Commentary on Company Law Cases

The couple, A and B, jointly invested to establish XX Limited Liability Company. A is the chairman and general manager, while B is the financial officer of the company. In May 1995, B secretly took away 1.5 million yuan in construction funds and nearly 10,000 yuan in cash received by the company, and their whereabouts are unknown. Two weeks later, B entrusted a lawyer to file for divorce in the local people's court, claiming joint marital property and demanding A pay 5 million yuan in a lump sum (that is, in addition to the 1.5 million yuan taken by B, A is required to pay an additional 3.5 million yuan). A did not directly respond to B's civil lawsuit but reported to the People's Procuratorate, arguing that the money taken by B was not the company's property but state construction funds. The People's Procuratorate initiated criminal proceedings against B for embezzling state construction funds based on A's report.

The author has a different opinion on the characterization of this case. To facilitate explanation, it is necessary to first discuss the nature and scope of corporate property rights. Article 6, paragraph 2 of the Company Law states: "The company enjoys all property rights formed by shareholder investments." There are differing views in the theoretical community regarding the nature of such property rights. The author holds the view of ownership. The main reasons are: (1) Investment is a property transfer act, not a loan act. Once shareholders invest, they lose the right to control the invested property, and not only can they not withdraw the investment (Article 34), but it also belongs to the company (Article 181). (2) The equity obtained by shareholders based on investment has the characteristics of securitization and abstraction. Holding equity means that shareholders only occupy the company's shares in terms of value and cannot directly possess the company's property. Company property belongs to the company, and shareholders can sell their shares but cannot sell the company's assets. (3) Equity is transferable and can bring economic benefits to the holder, containing property content. Especially under the shareholding system, since stocks are circulating securities and valuable securities, they can flow freely independent of company property, possessing the characteristics of virtual capital, thus recognizing the company's legal ownership does not contradict the principle of "one object cannot have two owners."

Returning to the analysis of this case, the author believes that B's actions should be characterized according to the provisions of the Company Law regarding the crime of embezzling company property. The main reasons are: (1) As the financial officer of the company, B's acceptance of construction funds does not involve fraud; it is a company action, not a personal action. (2) The company has legal person status, and company property is different from the personal and family property of shareholders. Company property should include not only the property formed by shareholders' investments but also the property obtained in the course of the company's operations in the company's name. (3) In this case, although A and B are married, their family property and company property have different legal statuses; that is, in this case, personal and family property can only be considered as the company's "shares," not the company's physical assets. B's act of taking company property as family property without authorization confuses the boundary between company property and personal property, constituting the act of embezzling company property. (4) If characterized as embezzling state construction funds, many practical issues will be difficult to resolve. For example, when only general commercial funds are taken, it is not easy to hold B accountable. Additionally, it is also difficult to determine the company's obligation to return this property, because since it is personal embezzlement of construction funds, it cannot be recognized that the receipt was a company action, thus inferring that the company did not receive this amount, and therefore when the collection fails, the company can also be exempt from responsibility for the loss of this amount.

(2)

A, B, and C jointly invested to form XX Limited Liability Company. A is the major shareholder with a 70% investment ratio. To attract talent and for the company's development, A intends to gift part of their investment to D and has asked a lawyer to draft a share transfer contract.

From the perspective of legal practice, this case mainly involves how to understand and apply the provisions of the Company Law regarding the transfer of equity (investment) in limited liability companies. According to Article 35 of the Company Law, shareholders can freely transfer all or part of their investment; when transferring their investment to persons outside the shareholders, it must be approved by more than half of the shareholders, but shareholders who do not agree to the transfer must purchase the transferred investment; if they do not purchase the transferred investment, it is deemed as agreeing to the transfer; if shareholders agree to transfer the investment, other shareholders have the right of first refusal under the same conditions. From the provisions of Article 35 of the Company Law, the gift should be valid. Because the law does not prohibit the transfer of equity, and the transfer can be either compensated or uncompensated, a gift as an uncompensated transfer aligns with the principle spirit of the Company Law allowing transfers. Moreover, from the perspective of civil law, equity gifts should also be supported. However, another issue is relatively more complex, namely how to apply the conditions for the effectiveness of equity transfer under the Company Law. Specifically, the provisions regarding the conditions for investment transfer in the Company Law mainly concern compensated transfers. For uncompensated transfers, it is still difficult to find specific basis for operation. The author believes that (1) the principle of shareholder consent as stipulated in legislation should be upheld. Because limited liability companies have a strong personal character, changes in shareholders may affect the company's style and even its reputation; furthermore, the transfer of investment will also lead to changes in equity ratios, and since shareholders of limited liability companies participate in management according to their investment ratios, this may also affect the company's management structure. This is the reason why the Company Law imposes certain restrictions on the transfer of equity in limited liability companies. (2) From a technical perspective, to avoid disputes, the consent of all shareholders can be set as a condition for effectiveness. This can avoid issues regarding the purchase price by dissenting shareholders and can also be seen as a waiver of the right of first refusal by shareholders.

