Shareholder interest damage liability dispute among Plaintiff Zhu Jianming (“Plaintiff”), Defendant Zhang Mingsheng(“Defendant”) and the third parties --- Shenzhen Longhuasanbao Industrial Co., Ltd.(“Sanbao Company”), Shenzhen Niulanqian Cooperative Stock Company (“Niulanqian Company”), Yan Hing Machinery (Shenzhen) Co., Ltd. (“Yan Hing Company”)& Shenzhen Fu Hao Estate Co., Ltd.(“Fu Hao Company”)
Key Words: action of confirmation, interest of action, judgment
Key Points in Judgment: Whether action of confirmation is provided with interest of action shall be judged from three aspects: I. object of confirmation. Except under special conditions, parties are allowed to bring up request of confirming legal relationship rather than require of confirming facts. In principle, parties are allowed to bring up request of confirming existing legal relationship rather than previous or future legal relationship. II. Function of action of confirmation as means of settling disputes. Action of confirmation plays a supplementary role. If parties are allowed to file other forms of lawsuit, in principle, interest of action of confirmation will be denied. III. Whether there is actual necessity of immediate confirmation.
Relevant provisions
Article 119 and Article 154.1.3 of Civil Procedure Law of the People’s Republic of China
Case Index
Trial of first instance: Civil Judgment [(2015) ShenQianFa She Wai Chu Zi No.17] (“the Judgment”) issued by the People’s Court of Shenzhen Qianhai Cooperation Zone (August 6, 2015)
Case Details
Plaintiff claimed that, Sanbao Company was established on January 15, 1992 with registered capital of RMB 2.10 million; currently, there are four shareholders and shareholding information is as followed: Lao Jinying 10%, Zhu Jianming 20%, Wang Judi 10% & Zhang Mingsheng 60%; its legal representative is Zhang Mingsheng. On June 25, 2009,the general meeting of SanbaoCompanyvoted for and passed a General Meeting Resolution which included the decision that Zhang Mingsheng would be responsible for contribution of rebuilding the dormitory building, area allocation and the like.However, after Defendant dismantled two dormitory buildings of Sanbao Company, so far such dormitory buildings had not been rebuilt yet and thus shareholder interest of SanbaoCompany suffered from serious loss.For so many years, Plaintiff had been asking Defendant to rebuild the dormitory buildings and indemnify for the loss, but Defendant failed to give specific reply.In 2014, Defendant proposed that Sanbao Company should participate in urban renewal plan, but Plaintiff rejected the proposal.In order to prevent Defendant from abusing shareholder’s rights to continue to damage interests of the company and other shareholders, the general meeting of Sanbao Company voted for and passed a General Meeting Resolution On November 1, 2014.In accordance with this Resolution, transfer and pledge of the entire equity, transfer and pledge of land and property and participation in urban renewal plan (including acceptance of and consent for specific proposal of such plan) and other significant projects of the company shall be approved by shareholders with more than 90% of votes.If a shareholder is contrary to this provision, relevant shareholder himself/herself shall be responsible for relevant risk and liability, and if the company or other shareholders suffer from loss accordingly, such shareholder shall be responsible for indemnity. Before Zhu Jianming and Lao Jinying gave up rights by written statements, General Meeting Resolution dated June 25, 2009 remained legally effective, etc..On January 6, 2015, Defendant failed to hold a general meeting of Sanbao Company in advance and signed a Cooperation Framework Contract (“the Contract”) with Niulanqian Company and Yan Hing Company without authorization. It was provided by Article 9.7 of such Contract the Party A, Party B and Party C shall respectively complete the project application and put into practice necessary effective resolutions of Board of Directors, general meeting and the like which will serve as attachments hereto; it was provided by Article 11 that if any party hides the truth and thus causes the project to be unable to be started, the hiding party shall indemnify related interested party for relevant loss. Plaintiff believed that the activity that Defendant signed a contract without authorization impaired interests of Sanbao Company and other shareholders, and in the meantime, that Defendant hid the truth would cause Sanbao Company to assume liabilities for breach of contract, and thus entrusted a lawyer to respectively send a Lawyer’s Letter to Defendant, Supervisor Wang Judi of Sanbao Company, Niulanqian Company and Yan Hing Company on February 2, 2015. And such letters were served on all above parties on February 3, 2015. However, after Defendant received the letter, Defendant not only refused to hold an extraordinary general meeting but signed a Cooperative Real Estate Development Agreement (“the Agreement”) with Fu Hao Comapny, Niulanqian Company and Yan Hing Company again on behalf of Sanbao Company without authorization on February 9, 2015. In a word, as a major shareholder, legal representative and general manager of Sanbao Company, Defendant abused shareholder’s rights, repeatedly violated Articles of Association and General Meeting Resolution and overstepped his authority to sign contracts with other companies, which impaired interests of Plaintiff, Sanbao Company and other shareholders. Hence, Plaintiff, based on Articles 20, 151 & 152 of the Company Law, Article 50 of the Contract Law and other relevant laws and regulations, prayed as followed: I. order that the activity breaches relevant General Meeting Resolution which Defendant overstepped his authority to sign the Contract with Niulanqian Company and Yan Hing Company on behalf of Sanbao Company on January 6, 2015; II. Order that the activity breaches relevant General Meeting Resolution which Defendant overstepped his authority to sign the Agreement with Fu Hao Company, Niulanqian Company and Yan Hing Company on February 9, 2015; III. Order that Defendant shall assume all litigation cost.
