Under the legal framework of the Company Law of the People’s Republic of China, the information rights are a fundamental right for company shareholders. However, in practice, due to the control of major shareholder(s) over company affairs, cases abound where minority shareholders cannot obtain information about the company, particularly financial status and operational details. This lack of transparency has led to numerous disputes over shareholder information rights. In any Joint-venture, if the foreign shareholders are located outside China, they face greater challenges in requiring company information compared to domestic minority shareholders.

The good news is that the revised Chinese Company Law, which took effect on July 1, 2024, makes significant revisions to protect shareholder rights, making it easier for foreign shareholders to exercise their rights. This article will focus on limited liability companies with foreign capital as an example and discuss how foreign shareholders can exercise their information rights, including accounting vouchers, and special considerations in cross-border litigation based on recent judicial practices.

New Company Law Benefits Minority Shareholders in Limited Liability Companies in Exercising Their Information Rights

Comparing the latest revision of the Company Law with previous versions, we can see that the revised law is more favorable for protecting the information right of minority shareholders, primarily reflected in:

l Expansion of the scope of shareholders’ rights to inspect (and copy) company information, specifically including accounting vouchers.

l Addition of provisions allowing shareholders to inspect (and copy) materials related to wholly-owned subsidiaries.

l Permitting shareholders to engage professional intermediaries to conduct such inspection, while these intermediaries must adhere to confidentiality obligations.

Before the revision, there was no explicit legal provision allowing shareholders to review accounting vouchers. Since financial reports and accounting ledgers can be easily falsified, whether shareholders could examine accounting vouchers, considered the "underlying records," became a point of contention in lawsuits over shareholder’s information rights. However, due to the absence of clear legal basis, courts issued inconsistent rulings.

Supportive View: Accounting ledgers and accounting vouchers have a corresponding relationship. Allowing shareholders to review accounting vouchers better safeguards their rights.

Case: In its judgment [(2023) Guangdong 01 Final Civil Appeal 6652], the Guangzhou Intermediate People's Court stated: according to Articles 9, 14, and 15 of the Accounting Law, accounting ledgers are compiled based on accounting vouchers. There is a corresponding relationship between accounting vouchers and accounting ledgers... relatively speaking, accounting vouchers, as original records of the company's business activities, are more objective. Therefore, allowing shareholders to review accounting vouchers does not cause significant harm to the company but instead helps shareholders verify the authenticity and completeness of the accounting ledgers, substantially safeguarding the realization of shareholders' information rights and avoiding the frustration of legislative intent. Within this limit, the company bears the obligation to tolerate and cooperate.

Opposing View: Accounting vouchers do not fall under the scope of shareholder information rights as stipulated in Article 33 of the Company Law.

Case: In its judgment [(2020) Beijing 04 Civil First Instance 396], the Fourth Intermediate People's Court of Beijing wrote: the original accounting vouchers and the bank statements do not fall within the scope of documents that shareholders are entitled to inspect as stipulated in Article 33 of the Company Law, and X Corporation failed to demonstrate the reasonableness and necessity of its request to inspect such documents, the protection of shareholder information rights and the interests of the company need to be balanced. The interpretation of the scope of shareholder information rights should not be expanded beyond the legal provisions without justification.

Neutral View: According to the agreement between the parties of the joint-venture contract and for the consideration of balancing interests, the inspection of accounting vouchers is allowed.

Case: In its judgment[(2020) Supreme People’s Court Retrial 170], the Supreme Court did not dwell on whether accounting vouchers fall within the scope of the statutory right to know, but rather, based on the agreement in the joint venture contract allowing the appointment of auditors by the parties themselves and the fact that the joint venture company was in the process of liquidation, supported the foreign shareholder’s right to inspect accounting vouchers, considering the balance of interests and ensuring the authenticity of the information.

In summary, prior to the amendment of the law, the inspection of a company’s accounting vouchers fell within the discretion of judges, leading to inconsistent judgments in similar cases. The new Company Law includes this right directly within the scope of legal protection, ensuring the integrity of minority shareholders' right to know and preventing the frustration of legislative intent.

