Introduction: When the contradictions between shareholders of a company cannot be reconciled, resulting in the failure of the shareholders' meeting mechanism and the loss of the company's human compatibility foundation, a company deadlock may occur. According to the general theory, the company deadlock is the only reason for judicial compulsory dissolution of the company. Article 182 of the Company Law and Article 1 of the Interpretation 2 of the Company Law stipulate the relevant legal conditions required to forcibly dissolve a company through judicial intervention in the event of a deadlock in the company. Dissolution of a company is the most destructive and destructive for the company, and may have a significant impact on the company, its other shareholders, and creditors. Therefore, it is relatively difficult to apply for judicial compulsory dissolution of a company, whether in terms of the strictness embodied in the above legal provisions, or in terms of the humble judicial policy stance applied to judicial power and the grasp of such cases in judicial practice. So, if the contradictions between the shareholders of a company have intensified to the extent that they cannot be reconciled, is it feasible for shareholders to withdraw from the company through judicial dissolution? What conditions should the court examine to support judicial dissolution of the company? What litigation preparations do I need to make if I apply for dissolution of the company? This article will attempt to answer the above questions.

 

1、 Legal Basis for Judicial Compulsory Dissolution of Companies

 

According to Article 182 of the Company Law, "If a company encounters serious difficulties in its operation and management, and its continued existence may cause significant losses to the interests of shareholders, which cannot be resolved through other means, shareholders who hold more than 10% of the voting rights of all shareholders of the company may request the people's court to dissolve the company." In the event of a company deadlock, The conditions under which a shareholder can file an action to dissolve the company include one procedural condition and three substantive conditions. A procedural condition is that the plaintiff must be a shareholder holding 10% or more of the company's voting rights. The three substantive conditions refer to: (1) serious difficulties in the operation and management of the company; (2) Continued existence will cause significant losses to shareholders' interests; (3) It cannot be resolved through other means. This is the so-called trilogy of judicial compulsory dissolution of companies.

 

In addition, the first paragraph of Article 1 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II) (2014 Amendment)" (hereinafter referred to as the "Interpretation II of the Company Law") specifies the condition that "serious difficulties arise in the operation and management of a company", That is, "If a shareholder who individually or collectively holds 10% or more of the voting rights of all shareholders of the company brings a lawsuit for dissolution of the company for one of the following reasons, and it complies with the provisions of Article 182 of the Company Law, the people's court shall accept it: (1) The company has been unable to hold a shareholders' meeting or shareholders' meeting for more than two years, and there are serious difficulties in the company's operation and management;" "When shareholders vote, they are unable to reach the proportion prescribed by law or the company's articles of association, fail to make effective resolutions at the shareholders' meeting or shareholders' meeting for more than two years, and there are serious difficulties in the company's operation and management;"; （3） The company's directors have long-term conflicts and cannot be resolved through the shareholders' meeting or shareholders' meeting, resulting in serious difficulties in the company's operation and management; （4） "Other serious difficulties in operation and management, and the continued existence of the company may cause significant losses to the interests of shareholders.".

 

Article 1 (2) of the Second Interpretation of the Company Law states: "If a shareholder brings a lawsuit to dissolve a company on the ground that his rights and interests such as the right to know and the right to request profit distribution are damaged, or the company suffers losses or property is insufficient to repay all its debts, or the company's business license is revoked without liquidation, the people's court shall not accept the lawsuit." This directly stipulates the circumstances under which the court shall not accept the lawsuit to dissolve a company.

 

2、 The Conditions for Filing and Examination of Judicial Compulsory Dissolution of Companies

 

The dissolution of a company involves the survival of the company, multiple stakeholders such as shareholders, creditors, and employees, and the stability of the market economic order. Therefore, unlike other cases, a company dissolution case requires a review of whether the company meets the statutory dissolution conditions at the filing stage. Strictly speaking, Article 182 of the Company Law and Article 1 of the Interpretation 2 of the Company Law provide both the filing and review conditions for a company dissolution lawsuit and the substantive review conditions for a judgment on company dissolution. However, in judicial practice, the review of whether a company meets the conditions for dissolution at the filing stage is generally a formal review rather than a substantive review. On the one hand, at the filing stage, it is actually difficult for the sued court to conduct a detailed and comprehensive evaluation of specific evidence; On the other hand, since the implementation of the registration system after 2015, the standards for filing and reviewing cases of dissolution of companies have also been relaxed.