Defendant argued that: I. as legal representative and executive director of the company, he was not contrary to General Meeting Resolutions by signingthe Contract; II. The Agreement was a conditional agreement which was not in breach of General Meeting Resolution. And such agreement was specifically specified in Articles 27 & 28 of The Agreement.
Sanbao Company, as a third party, alleged that it had no opinions.
Niulanqian Company, as a third party, alleged that: I. Sanbao Company and we were in the same neighborhood for many years and we got along with each other well. As far as we knew, Sanbao Company had no substantive operation business, buildings on the land of Sanbao Company involved in the case were dismantled due to quality problem and new buildings were not timely rebuilt due to planning and control and other similar causes. Just in consideration of good cooperation relationship with Sanbao Company, we were willing to include the land of Sanbao Company into the urban renewal plan led by our company. If Sanbao Company refused to participate in this urban renewal plan, we were unable to include Sanbao Company’s land into this project when we applied for revision of the statutory plan and it was likely for the national land planning department to revise the purpose of land of Sanbao Company or even define it as land for roads, which would cause the value of Sanbao Company’s land to drop sharply, thus we suggested that all shareholders of Sanbao Company carefully think about it. If they missed this chance, it would be a big regret. We have signed the Contract and the Agreement with Yan Hing Company and Fu Hao Company, and the legal representative of Sanbao Company has signed and affixed official seal on such agreements so that they were of legal effect, and the General Meeting Resolution of Sanbao Company was not legally binding on us. In addition, this action would not affect development of the urban renewal plan and implementation of such agreements, and corresponding legal results shall be respectively assumed by Sanbao Company and all shareholders. As a result, we prayed that your court would coordinate all shareholders of Sanbao Company to reach a consensus so that the land would be incorporated into the urban renewal plan as soon as possible and besides we also suggested that all shareholders of Sanbao Company think about it in the long run to reach a consensus as soon as possible.
Yan Hing Company, a third party, alleged that: I. it was provided by the Company Law that internal general meeting resolution of Sanbao Company was not legally binding on our company. II. When Sanbao Company was discussing details of the Contract with our company and Niulanqian Company, Shareholder Zhu Jianming was present for consultation for many times and had no objection to participation in the urban renewal plan. III. It was provided by Articles 27 & 28 of the Agreement signed by four parties that the Agreement might only be established after Sanbao Company acquired the approval of corresponding general meeting so that whether Sanbao Company would participate would not affect the performance of the Agreement. In conclusion, internal shareholder interest dispute of Sanbao Company was not directly legally related to our company, and corresponding legal results shall be assumed by Sanbao Company and shareholders thereof on their own.
Fu Hao Company, a third party, alleged that: I. internal decision of Sanbao Company was not legally binding on our company. When our company discussed the urban renewal & modification and signed the Agreement with Sanbao Company, we have reminded Sanbao Company of corresponding legal consequence and commercial risk of failure to participate in the project. Based on the Company Law and other laws, internal general meeting resolution of a company shall not constitute a defense against a third party. Furthermore, whether Sanbao Company would participate would not affect the development of this urban renewal plan. II. Value and planning possibility of the land of Sanbao Company. If Sanbao Company would participate in the urban renewal plan, its land might only be used for enclosure, green belt, fire passage and the like due to small area and its corner location and this land had low utility value, and our company has given Sanbao Company and all shareholders thereof maximum interests and concession during the allocation. At the moment, the urban renewal plan of Niulanqian Village was in progress. If it was unable to include the land under the name of Sanbao Company into the urban renewal plan due to internal shareholder conflict, it would have no big influence on the progress of our company and the project, but instead Sanbao Company would miss this biggest opportunity of realizing its land value, and it was possible that land of Sanbao Company would be changed to other purposes by relevant government authority during the planning and adjustment, such as public roads and green space. III. Suggestions and opinions. In consideration of good cooperation relationship and long-term interests of all parties, we suggested that all shareholders of Sanbao Company should confirm as soon as possible whether to be included into the urban renewal plan in the spirit of one mind, hand in hand and win-win. In addition, we also prayed that the judge could realize the mediation as soon as possible to avoid the condition where all parties would suffer from loss.