One significant innovation in the revision of the Company Law is the inclusion of the company's wholly-owned subsidiaries within the scope of shareholder information rights. The exercise of these rights is analogous to the scope of materials that shareholders may inspect and duplicate within the company itself.

Special Considerations for Foreign Shareholders Filing a Lawsuit for Information Rights

Unlike purely domestic companies, foreign shareholders in joint ventures may be foreign individuals or corporate shareholders, introducing foreign elements into shareholder information rights lawsuits. As a result, there are some unique matters to consider in the application of procedural and substantive law.

1. Applicable Law and Jurisdiction

According to Article 14 of the Law on the Application of Laws to Foreign-related Civil Relations , disputes over shareholder information rights should be governed by the law of the place of registration of the company. If the principal place of business differs from the place of registration, the law of the principal place of business may apply. Given that joint ventures are registered domestically, the Company Law of China should apply. According to Article 3 and 22 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law , lawsuits over shareholder information rights should be heard by the court where the company is domiciled.

During litigation, companies often raise objections to the court's jurisdiction, claiming that the court lacks jurisdiction. When the principal place of business and the place of registration differ, the principal place of business is usually recognized as the domicile of the company. In Case No. [(2022) Beijing 0113 Civil First Instance 7897], the shareholder filed a lawsuit with the court where the company was registered, but the company submitted evidence such as the lease contract and payment notices to show that its principal place of business was not at the registered address. The court ruled that the dispute over shareholder information rights should be heard by the court where the company's principal place of business is located, thus upholding the company's objection to jurisdiction and transferring the case to the appropriate court.

It should be noted that in some regions, there may be provisions for centralized jurisdiction over foreign-related civil and commercial cases. For example, in Case No. [(2022) Guangdong 01 Final Civil Appeal 1318], the company argued that its registered address was in Zengcheng District, Guangzhou, and that the case should be transferred to the Zengcheng District Court. The Guangzhou Intermediate People's Court maintained the ruling of the first-instance court (Nansha Free Trade Zone Court) dismissing the jurisdictional objection, in accordance with the provincial high court's provision for centralized jurisdiction over first-instance foreign-related civil and commercial cases in the Nansha Free Trade Zone.

2. Transition Between Old and New Laws

On January 1, 2020, the Foreign Investment Law came into effect, and the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Cooperative Joint Ventures, and the Law on Foreign-invested Enterprises (collectively referred to as the "Three Foreign Investment Laws") were abolished. Previously established foreign-invested enterprises under the "Three Foreign Investment Laws" could continue to maintain their original organizational forms for five years following the implementation of the Foreign Investment Law. One notable feature of joint venture with the form of limited liability company established during the "Three Foreign Investment Laws" period was the absence of a shareholders' meeting, with the board of directors serving as the highest authority. This historical organizational form may be one reason why companies restrict the scope of information available to shareholders.

In Case No. [(2023) Beijing 04 Civil First Instance 83], X Beijing Company was established in 2009, according to its Articles of Association, the highest authority of the company was the board of directors, and no shareholders' meeting was established. The company refused the shareholder's request to inspect the minutes of the shareholders' meeting on this basis. The court held that although the company's Articles of Association did not provide for a shareholders' meeting, there were documents in the company's business archives pertaining to shareholders' meetings, so the shareholder had the legal right to inspect and copy them. Furthermore, Article 33 of the Company Law does not impose restrictive conditions on the shareholder's exercise of information rights regarding such documents. Therefore, the court rejected X Beijing Company's argument that the shareholder had previously inspected the documents and therefore could not inspect them again.

Other Common Issues in Lawsuits Over Information Rights

Foreign shareholders in joint ventures, in addition to being subject to laws and regulations such as the Civil Procedural Law regarding cross-border commercial cases, should also pay attention to common issues when filing lawsuits over information rights. These are specifically reflected in:

1. Qualification to Query

As the name suggests, "lawsuits for shareholder information rights" require that the plaintiff possess shareholder status at the time of filing the lawsuit.