(3)

A, B, and C jointly invested to establish XX Limited Liability Company. According to the investment agreement, A invested 510,000 yuan, while B and C invested 300,000 yuan and 190,000 yuan respectively. A serves as the chairman, while B and C serve as directors, and the manager is to be appointed by the board of directors. After the company was established, A, citing their status as the major shareholder, demanded to also serve as the general manager, but B and C insisted on hiring another manager outside the three of them, citing the principle of "the minority obeys the majority." A dispute ensued.

From the perspective of the application of the Company Law, the resolution of the above dispute involves the following legal issues: (1) Can the chairman and general manager of a limited liability company be held by one person? (2) The method of appointing the manager of a limited liability company; (3) How to coordinate and balance the shareholder relationships in a limited liability company.

The author believes that, first, the Company Law does not explicitly prohibit the chairman and manager of a limited liability company from being held by one person, and what the law does not prohibit should be considered permissible. Therefore, Party A's claim to concurrently hold the position of general manager does not violate the company's regulations. Second, Article 50 of the Company Law stipulates that the manager of a limited liability company shall be appointed or dismissed by the board of directors. Article 49 further states that the rules of procedure and voting methods of the board of directors, except as provided by this law, shall be stipulated by the company's articles of association. However, in this case, one of the reasons for the dispute is that the articles of association do not clearly specify the rules of procedure for the board of directors, leading to a disagreement between the major shareholder demanding voting by capital contribution ratio and the minority shareholders demanding voting by "headcount." Third, there are roughly three ways to resolve this case: (1) Following the model of Article 41 of the Company Law, where "the shareholders' meeting of a limited liability company exercises voting rights according to the capital contribution ratio," Party A can concurrently serve as the manager. (2) Following the provision of Article 117 of the Company Law regarding joint-stock companies, which states that "the board of directors must pass resolutions by a majority of all directors," adopting the majority opinion of Parties B and C. (3) Parties A, B, and C can negotiate to clarify the unspecified matters in the company's articles of association (i.e., the rules for board meeting resolutions). If negotiations fail, operations can only proceed according to the "capital contribution ratio." In the author's view, resolving it in the first way seems to better align with the spirit of the Company Law and the characteristics of limited liability companies.

(Four)

On January 28, 1995, a certain city's ××× Co., Ltd. published a notice in the local newspaper announcing the convening of a shareholders' meeting. The notice imposed the following restrictions on the qualifications of shareholders attending the meeting: Any shareholder holding more than 5,000 shares (including 5,000 shares) of the company as of the close of the Shenzhen Stock Exchange on July 14, 1995, is qualified to attend this shareholders' meeting. Shareholders who cannot attend for any reason and those holding less than 5,000 shares may appoint representatives to attend and exercise shareholder rights. All attending shareholders must present a shareholding certificate issued by a securities firm and their ID card. Representatives must hold the principal's shareholding certificate, ID card, and power of attorney to attend the meeting. Shareholders who are qualified but cannot attend this shareholders' meeting may also fax or mail copies of the above valid documents to authorize a director of the company's board to exercise voting rights on their behalf. Corporate shareholders must present a unit certificate to attend the meeting.

Some believe that the company's practice of restricting attendance at the shareholders' meeting effectively deprives minority shareholders of their right to attend, which does not comply with Article 106 of the Company Law regarding "each share having one vote." In this regard, the author cannot agree. The main reason is:

First, the company's approach is reasonable. Specifically, there are many minority shareholders in a joint-stock company, and in an information and electronic society, minority shareholders are widely distributed and highly mobile. They may either have no interest or may not be able to attend the shareholders' meeting in person. From the company's perspective, it is neither possible nor necessary to provide a large venue for all shareholders to attend the annual meeting. Moreover, restricting shareholders' attendance qualifications and allowing representation through proxies helps to form a more concentrated opinion among dispersed shareholders, which is beneficial for passing various resolutions at the meeting. For this reason, restricting shareholders' attendance qualifications is a common phenomenon among joint-stock companies.

Second, Article 106 of the Company Law regarding "each share having one vote" only implicitly involves the issue of shareholders' right to attend (i.e., voting rights can be exercised in person), but it does not imply that attendance qualifications cannot be restricted, because voting rights can also be delegated to others for exercise.

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