The court found out through trial that: the third party Sanbao Company was established on January 15, 1992, and when the company was established, shareholders and shareholding status were as followed: Zhang Mingsheng 60%, Zhu Wenying 9.52%, Wang Judi 10%, Lao Jinying 10%,and CaiXiujuan 10.48%.
On June 25, 2009, Zhang Mingsheng, Lao Jinying and Wang Judi signed a general meeting resolution: I. based on current development of the company, it is approved that Zhang Mingsheng shall be responsible for rebuilding dormitory buildings (Buildings E&F with area of 3464.16 m2) which will be allocated to all shareholders based on the ratio of 1:1.1. Total building area is up to 3810 m2 (including 480 m2 store area and 3329 m2 dormitory area). Lao Jinying will be allocated with 30% area (144 m2 store area and 999 m2 dormitory area); Wang Judi will be allocated with 10% area (48 m2 store area and 332.9 m2 dormitory area); Zhang Mingsheng will be allocated with 60% area (288 m2 store area and 1998m2 dormitory area). Such allocation shall be completed based on the floor of relevant unit and Lao Jinying has priority over the allocation. II. During the construction, Shareholder Zhang Mingsheng shall be responsible for risk and all businesses. III. During the construction, dividend shall be distributed based on original distribution proposal, i.e. RMB 3000/share/person.
On November 18, 2010, shareholders and shareholding status were changed to: Zhang Mingsheng 60%, Zhu Jianming 20%, Lao Jinying 10% and Wang Judi 10%.
On November 1, 2014, all shareholders of Sanbao Company reached a general meeting resolution: I. all shareholders promise that, without written consent of shareholders with more than 90% votes, the company shall not apply for or offer a loan externally or invest in other enterprise or individual or guarantee for others. If a shareholder violates this provision, relevant risk and liability shall be assumed by himself/herself. II. Shareholder Zhang Mingsheng guarantees that: at present, the company applies for or offers no loan, sets no real estate mortgage, creates no stock equity pledge and invests in no other enterprise or individual or provides no guaranty for others; if there is false statement, relevant risk and liability will be assumed by himself, and if the company or other shareholders suffer from loss accordingly, he is willing to assume the indemnity. III. Transfer and pledge of the entire equity, transfer and pledge of land and property and participation in urban renewal plan (including acceptance of and consent for specific proposal of such plan) and other significant projects of the company shall be approved by shareholders with more than 90% of votes; if a shareholder is contrary to this provision, relevant shareholder himself/herself shall be responsible for relevant risk and liability, and if the company or other shareholders suffer from loss accordingly, such shareholder shall be responsible for indemnity. IV. Perfect financial systems of the company. Shareholder Zhang Mingsheng is responsible for arranging the preparation of financial statements at the end of each financial year and submitting such statements to all shareholders after they are reviewed by an accounting firm based on relevant laws. V. Shareholders Zhu Jianming and Lao Jinyinghave the right to consult and copy accounting books of the company. VI. Article 3 of General Meeting Resolution dated June 25 of 2009 is modified to be: as of November in 2014, during the construction, dividend of every 10% stock rights of each month will be up to RMB Four Thousand Five Hundred. And other clauses of the Resolution will remain legally effective before Zhu Jianming and Lao Jinying give up their rights in written statement.
On January 6, 2015, Defendant signed the Contract with NiulanqianCompany and Yan Hing Company. Three parties proposed to work together to introduce a fourth party --- a real estate developer --- with development qualification and ability to carry out urban renewal to the plot which belonged to such three parties (see the right certificates and attached plans of such three parties for scope and area of lands of three parties). The cooperation period was temporarily three years during which the said three parties would try best to conclude an agreement with the fourth party. And as of the date when a cooperation agreement was signed with the fourth party, it would be required that the fourth party shall formally include the plan into the urban renewal plan of Shenzhen within two years. Moreover, such three parties shall respectively complete relevant project application and put into practice effective resolutions of Board of Directors, general meeting and the like as attachments thereto.
