Keywords: Civil, Dissolution of Company, Dismissal of Claim

Case-handling attorneys: Li Haiyi, Yang Xingquan

Key points of the judgment: The plaintiff, relying on the provisions of the Company Law, requested the dissolution of the joint venture company. Since the voting rights held by the plaintiff exceed 10 percent, the plaintiff is entitled to file a lawsuit for dissolution of the company. According to the Company Law, the dissolution of a company requires the simultaneous fulfillment of three conditions: (1) serious difficulties in the company’s management and operation; (2) continued existence of the company would cause significant damage to the interests of shareholders; and (3) such difficulties cannot be resolved through other available means. First, regarding whether the joint venture company is experiencing serious difficulties in management and operation, in this case, the joint venture has convened board meetings multiple times since its establishment and has adopted valid resolutions. In the two years preceding the filing of the lawsuit, the plaintiff itself had already adopted valid resolutions on major company matters. Meanwhile, the joint venture has been continuously operating and has maintained good business performance. The evidence provided by the plaintiff is insufficient to prove that the joint venture’s management and operations have broken down and cannot function normally; therefore, no serious difficulties in management and operation have occurred. Second, concerning whether the continued existence of the joint venture would cause significant damage to the interests of shareholders, given that the joint venture is not facing serious difficulties in management and operation, whether its continued existence would indeed cause significant damage to shareholder interests should be analyzed in conjunction with the available remedies for protecting shareholder interests. The existing evidence is still insufficient to establish that the continued existence of the joint venture would cause significant damage to shareholder interests. Finally, regarding whether the disputes among the shareholders of the joint venture can be resolved through other means, the requirement that such disputes cannot be resolved through other channels is a necessary prerequisite for shareholders to request the dissolution of the company. Only when all possible remedies have been exhausted and the corporate deadlock remains unresolved may shareholders be granted the right to seek judicial dissolution of the company. In this case, although the conflicts among the shareholders are difficult to reconcile, these conflicts do not constitute a statutory ground for dissolving the company. Shareholder disputes can be resolved through internal mechanisms, such as exercising the right to information, requesting dividends, or utilizing shareholder exit mechanisms. Therefore, the joint venture does not meet the dissolution conditions stipulated by the Company Law and should not be dissolved. The plaintiff’s claim lacks factual basis, and thus the court does not support it.

Facts of the Case: A certain automobile service company in Shenyang (hereinafter referred to as the Joint Venture) was established by a certain joint-stock company (hereinafter referred to as the Plaintiff) and Shenyang Group Co., Ltd. (hereinafter referred to as the Chinese Shareholder). The Plaintiff has filed a lawsuit against the Joint Venture and the Chinese Shareholder, requesting the dissolution of the Joint Venture. The Plaintiff’s grounds for the lawsuit are as follows: The long-standing conflicts among the directors of the Joint Venture are an objective fact; these conflicts among directors directly reflect antagonism and loss of trust between the shareholders, thereby undermining the foundation for joint operation. As a result, the company is facing extreme difficulties in management and operation, and continued existence of the company would cause substantial damage to the Plaintiff’s interests, and such issues cannot be resolved through other means. According to Article 182 of the Company Law and the Second Judicial Interpretation of the Company Law, the Joint Venture should be dissolved. The Joint Venture and the Chinese Shareholder disagree with the dissolution of the Joint Venture, arguing that since its establishment, the Joint Venture has consistently operated normally and has never experienced any difficulties in management or operation.

Ruling: The first-instance judgment dismissed the plaintiff, a certain corporation’s, claim.

The case filing fee of RMB 174,904 shall be borne by the plaintiff, a certain joint-stock company.

Reasons for the First-Instance Judgment: The automobile service company has not fallen into a situation where its corporate management and operations have completely broken down and it is unable to function normally; the company’s management and operations have not encountered serious difficulties. Based on the evidence currently available in this case, there is still insufficient proof to establish that the continued existence of the joint venture would cause significant harm to the interests of the shareholders. Disputes among shareholders do not constitute a statutory ground for dissolving the company; such shareholder disputes can be resolved through internal mechanisms (such as the right to information, the right to request dividends, and mechanisms for exiting equity). Since the joint venture does not meet the dissolution conditions stipulated by the Company Law, it should not be dissolved, and the plaintiff’s claim lacks factual basis.

Relevant statutory provision: Article 182 of the Company Law: If a company encounters serious difficulties in its operation and management, and continued existence would cause substantial losses to the interests of its shareholders, and such difficulties cannot be resolved through other means, shareholders holding more than ten percent of the total voting rights of the company may request the people’s court to dissolve the company.

Article 1 of the Second Judicial Interpretation of the Company Law stipulates: Shareholders who individually or collectively hold more than ten percent of the total voting rights of the company’s shareholders, and who bring a lawsuit for dissolution of the company on one of the following grounds and meet the requirements set forth in Article 182 of the Company Law, shall have their cases accepted by the People’s Court:

• The company has been unable to hold a shareholders’ meeting or a general meeting of shareholders for more than two consecutive years, and the company’s business operations and management have encountered serious difficulties.
• When shareholders are unable to reach the statutory or articles of association-required quorum during voting, and for more than two consecutive years they cannot adopt valid resolutions at the shareholders’ meeting or general meeting of shareholders, the company’s business management will encounter serious difficulties.
• The company’s directors have been in long-term conflict and are unable to resolve the issue through the shareholders’ meeting or general meeting of shareholders, leading to serious difficulties in the company’s management and operations.