In cases of proxy holding, hidden shareholders generally cannot directly assert information rights, but there are exceptions in practice. In Case No. [(2016) Guangdong 01 Final Civil Apeal 62], although the first-instance court ruled that hidden shareholder, Mr.Guo, did not enjoy shareholder information rights, the Guangzhou Intermediate People's Court, which handled the appeal, held that a resolution of the company board had already clearly stipulated that all the benefits of the involved company were to be enjoyed by Mr.Guo, and the other board members according to their shareholdings, making them the actual shareholders of the company. All board members, the involved company, and the nominal shareholder signed and/or stamped the resolution, and the company acknowledged the authenticity of this resolution during the first-instance proceeding. Therefore, the Guangzhou Intermediate People's Court ruled that Mr.Guo possessed shareholder status and enjoyed information rights.

Furthermore, a small shareholding ratio does not affect the recognition of shareholder status, even if the shareholding ratio is below 1% [(2023) Beijing 04 Civil First Instance 83], and cannot limit the information rights of shareholders. For shareholders who have not fully paid their capital contributions, some courts hold that while shareholders with capital contribution defects may have their profit distribution rights restricted, they still retain shareholder status until the company revokes their status. Information rights, as inherent rights of shareholders, should not be deprived [(2019) Beijing 04 Civil First Instance 507], [(2021) Beijing 04 Civil First Instance 1196].

Additionally, in cases where parties acquire shareholder status based on arbitration awards or court judgments, the timing of obtaining shareholder status needs to be confirmed. In Case No. [(2019) Beijing 04 Civil First Instance 810], the court held that the legal person shareholder obtained shareholder status in the involved company not through capital contributions but through compulsory execution procedures based on relevant arbitration awards and legal documents. However, the execution ruling and assistance in execution notice had been revoked, leaving the legal person shareholder's status lacking a legal basis and pending confirmation. Therefore, the claim for shareholder information rights was not supported.

2. Preliminary Procedures for Filing a Lawsuit

Article 55 of the new Company Law stipulates that if a shareholder wishes to inspect accounting books and accounting vouchers, they should initiate a written request to the company. The company shall respond within fifteen (15) days of receiving the request. Only if the company refuses such inspection can the shareholder file a lawsuit for information rights. This part of the content is largely consistent with the provisions before the amendment. In court, companies often defend against this part of the claim by arguing that the shareholder has not fulfilled the preliminary procedures. The form of the written request is not legally required, and is usually based on mutual agreement or commercial practice. Foreign shareholders can also initiate requests through lawyer's letter [(2022) Beijing 04 Civil First Instance 879].

3. "Improper Purpose"

In lawsuits for shareholder information rights, the main defense argument from the company side is that the shareholder has an "improper purpose that may harm the legitimate interests of the company," such as actual competition. However, the company bears a very strict burden of proof, and courts rarely support this defense.

In Cases [(2023) Jiangsu 02 Final Civil Appeal 634], [(2021) Beijing 04 Civil First Instance 1196], [(2021) Shanghai 0114 Civil First Instance 20382], and [(2020) Guangdong 06 Final Civil Appeal 7742], regardless of whether a shareholder serves as a director of a potential competitor, or the actual controller of a legal person shareholder is a shareholder of a competing company, or the equity of a legal person shareholder is acquired by another foreign company with overlapping business scopes, or even if other companies under the name of the actual controller of the legal person shareholder are engaged in litigation with the involved company, courts have not accepted the company's "improper purpose" defense. However, they may require the shareholder to make a commitment to the lawful use of company materials and to keep such materials confidential.