On February 2, 2015, the lawyer entrusted by Plaintiff issued lawyer’s letters to Defendant, Wang Judi and the third parties --- Sanbao Company, NiulanqianCompany and Yan HingCompany, which declared that: I. as it was not approved by a general meeting resolution, Zhang Mingsheng, legal representative of Sanbao Company, was not entitled to sign the Contract with the company; II. Mr. Zhu Jianming refused to acknowledgethe legal effect of the Contract and would not be responsible for adverse consequences arising from invalidation of such Contract; III. As Zhang Mingsheng overstepped his authority to sign the Contract on behalf of Sanbao Company and adverse consequences arising therefrom shall be assumed by himself, and all losses incurred by other shareholders of Sanbao Company and related interested parties of the Contract shall also be indemnified by Zhang Mingsheng.
On February 9, 2015, Defendant Zhangon behalf of Sanbao Company signed the Agreement with Niulanqian Company, Yan HingCompany, and Fu HaoCompany. And it was provided by such Agreement that such four parties shall be jointly devoted to including the land of the project into the urban renewal plan on condition that Fu HaoCompany invested fund and human resources and Sanbao Company, NiulanqianCompany, and Yan HingCompany provided interests in land and centralized arrangement made for the function planning of Yousong neighborhood of Longhua New District by the people’s government of Shenzhen was satisfied. In the Agreement, such four parties laid down agreements in earnest money, cooperation method and allocation, right and obligation, liability for breach of contract, confidentiality, notice and service, dispute settlement and the like. It was provided by the Agreement that it would be put into practice after legal or authorized representatives of all parties signed and sealed and would come into force after all parties obtained all necessary approvals or authorizations specified by Articles of Association or relevant laws. Besides, all parties shall obtain such approvals or authorizations prior to April 10 in 2015. If Sanbao Company failed to acquire such authorization or approval on schedule, other three parties unanimously agreed that Sanbao Company would withdraw from the Agreement and not assume liability for breach of contract, and withdrawal of Sanbao Company would not affect the performance of the Agreement and rights and obligations of other parties.
Judgment
The People’s Court of Shenzhen Qianhai Cooperation Zone made a Civil Judgment [(2015) Shen Qian Fa She Wai Chu Zi No. 17] on August 6, 2015. In accordance with Articles 119 & 154.1.3 of Civil Procedure Law of the People’s Republic of China and Article 8.2 of Measures for Payment of Court Cost of the People’s Republic of China, the court rules as follows:
Reject the complaint of the Plaintiff.
The Judgment will have come into force if parties fail to lodge an appeal after the judgment is pronounced.
Legal Grounds
The effective Judgment holds that this case is an action of confirmation, and as parties fail to reach an agreement on applicable laws, the court applies laws of Mainland China as governing law based on doctrine of the most significant relationship.
If relevant party brings an action of confirmation to the court, this action shall bear interest which is worth the litigation, i.e. interest of action. To judge whether there is interest of action, there are three standards: I. appropriateness of object of confirmation. Firstly, in principle, subject of an action of confirmation is limited to legal relationship. Except under special condition, fact may not serve as subject of an action of confirmation. Fact is a cause or prerequisite for occurrence of legal relationship, falls under the scope of cognitive object, and makes the judge unable to determine its value. Secondly, in principle, action of confirmation is limited to existing legal relationship, and previous legal relationship may not serve as subject of an action of confirmation. II. It shall be mature dispute, i.e. immediate and actual necessity of dispute settlement. Judgment standards are: on one hand, defendant denies legal status of plaintiff and causes right or status of plaintiff to be unstable or dangerous. On the other hand, such unstableness or danger of plaintiff must actually exist. III. Appropriateness of means of settlement. Action of confirmation belongs to a kind of supplementary means. If parties may take other forms of action, in principle, interest of action of confirmation will be denied.
In this case, the first two claims of Plaintiff require confirming that Defendant violated relevant general meeting resolutions to sign the Contract and The Agreement with third parties. Action of confirmation brought up by Plaintiff lacks interest of action because: I. from perspective of main elements of an action, legal relationship for which the party requests confirmation shall be whether legal relationship between himself and Defendant exist; however, what Plaintiff in this case requests the court to confirm is the relationship between Defendant and third parties. II. From the perspective of object, object of confirmation for which Plaintiff took action of confirmation is confirmation for fact rather than legal relationship among parties. III. From the perspective of appropriateness of means of settlement, if Plaintiff believes that Defendant, as strong stock holder and legal representative, overstepped his authority to cause him to suffer from loss, Plaintiff may complain that the shareholder abused his shareholder’s rights and impaired interests of other shareholders and claim for compensation or take legal action for compensation for senior management damaged interests of shareholders. And it is not necessary to take a legal action of confirmation. In conclusion, claims of Plaintiff lack elements for an action of confirmation and fail to satisfy suit filing conditions.
