, June, 2013.