Briefcase on Corporation Law IV Shareholders’ right —— Appraisal Right of Dissenters

Case Summary Mr. Chen, Mr. Wang and Mr. Lee set up a real estate company (hereinafter referred to as “the Company”). The registered capital of the Company is 20 million RMB. The Capital Structure of the Company is as follows:  Mr. Chen contributed 4 million RMB, accounting for 20% of the RC.  Mr. Wang contributed 12 million RMB, accounting for 60% of the RC.  Mr. Lee contributed 4 million RMB, accounting for 20% of the RC.

Case Summary Mr. Chen Mr. Wang Mr. Lee Real Estate Company Mr. Chen was the Deputy General Manager of the Company. But he has removed from His duty now.

Case Summary Mr. Wang is the legal representative, chairman of the board and general manager of the Company. Mr. Chen is the deputy general manager of the Company. During the period of business operation, Mr. Chen and Mr. Wang could not reach consensus on some business issues. And the conflict between them had been worsened. Eventually Mr. Chen was removed from his duty. Mr. Chen believed that he could not cooperate with Mr. Wang anymore and what he should do was to withdraw his contribution capital and leave the company.

Case Summary Mr. Chen sued the Company to acquire his equity interests based on a reasonable price. He claimed that  He was out in the cold in the operation of the Company;  It is difficult for him to participate in the daily operation of the Company;  He could not enjoy his shareholder’s right in a sound way.  The relationship among the shareholders was too bad to conduct business in a friendly and efficient way.  Mr. Wang’s behaviors showed that he intend to end up the cooperation with Mr. Chen.  Mr. Chen had no choice but to withdraw his contribution.

Case Summary The Company defended that Mr. Wang acted properly and performed his duty in good manner. Mr. Wang did not intend to reject and ignore Mr. Chen’s shareholder’s right. The court shall not enforce Mr. Chen’s claim.

Appraisal Right of Dissenters What is Appraisal Right of Dissenters ? In corporate law the appraisal remedy gives shareholders the right to dissent from types of corporate transactions and to obtain payment for their shares from the corporation. The remedy is typically viewed as a form of protection for minority shareholders,. The appraisal remedy in corporate law confers upon shareholders a statutory right to dissent from specified fundamental or structural changes in the life of their corporation. The remedy requires the corporation to facilitate the shareholders’ withdrawal by buying back their shares for fair value, or its equivalent, as determined through appraisal proceedings.

Appraisal Right of Dissenters in Chinese Company Law Limited Liability Company Article 75 Under any of the following circumstances, shareholders who cast an opposing vote to a resolution passed by the shareholders’ meeting may request that the company acquire their equity interests based on a reasonable price: (1) the company has not made a profit distribution to the shareholders for five consecutive years although the company has been profitable for those five consecutive years and satisfy profit distribution requirements stipulated in this Law; (2) merger, division and transfer of main assets of the company; or (3) expiry of the term of business operations stipulated in the articles of association of the company or the occurrence of a trigger event for dissolution stipulated in the articles of association or the passing of a resolution by a shareholders’ meeting to amend the articles of association for subsistence of the company. Where the shareholders fail to conclude an agreement for acquisition of equity interests within 60 days from the date of the resolution by the shareholders’ meeting, the shareholders may file a lawsuit with a people’s court within 90 days from the date of the resolution of the shareholders’ meeting.

Appraisal Right of Dissenters in Chinese Company Law Company Limited by Shares Article 143 Companies shall not make a share buyback, except under any of the following circumstances: Article 143 (4) request from shareholders who object to a resolution of a shareholders’ general meeting on merger or division of the company for the company to acquire their shares.

Questions Shall the Company acquire Mr. Chen’s equity interests based on a reasonable price? Can Mr. Chen enjoy Appraisal Right of Dissenters in this case? What are the legal conditions and procedures to acquire shareholder’s equity in a LLC or a stock company?

Case Analysis In this case, Mr. Chen shall not claim Appraisal Right of Dissenters to seek remedy in accordance with the Article 75 of the Company Law. Consequently, Mr. Chen shall not require the Company to acquire his equities. Actually, the condition in this case is common in daily operation of companies. Furthermore, it a possible risk resulting from the structure of a LLC. If a shareholder of LLC is allowed to claim Appraisal Right of Dissenters in this condition, the sound operation of LLC will be affected greatly. This case gives a message to all the shareholders of a LLC or investors intending to establish a LLC, that is be prudent and cautious when choosing partners. Furthermore, shareholders or promoters can agree on withdrawal mechanism to avoid the future risk.