Remarks
This case is a typical case about actionofconfirmation.
Generally, action of confirmation refers to an action where plaintiff requests the court to confirm whether certain legal relationship he/she claims exists. If plaintiff requests confirming that the relationship exists, it is called as positive action of confirmation; if plaintiff requests confirming that the legal relationship does not exist, it is called as negative action of confirmation.
In an action of complaint, if there is no limit in object and subject of an action, issue concerning interest of action will violently emerge itself. If it is not limited by interest of action, it will be bound to lead to action abuse which on one hand wastes precious judicial resources and on the other hand causes relevant parties to suffer from passive and inappropriate troubles to respond to an action. Therefore, civil procedure laws in many countries and regions have relevant provision for interest of action of confirmation. For example, it is provided by German Civil Code: “for an action which confirms whether a legal relationship exists…, if plaintiff enjoys legal interest, plaintiff may take this legal action”. In China, I believe that, in an action of confirmation, there is interest of action only if right or legal status of plaintiff is actually unstable and it is effective and appropriate to eliminate this unstableness through confirmation of a court to settle relevant dispute. When judging a specific case, it shall be done from the following three perspectives:
I. Judge whether subject chosen by a plaintiff may be considered as object of an action of confirmation from the perspective of object of confirmation
Firstly, except under special condition, relevant parties are unable to require confirming facts, and they may only bring up confirmation request for legal relationship. Fact is the prerequisite or cause for occurrence of legal relationship, falls under the scope of cognitive object and makes the judge unable to judge its value. Pure fact may not be considered as object of action. Under special condition, relevant parties may bring an action of confirmation for facts. For example, people may bring action of confirmation for authenticity of certificates which serve as evidence for relevant legal relationship or the fact that relevant intellectual property rights infringed no rights of others.
Secondly, in principle, relevant parties are only allowed to request confirming existing legal relationship instead of previous or future legal relationship. This is because previous or future legal relationship is subject to change and it is meaningless to confirm at present.
II. Judge from the perspective of function of action of confirmation --- means of dispute settlement
Action of confirmation plays a supplementary role. If parties are allowed to resort to other forms of litigation means, in principle there is no interest of action of confirmation. If a creditor’s right matures and the creditor only brings an action of confirmation rather than action of performance, it shall be deemed that there is no interest of action. In addition, with regard to confirmation of question of procedure of the case, for example, whether there is authority of agent ad litem or there exist litigation elements, there is no interest in bringing another action.
III. Judge whether there is actual necessity for immediate confirmation
It is provided by Article 256 of German Code of Civil Procedure that action of confirmation may be brought when there is legal interest of immediate confirmation. Generally, scholars in Taiwan believe that necessity of immediate confirmation refers to the necessity for a plaintiff to immediately and actually use confirmatory judgment of a court to eliminate the danger or unstableness due to defendant when right or legal status of plaintiff is subject to danger or unstableness due to denial of defendant or other causes. But I believe that the following two aspects shall be taken into consideration for whether there is actual necessity of immediate confirmation: on one hand, defendant denies legal status of plaintiff and thus right or status of plaintiff is subject to unstableness or danger; on the other hand, such unstableness or danger of plaintiff shall be immediate and actual unstableness or danger.
In this case, it is required by the first and second claims of Plaintiff to confirm that Defendant violated relevant general meeting resolutions to sign Cooperation Framework Contract and The Agreement with third parties. Whether Defendant was contrary to relevant general meeting resolutions to sign contracts on behalf of the company is a matter of fact. What legal effect did Plaintiff pursue? To declare that agreements signed by Defendant on behalf of the company are invalid? or to pursue indemnity for loss incurred by Plaintiff due to acts of Defendants? This action of confirmation failed to specify such effect and it was unable for the court to judge such effect. Therefore, from the perspective of object of confirmation, what Plaintiff chose for subject of action is fact rather than legal relationship. For function of action of confirmation as means of dispute settlement, if Plaintiff believed that, as strong stock holder and legal representative, Defendant overstepped his authority to cause him to suffer from loss, Plaintiff might bring an action for damages rather than action of confirmation on the ground that a shareholder abused his shareholder’s rights and damaged interests of other shareholders or senior management impaired interests of shareholders. In conclusion, action of confirmation brought by Plaintiff bears no interest of action and shall be rejected.
Case officer: Zhang Zhanju, Hu Shao, Wang Yun
Compiled by: Ma Zhanju, Presiding Judge of the People’s Court of Shenzhen Qinhai Cooperation Zone
