The Withdrawal of Shareholders

Considering the many unfavorable results of company dissolution, it can be appointed in the articles of association that the withdrawal of shareholders should be the pre-procedure for dissolution of the company. Only when shareholders cannot agree upon their ways of withdrawal, the company takes the act of dissolution. Therefore, the author suggests that the company regulates in the articles of association that the withdrawal of shareholders should be a necessary procedure before the resolution of the company.

But it should not force different parties of the shareholders to agree upon this resolution. Shareholders should be allowed to discuss on this matter, the best result is to form a resolution, but if a resolution cannot be made, the dissolution of the company is employed. Since dissolution of the company is the last measure for company to resolve corporate deadlock, it should be regulated in the articles of association, so that the company can enter into the dissolution process and thereby break the corporate deadlock. At the time of the establishment of a company, it allows shareholders to choose their ways of withdrawal according to their wishes and the actual situation of the company. It must be noted that the first approach is the best strategy. Not only does it allow the company to continue to exist, the procedure of it is simple. The second approach may well be a good way to resolve the corporate deadlock, especially for large-scale enterprises with good assets and good operating state. It is a move that can be boldly took on the condition that it does not damage the creditors’ interest.

However, this approach involves reducing the company’s registered capital. Shareholders should form resolution on the reduction of capital (it is a difficult move in the case of the loss of mutual trust among shareholders). The company should notify known creditors and make newspaper announcements, but at the same time safeguard the interests of creditors. It can be seen that the procedure of the second approach is more complicated than the first approach.

And it also involves complex issues such as the protection of creditors and equity price. Therefore, for company with poor operating conditions, non-performing assets and debt, it should be cautious when adopting the second approach in case the withdrawal of one side of the shareholders may result in the situation where the company’s asset is insufficient to cover the debt, and therefore damages the creditors’ interest, especially when some shareholders attempt to withdraw their capital to circumvent their shareholder responsibilities. For these reasons, the author is inclined to the first approach. It has been mentioned that when taking the first approach, it is unfair to force one party to transfer their shares. The way of transfer should be allowed to be discussed. In order to determine the transfer and buyer of the shares, there is a “bidding process” that can be referred to in the judicial practice. In the bidding process, the articles of association provide the bids. Within a prescribed period of bid, shareholders with the highest price become the buyer, while shareholders who do not participate in the bidding or offer a lower price have to transfer their shares. In such way, the company solves the transfer problem with a bid.

The author believes that the transfer of shares is very complicated. There are plenty ways of transferring, for example, it can be transferred internally or externally. There are many shareholders in the internal transfer. To decide which shareholder to transfer to and the price of transfer can be a bother. It is difficult for the articles of association to cover all the situations. And often the more it regulates, the more possible vulnerabilities there are. Therefore, the author believes that the company does not need to have specific provisions on transfer in the articles of association. It only needs to make sure that the transfer is a necessary pre-procedure.

All sides can discuss upon this matter. And if a resolution cannot be formed, then the company dissolved. Therefore, the author suggests that the articles of association regulate the following: If the Board of Directors could not form effective resolutions on matters that need to be resolved, then the meeting should be postponed and reconvened twenty-four hours later. If the board reconvened is still unable to form any effective resolution, it should keep detailed records of relevant discussions and hand them over to shareholders or designated representatives for further discussion and resolution. Within forty-five days after the board meeting reconvened, if shareholders or designated representatives still could not form any effective resolution, shareholders should discuss on the purchase of equity by one side of the shareholders from the other side. If shareholders fail to reach an agreement on the sale of equity, either party may inform the other party by written notice to convene a board meeting to discuss the dissolution of the company. Shareholders should urge directors to attend the meeting and agree to sign the resolution on the dissolution and liquidation of the company. It should be noted that, Article 75 in “The Law of Corporations” provides the shareholders withdrawal system, but it does not specify whether the corporate deadlock conforms to its regulations.

The Article 75 regulates: “Under the following circumstances, shareholders who vote against the resolution may request the company to purchase their shares at a reasonable price: 1. The company does not distribute profits to shareholders for five consecutive years, while the company is actually profitable during the five years, and it conforms to the profit distribution conditions regulated in this provision; 2. The company merges, divides or transfers its main property; 3. Due to the expiration of the term of the operation of the company as regulated in the articles of association, or other reasons for the dissolution of the company, the shareholders’ meeting forms an resolution to revise the articles of association and continue the existence of the company. Within 60 days after the meeting form the resolution, if shareholders cannot come to a purchase agreement with the company, they can institute a proceeding against the company within 90 days after the meeting. The author believes that the withdrawal situation as provided in the provision contains three parts: the shareholders’ meeting has form a resolution, shareholders who withdraw vote against the resolution, and it is the company who buys back the shares rather than other shareholders. But in the case of corporate deadlock, it is impossible for shareholders to from any resolution. And for Sino-foreign joint ventures, the organizational structure of the company is the board of directors rather than the board of shareholders.

Therefore, provisions of the Article 75 in “The Law of Corporations” do not apply to the corporate deadlock of joint ventures. Section II Solution during the Event Solution during the event means when conflict among shareholders and directors has already affected the company’s management and operations, the company solves the deadlock through mediation and arbitration. Of course, mediation and arbitration can be applied to any stage of corporate deadlock, that is before, during and after the event. Before the event, the company can regulates in the articles of association that mediation should be a necessary pre-procedure when breaking the corporate deadlock. It can appoint a third person as the mediator.

Both sides should cooperate with the mediator. Or the company can regulate in the articles of association the arbitration clause or arbitration agreement before the proceeding, so that it can refer to the arbitration for the corporate deadlock. Shareholders and directors can also mediate during and after the event to solve the corporate deadlock through mediation and arbitration. Either party can ask a third person to mediate. In order not to be lengthy and at that same time highlight the key point, the author will discuss the measures of mediation and arbitration during the event in this section. But in fact, as mentioned before, mediation and arbitration can be applied to any stage of the corporate deadlock. Mediation as the Necessary Pre-Procedure for the Resolution of Corporate Deadlock It is when there is problem in the “collaboration” of the company, directors or shareholders begin to take opposite attitudes and act against each other.

Mediation can help to ease the conflicts and reconcile shareholders and directors. Life tells us that many things are not irreconcilable. By mediation of a third party, conflicts can be resolved, and misunderstanding can be eliminated. Especially for dispute caused by poor communication or momentary impulse, mediation can help resolve contradictions. Mediation has a direct effect on the conflicts. It is easy to use. And it consumes little social resources.

Therefore, when corporate deadlock occurs, medication should be the first measure to be taken. The author suggests that a company can regulate in the articles of association that mediation should be a necessary pre-procedure when solving the corporate deadlock, and it can appoint a third party as the mediator.

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