 

After searching and analyzing relevant judicial cases and combining the author's litigation experience in handling company dissolution cases, the author believes that in addition to meeting the prosecution conditions of ordinary litigation, the court mainly considers whether the prosecution meets the following conditions when deciding whether to accept a company dissolution lawsuit:

 

（1） Whether the plaintiff has the qualification to sue, that is, whether the plaintiff provides evidence to prove that it is "a shareholder who individually or collectively holds more than 10% of the voting rights of all shareholders of the company" when filing a lawsuit. This is the procedural condition for filing a lawsuit for dissolution of the company. If the conditions for filing a lawsuit are not met, the case will be directly rejected. For example, in the case of dissolution dispute between Song Xiaoqing and Beijing Dacheng New Technology Industry Co., Ltd. (Case No.: (2021) Jing 0108 Min Chu No. 3156), the People's Court of Haidian District, Beijing, ruled that the plaintiff did not provide evidence to prove that he was "a shareholder holding more than 10% of the voting rights of all shareholders of the company" and refused to accept it.

 

（2） Conduct a formal review of the reasons for the dissolution of the company in accordance with Article 182 of the Company Law and Article 1 of the Interpretation 2 of the Company Law. Generally speaking, the court focuses on whether the statement of facts and reasons in the complaint meets the three legal conditions for dissolution of a company, and is accompanied by preliminary evidence, such as the notice of other shareholders refusing to convene or participate in the shareholders' meeting. It should be pointed out that there are certain differences in the understanding of this formal condition by various local courts, and some courts have conducted substantive reviews on whether the statutory dissolution conditions are met at the filing stage, requiring the plaintiff to provide sufficient evidence to prove that the company has a deadlock, otherwise it will not be accepted. For example, the case where the applicant Zhao Chunying sued the respondent for the dissolution of Ordos Mengjiu Liquor Co., Ltd. (Case No.: (2016) Nei 0626 Min Chu 1668), The People's Court of Wushen Banner, Inner Mongolia Autonomous Region, ruled that Zhao Chunying's lawsuit on dissolution of the company was inadmissible on the grounds of "not submitting new evidence to prove that the continued existence of the defendant Ordos Mengjiu Liquor Industry Co., Ltd. would cause significant losses to shareholders, and also failed to prove that the difficulties could not be resolved through other means.".

 

（3） The facts and reasons in the complaint should not contain the statement stated in Article 1, Paragraph 2, of the Second Interpretation of the Company Law that "a lawsuit for dissolution of a company is filed on the grounds that the rights and interests such as the right to know and the right to request profit distribution are damaged, or the company suffers losses or property is insufficient to repay all its debts, or the company has its business license revoked as a legal person but has not been liquidated.". Otherwise, the court may not accept it. Because in this case, the court generally believes that there are still other ways to resolve the conflicts between shareholders, which does not reach the level of "serious difficulties in the company's operation and management" stipulated by law.

 

To sum up, when a company is dissolved through litigation, at the filing stage, the court generally conducts formal and procedural review of the complaint and evidence, rather than specific and substantive review of the content of the case. However, due to the incompleteness of judicial practice, if the plaintiff files a lawsuit for dissolution of the company without sufficient evidence preparation, there may indeed be a risk of inadmissibility.

 

3、 Analyze the substantive review conditions for supporting the dissolution of a company with relevant cases

 

Case: Supreme Court Zhao Xufeng, Shaanxi Yixi Investment Management Co., Ltd. Company dissolution dispute retrial case [(2019) Supreme Court Minshen No. 2477]

 

（1） Basic facts of the case

 

The retrial applicant Zhao Xufeng applied to the Supreme Court for retrial due to a dispute over the dissolution of the respondent Shaanxi Yixi Investment Management Co., Ltd. (hereinafter referred to as Yixi Company) and Pu Xiaochuan Company, and was not satisfied with the Shaanxi Provincial High People's Court's (2018) Civil Judgment No. 901.

 

The applicant, Zhao Xufeng, applied for retrial and claimed that Zhao Xufeng met the four conditions generally required for shareholders to forcibly dissolve a company as determined by the court of second instance: 1. Zhao Xufeng's shareholding ratio is 10%; 2. The operating mechanism of Yixi Company has completely failed, and the company has never held a shareholders' meeting since 2014, which proves that the company has encountered difficulties in operation and management; Zhao Xufeng has previously filed a lawsuit demanding dividends, and the company's operating difficulties cannot be resolved through other means; 4. Yixi Company is controlled by Pu Xiaochuan alone. The financial statements show that the company's huge assets have been transferred to other companies controlled by Pu Xiaochuan without Zhao Xufeng's knowledge. The company's profits cannot be distributed, and the company's losses are for unknown reasons. Yixi Company has no factual basis and practical significance for existence. In addition, Zhao Xufeng's exercise of the right to dissolve the company is not conditional on the repurchase of shares agreed in the Labor Contract signed with Yixi Company on March 1, 2013, based on the fact that the company's operating mechanism is completely malfunctioning.