(4) Other serious difficulties in business management arise, and the continued existence of the company would cause significant losses to the interests of shareholders.

Lawyer’s Perspective:

• The plaintiff’s grounds for filing this lawsuit are the long-standing conflicts among the directors of the joint venture, which have made it extremely difficult to manage and operate the company. If the company continues to exist, the plaintiff will suffer substantial losses, and these issues cannot be resolved through other means. The reason for bringing this lawsuit on these grounds is that there is no time limit—such as a two-year period—for resolving long-standing directorial conflicts. By the time the lawsuit was filed, the board of directors had already been unable to reach any effective resolutions for one year and two months, and this situation has persisted ever since, reaching two and a half years by the time of the first-instance judgment. Moreover, the deadlock on the board of directors cannot be resolved through shareholders’ meetings or equity transfers. Therefore, the case meets the requirements of Article 1, Paragraph (3) of the Second Judicial Interpretation of the Company Law and should be ruled to dissolve the company. The first-instance judgment did not adopt the plaintiff’s view for two reasons. First, the court argued that “within the two years preceding the filing of the lawsuit, the plaintiff had already reached valid resolutions on major company matters. Meanwhile, the joint venture has continued operating smoothly and has maintained good business performance, and the evidence provided by the plaintiff is insufficient to prove that the joint venture is experiencing severe difficulties in management and operation.” We contend that, first, there is no two-year time limit stipulated in the law for determining whether long-standing directorial conflicts have led to a failure to reach effective resolutions on major matters. Second, the fact that the company continues to operate smoothly and maintains good performance does not constitute proof that the company is not facing severe management difficulties. To determine whether a company is experiencing severe management difficulties, one must comprehensively analyze the operational status of its organizational structure—including whether the shareholders’ meeting, the board of directors, and the supervisory board, as the company’s power and management bodies, are functioning normally; whether they are unable to make effective resolutions on company matters; and whether all aspects of the company’s operations have come to a standstill. Good business performance is a financial issue rather than a management issue. In this case, the long-standing conflicts among the directors of the joint venture have persisted continuously, reaching two and a half years by the time of the judgment, and the deadlock has remained unresolved. This deadlock on the board of directors has inevitably led to severe management difficulties for the joint venture. The second reason given by the first-instance judgment is that disputes among the shareholders of the joint venture do not constitute a statutory ground for dissolving the company; such shareholder disputes can be resolved internally. Not every dispute between shareholders necessarily justifies dissolution of the company. However, when shareholder disputes escalate to the point of creating a deadlock in the company’s operations—such as when the company is unable to hold a shareholders’ meeting or general meeting of shareholders for two consecutive years, or when it fails to reach valid resolutions at such meetings for more than two years—these situations clearly demonstrate the existence of serious shareholder conflicts. It is an objective fact that the conflicts among the shareholders (directors) of the joint venture cannot be resolved through other means. For example, although the plaintiff requested the transfer of equity and a fair valuation through appraisal, the Chinese shareholders firmly refused. Even mediation efforts by the People’s Court were unsuccessful. This is a typical manifestation of severe management difficulties, and the continued existence of the company would inevitably cause significant losses to the shareholders. Therefore, the plaintiff’s claims should be upheld. The first-instance judgment’s failure to support the plaintiff’s claims represents a classic case of conflicting facts and differing interpretations and understandings.
• The first-instance judgment ruled that the case filing fee of 174,904 yuan shall be borne by the plaintiff. It is perfectly reasonable for the losing party to bear the litigation costs. However, in this case, it was erroneous to base the case filing fee on the registered capital of the joint venture. The Supreme People’s Court’s Civil Judgment No. 373 (2017) issued by the Supreme People’s Court clearly stated: “Since the lawsuit for dissolution of a company is a non-property case, the original trial court’s practice of collecting the case filing fee based on the value of the property at issue was improper, and this court has accordingly corrected it in accordance with the law.” The plaintiff had already pointed out to the first-instance judge that the case filing fee should be collected on a per-case basis, but the judge ignored this suggestion. When considering whether to appeal, the plaintiff asked its lawyer to inquire with the Provincial Higher People’s Court about how the case filing fee should be collected in lawsuits for dissolution of companies. The Provincial Higher People’s Court’s response remained that the fee should still be collected based on the registered capital amount. A search of the case filing fee practices for lawsuits for dissolution of companies at all levels of people’s courts in Liaoning Province revealed that grassroots people’s courts more often collected fees on a per-case basis, whereas the Shenyang Intermediate People’s Court uniformly collected fees based on the registered capital amount. This directly led the plaintiff to give up on appealing.

Case-handling attorneys: Li Haiyi, Yang Xingquan