Regarding the legitimacy of the purpose, the Supreme People's Court, in its ruling [(2019) Supreme People’s Court Civil Retrial 1756], clearly stated that "the protection afforded by refusing inspection is for the legitimate interests of a company, not all interests, and the determination of proper or improper purposes is subject to this limitation." In that case, the Supreme Court held that "[although representative of shareholder BeiX Company, DongX Company, was appointed by a foreign court as the joint liquidator of BeiX Company's parent company], the information obtained by DongX Company through this shareholder information rights lawsuit and used in foreign litigation should not be considered as harming or possibly harming the legitimate interests of BeiX Company… Information rights consistent a statutory and inherent right of shareholders. The exercise of shareholder information rights by DongX Company to obtain relevant information is not necessarily linked to the criminal proceedings taking place abroad, nor should it be considered as a situation of 'providing evidence and assistance to a foreign country.'"

4. Legal Consequences of Company Noncompliance

If a company fails to comply with an effective court judgment, foreign shareholders can apply for enforcement. If the company continues to resist or is "unreachable," the court will impose restrictions on high consumption and list the entity as a dishonest debtor [(2021) Jiangsu 0509 Execution 9181-1], [(2020) Beijing 04 Execution 339].

Conclusion

From judicial practice cases, we can see that shareholder information rights, as one of the most fundamental rights of shareholders, are generally supported by courts in most circumstances. The introduction of the new Company Law not only expands the scope of information rights for minority shareholders through explicit legal provisions but also provides a legal basis for intermediaries to assist in inquiries. These innovations are beneficial for protecting the rights of foreign shareholders investing in China and consolidating a fair business environment.

At the same time, we recognize that lawsuits for shareholder information rights may be the first step in a strategy for minority shareholders to protect their interests, potentially followed by litigation related to the abuse of power by controlling shareholders or actual controllers that harms the interests of foreign minority shareholders. Jotai Law Firm and our cross-border legal services team will continue to share our view on how foreign shareholders can protect their legitimate rights and interests under the new Company Law, for our readers.

Notes:

Interpretation of the Supreme People's Court on Certain Issues Regarding the Application of the Company Law of the People's Republic of China (IV)

Article 10: In cases where a shareholder requests to inspect or duplicate specific documents and materials of the company, if the court supports the plaintiff's claims, it shall specify the time, place, and list of specific documents and materials to be inspected or duplicated in the judgment.

When a shareholder inspects the company's documents and materials based on an effective court judgment, the inspection can be assisted by accountants, lawyers, or other intermediaries who are legally obligated to maintain confidentiality, provided that the shareholder is present.

Law on the Application of Laws to Foreign-related Civil Relations of the People's Republic of China

Article 14: The civil capacity, civil capacity for conduct, organizational structure, shareholder rights and obligations, etc., of a legal person and its branch offices shall be governed by the law of the place of registration.

If the principal place of business of a legal person differs from the place of registration, the law of the principal place of business may apply.

The habitual residence of a legal person is its principal place of business.

Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China (2022 Revision)

Article 3: The domicile of a citizen is his/her place of household registration; the domicile of a legal person or other organization is the location of its primary office.

If the primary office of a legal person or other organization cannot be determined, the place of registration or incorporation is deemed to be the domicile.

Article 22: Disputes arising from the company register, requests to change company registration, shareholder information rights, company resolutions, mergers, spin-offs, reductions in capital, increases in capital, etc., shall be determined according to Article 27 of the Civil Procedure Law.

Civil Procedure Law of the People's Republic of China

Article 27: Disputes arising from the establishment of a company, confirmation of shareholder status, distribution of profits, dissolution, etc., shall be heard by the people's court where the company is domiciled.

China conducts civil and commercial judicial assistance with foreign countries through the Hague Service Convention, Hague Evidence Convention, and currently effective bilateral judicial assistance treaties, mainly including service of judicial documents, investigation and evidence collection, and recognition and enforcement of judgments.

For more information, read the "Frequently Asked Questions on International Civil and Commercial Judicial Assistance" published on the official website of the Ministry of Justice of China in March 2023. Specific provisions for providing criminal evidence and judicial assistance abroad can be found in the International Criminal Judicial Assistance Law of the People's Republic of China and the Provisions on Several Issues Concerning the Implementation of the International Criminal Judicial Assistance Law of the People's Republic of China (Trial).