 

Yixi Company submitted its defense opinion stating that... (2) Yixi Company has not experienced serious difficulties in its operation. According to the provisions of the company's articles of association, the majority shareholder and actual responsible person of Yixi Company, Pu Xiaochuan, have more than two-thirds or more of the voting rights on major or general matters of the company, and Zhao Xufeng authorizes Pu Xiaochuan to exercise shareholder rights on his behalf. The power operation mechanism of Yixi Company is normal. The reason why Yixi Company did not hold a shareholders' meeting was that Zhao Xufeng authorized Pu Xiaochuan to exercise shareholder voting rights, and Zhao Xufeng did not request a shareholders' meeting and refused to participate in it. （3） The existence of Yixi Company has not caused significant losses to shareholders' interests. Yixi Company is the executive partner of Shaanxi Yixi Circular Economy High tech Venture Capital Fund, registered with the China Securities Investment Fund Industry Association, and collects fund management fees as agreed. Its operation and management are stable. The 2017 annual audit report submitted by Yixi Company in the first instance showed that the company had a balance at the end of the year, which did not harm the interests of shareholders. （4） Zhao Xufeng may, in accordance with the agreement in the Labor Contract signed with Yixi Company, advocate that Yixi Company repurchase its equity, or adopt negotiation, negotiation, mediation, modification of the company's articles of association, etc., but Zhao Xufeng has not resolved disputes between shareholders through other means.

 

（2） Court opinion and case analysis

 

The Supreme Court held that the focus of the case was whether Yixi Company met the statutory conditions for dissolution. According to the reasons for Zhao Xufeng's application for retrial, the focus should be on reviewing whether the company has serious difficulties in its operation and management, and its continued existence will cause significant losses to shareholders' interests, which cannot be resolved through other means. In response, the Supreme Court held that:

 

First of all, there are no serious difficulties in the operation and management of Yixi Company. To judge "whether there are serious difficulties in the operation and management of the company", a comprehensive analysis should be conducted on the operational status of the company's organizational structures, such as whether the shareholders' meeting, the board of directors, and the board of supervisors are unable to operate normally, whether effective resolutions cannot be made on the company's matters, and whether all the company's affairs are in a state of paralysis. According to the fact that Pu Xiaochuan holds 85% of the equity of Yixi Company, and Zhao Xufeng entrusted Pu Xiaochuan to exercise shareholder voting rights on his behalf, even if Zhao Xufeng, a shareholder with 15% of the equity, does not participate in the shareholders' meeting, Yixi Company can still hold a shareholders' meeting and form effective resolutions. Moreover, even if Yixi Company has not held a shareholders' meeting for more than two years, it does not mean that it cannot hold a shareholders' meeting, let alone that the shareholders' meeting mechanism fails. Zhao Xufeng proposed that the company's operating mechanism fails without factual and legal basis. Therefore, Zhao Xufeng advocates that the reasons for the retrial application for serious difficulties in the company's operation and management cannot be established.

 

This judgment standard has also been clarified in the Supreme Court's Guiding Case No. 8, Lin Fangqing v. Changshu Kailai Industrial Co., Ltd. and Dai Xiaoming Company's dissolution dispute. In this case, the effective judgment of the Jiangsu High Court held that the focus of "serious difficulties in the company's operation and management" lies in the existence of serious internal obstacles in the company's governance structure and management, such as the failure of the shareholders' meeting mechanism and the inability to make decisions on the company's operation and management, which should not be unilaterally understood as a lack of funds and serious losses of the company. In this case, although Carlyle Company is in a profitable state, its shareholders' meeting mechanism has been malfunctioning for a long time, and there are serious obstacles to internal management. If it has reached an impasse, it can be considered that the company has encountered serious difficulties in its operation and management.

 

Secondly, Yixi Company operates normally, and the audit report shows that the company still has a surplus. The evidence provided by Zhao Xufeng is insufficient to prove that Pu Xiaochuan transferred the company's profits to other companies under its control, or that the continued existence of Yixi Company will cause significant losses to shareholders' interests.

 

It should be pointed out that the proof of the condition that "continued existence will cause significant losses to shareholders' interests" is indeed difficult. In judicial practice, this condition often requires a comprehensive analysis based on the two conditions of "whether there are serious difficulties in the company's operation and management" and "whether it can be resolved through other means". That is, under the state of failure of the company's internal governance mechanism and long-term deadlock, the company's due rights to investment, such as decision-making, management, and supervision, cannot be enjoyed, and the company's operating losses, costs, and debt risks increase, If a shareholder is unable to achieve investment income and cannot solve it through other means, it should be recognized or presumed that significant losses have occurred to the shareholder's interests.

 

In addition, although the Supreme Court cited "the company still has surplus" in this case to participate in the argument that "the continued existence of the company will cause significant losses to shareholders' interests", "the company surplus" is only a supplementary condition, not a sufficient condition. The aforementioned case of Lin Fangqing and the retrial case of the dissolution dispute between Shanghai Ruihua New Energy Automobile Co., Ltd. and Hainan Ruihuate New Energy Automobile Co., Ltd. tried by the Supreme Court [(2019) Supreme Court Minshen No. 1787] also hold this view. In determining whether there are serious difficulties in the operation and management of a company, the court is reexamining whether the operating status of the company's organizational structure is in trouble, whether the three meetings mechanism is malfunctioning, and whether there are serious obstacles to corporate governance and internal management, which have led to a deadlock in the company. However, whether the company has made profits or suffered losses is not a sufficient condition for judging whether there are serious difficulties in the operation and management of a company. In other words, even if the company loses money, it does not necessarily lead to serious difficulties in identifying the company's operations and management; Even if the company is profitable, there are serious obstacles to internal management and decision-making such as the long-term failure of the three meetings, especially the shareholders' meeting mechanism, which can be considered as serious difficulties in the company's operation and management.

 

Finally, if the conflict between Zhao Xufeng and Yixi Company can be resolved through other means, it is not appropriate to dissolve the company. Zhao Xufeng mainly had conflicts with Yixi Company and Pu Xiaochuan due to matters such as the company's failure to pay dividends, hold a shareholders' meeting, and financial issues. He believed that the rights and interests of its shareholders such as the right to know and the right to request profit distribution were damaged. According to Article 1, Paragraph 2, of the Second Interpretation of the Company Law, the cause advocated by Zhao Xufeng does not belong to the cause that the company should be dissolved. Zhao Xufeng may, in accordance with the relevant provisions of the Company Law, file a lawsuit to request the distribution of profits or provide account book inquiries, in order to remedy the shareholders' rights to know and property gains that he believes are damaged. Zhao Xufeng can also revoke the Power of Attorney in accordance with Article 410 of the Contract Law and exercise shareholder voting rights on his own. Zhao Xufeng can also advocate that Yixi Company repurchase its equity based on the "special agreement between the two parties: in order to maintain the sustainable development of the company, during the contract period, Party B leaves the company, and there is no bonus for the current month and year: the incentive equity held by Party B is recovered by the company, and the investment equity is repurchased by the company.". Therefore, Zhao Xufeng was able to resolve the conflict through other remedies.

 

In the above-mentioned Zhao Xufeng case, the Supreme Court listed "other approaches" and their feasibility based on the specific circumstances of the case. However, each case has its own particularity, and the original intention of the law's provision of this condition is to encourage the parties to seek solutions outside the litigation as far as possible, within a feasible and reasonable range, but it is not necessary to exhaust and implement all "other approaches" one by one. If the conflict between shareholders intensifies to the extent that any attempt cannot be objectively advanced, the court may not impose a requirement for this. For example, in the second instance case of the Supreme Court on the dispute over the shareholders' right to know and dissolution of Chongqing Zhenghao Industry (Group) Co., Ltd. and Chongqing Zhenghao Electromechanical Industry Co., Ltd. [2007] MEZZZ No. 31], regarding the part of self relief, the Supreme Court held that:, "Self relief mainly refers to the acquisition of minority shareholders' equity by major shareholders, the transfer of equity by minor shareholders, the reconvening of a shareholders' meeting to discuss solutions, judicial mediation, and other means. As for the concept of major shareholders' acquisition of minority shareholders' equity, due to the refusal of major shareholders to conduct an audit, it is impossible to evaluate the equity, and the major shareholder Zhenghao Industry clearly stated that this acquisition request is absurd and cannot be carried out. There is no evidence regarding the external transfer of equity by minor shareholders "It indicates that minority shareholders have tried, but for such equity interests that have sharp contradictions between shareholders, serious bullying by major shareholders, and the company's discontinued production, the court believes that it can be directly presumed that minority shareholders cannot make external transfers.". "In addition, although both parties were unable to convene a shareholders' meeting to discuss a solution, the court failed to preside over two mediations. The court believes that the majority shareholders have no sincerity in mediating and resolving the issue, and it can be directly presumed that there is no need to convene a shareholders' meeting to discuss a solution.".

 

To sum up, the dissolution of a company is an irreversible result for the company, and the court's attitude towards judicial dissolution is modest and prudent. According to the data disclosed in the "White Paper on the Trial of Corporate Disputes" of the Third Intermediate People's Court of Beijing, from 2013 to 2020, in addition to mediation and withdrawal cases, only 10 cases, accounting for 17.2%, were determined to constitute a company deadlock and should be subject to judicial dissolution, while the rest were determined not to constitute a company deadlock, accounting for 82.8%. This shows the difficulty of judicial dissolution of companies.

 

4、 Recommendations related to prosecution preparation

 

Based on the above analysis, the author suggests that shareholders should make the following corresponding preparations for filing a company dissolution lawsuit:

 

（1） Provide evidence that the plaintiff meets the qualifications of shareholders holding more than 10% of the voting rights of all shareholders of the company, such as the articles of association, company industrial and commercial registration information files or reports. Two points need to be noted. First, the shareholding ratio and voting power ratio are not the same concept. A company dissolution lawsuit requires a percentage of voting rights, not a percentage of shareholding. Generally, the shareholding ratio and the voting rights ratio are consistent, but in special cases, the shareholding ratio and the voting rights ratio may also be inconsistent, which should be checked in accordance with the company's articles of association, shareholder agreement, and other agreements; The second is that the identity of dormant shareholders has not been recorded in the industrial and commercial registration or shareholder register, and the plaintiff's shareholder identity was formally reviewed when the case was filed. Therefore, dormant shareholders cannot file a lawsuit for company dissolution, but should first change "dormant" to "prominent" through judicial decisions and other methods before filing a lawsuit for company dissolution disputes.

 

（2） The facts and reasons of the complaint submitted at the time of filing cannot be considered inadmissible by the court as stipulated in Paragraph 2, Article 1 of the Interpretation II of the Company Law. Otherwise, there may be a litigation risk of being directly ruled inadmissible by the court at the filing stage.

 

（3） Although the review of whether the company meets the statutory dissolution conditions at the filing stage is a formal review, it is still recommended to prepare sufficient evidence in accordance with the criteria of substantive review before filing the case. On the one hand, courts in different regions have different standards of grasping formal review, and individual courts may still conduct strict substantive review at the filing stage; Secondly, after the complaint reaches the defendant, it may attract the attention of the defendant company and other shareholders of the company, and it may be more difficult for the plaintiff to collect evidence.

 

（4） When conducting substantive trials, the court generally reviews and determines the trilogy of dissolution of companies stipulated in Article 182 of the Company Law. Therefore, it is recommended that the plaintiff, when filing a lawsuit, also collect and organize evidence around the trilogy. Specifically

 

"Serious difficulties occur in the company's operation and management", which is the core and most critical condition for the judicial dissolution of the company. Before filing a lawsuit, it is recommended to focus on preparing strong evidence based on this condition, such as collecting written letters convening meetings of other shareholders within at least two years, resolutions of the shareholders' meeting, and statements or letters of other shareholders' refusal to convene or participate in the meeting. If a meeting has not been proposed or held before, there is no need to rush to initiate litigation proceedings. It is recommended to issue written notice of convening an interim shareholders' meeting or board of directors again or multiple times regarding matters in dispute between shareholders, matters that fall within the decision-making scope of the shareholders' meeting or board of directors, or to submit a written commercial letter to other shareholders or directors and senior management personnel to resolve relevant disputes, and to retain relevant notices and letters, as well as courier numbers Sign in records and email notarization to create legal conditions for the dissolution of the company.

 

2. We should try to collect relevant evidence that "continued existence will cause significant losses to shareholders' interests," such as evidence that shareholders transfer profits to other companies, evidence that the three-way mechanism fails so that the plaintiff is unable to exercise shareholders' rights to know, management decision-making, supervision, and other relevant shareholder rights, as well as evidence that the company's assets are gradually depleted or lost, the company's debt risk increases, and costs increase.

 

3. Provide evidence that the plaintiff has attempted to resolve the dispute through other means, such as providing relevant evidence that the defendant company does not agree to repurchase equity, shareholders do not agree to purchase equity, or other opposing shareholders do not agree to transfer equity, do not agree to capital reduction, etc.

 

Although it is difficult to legally dissolve a company, it may be the only low-cost way for shareholders, especially minority shareholders, to exit the company in the event of a company deadlock. Therefore, before filing a lawsuit to dissolve a company, it is even more important to formulate a feasible litigation plan based on the specific situation of the case, prepare and collect sufficient and powerful evidence, and prevent litigation risks as much as possible, in order to achieve the goal of exiting the company and stop losses in a timely manner.

 

(This article is translated by software translator for reference only.)