Study on Defects in Shareholders' Meeting Resolutions

Author: Qian Yulin
Publisher:
Publish Date: 2005-06-01
Features: One of the characteristics of a joint-stock company is the diversification of equity and the dispersion of shareholders. As an independent legal entity, the company's property is separated from the personal property of its shareholders, and the company's will is separated from the individual wills of its shareholders. The shareholders' meeting, as the decision-making body of the company's will, serves as the "organ" of the company's will. However, due to the diversification of equity and the dispersion of shareholders, exploring how to form the company's will through resolutions of the shareholders' meeting has become a core issue of corporate theory, legislation, and practice. In fact, amid over a decade of storms and trials in China's securities market, it has also sparked extensive reflection on this matter.
The emergence of these issues is undoubtedly due to multiple factors, but one cannot overlook the severe shortcomings in China's corporate legislation. Whether it concerns the procedures of the shareholders' meeting or the content of its resolutions, both can affect the legal validity of the resolutions. How the company law should respond to these issues warrants in-depth theoretical research. Although since the 20th century, company laws in various countries have undergone a shift from weakening the authority of the shareholders' meeting to strengthening the role of the board of directors, this transformation does not imply that the "board-centric model" is the trend of modern corporate development. Theoretically, the differentiation of organs does not equate to the shareholders' meeting losing its position as the company's highest power organ—the highest decision-making body of the company. The nature of the company ensures that the centrality of the shareholders' meeting cannot be shaken.
Based on this, when delineating power divisions, company law has consistently assumed that the shareholders' meeting is the deliberative forum of members, who are the actual owners of the enterprise, and that it is the highest and final decision-making body of the company. Under the institutional design of company law, the shareholders' meeting still holds the ultimate authority over the company's fate, such as amending the articles of association, increasing or decreasing capital, mergers, business transfers, and dissolution. More importantly, the power to appoint and remove directors remains firmly in the hands of the shareholders' meeting, meaning that, theoretically, the shareholders' meeting still controls the company's operations. This indicates that the structure and institutional arrangements in company law still prioritize the protection of shareholder rights (power and rights) and envision the shareholders' meeting as a tool for shareholders to control management. However, reality is different—the development and evolution of companies have resulted in the board of directors, rather than shareholders, controlling the company. One reason for this is that shareholders generally show little interest in the rights granted by law or the articles of association to control the company's management. In their classic work Modern Corporation and Private Property, Berle and Means, in the 1930s, empirically analyzed the reasons behind shareholders' "rational apathy" regarding their rights in the shareholders' meeting. They argued that the ownership of shares in large companies is highly dispersed, and most shareholders believe that spending time, effort, and resources to change inefficient management strategies is not worthwhile, as the costs of such changes outweigh the returns on investment. Furthermore, it is extremely difficult for shareholders to act collectively.
Therefore, to some extent, it is not the original intent of company law but the actions of shareholders themselves—such as "voting with their feet" (the Wall Street Rule) or simply "free-riding"—that have led to the tendency of the shareholders' meeting becoming a shell or a hollow structure. As a result, reforming the shareholders' meeting to restore its position has become an issue that must be addressed. From the initial institutional design of company law to the gradual deviation of the shareholders' meeting from this design in reality, a paradox has emerged: since company law grants the shareholders' meeting the status of the highest power organ, why are its resolutions difficult to reflect the company's highest decision? The answer lies not in questioning or undermining the status of the shareholders' meeting but in finding a path to elevate it to its rightful position. The crux of the problem also lies here. The erosion of the shareholders' meeting's authority by the board of directors (or management) is one phenomenon, and shareholders' indifference toward the shareholders' meeting is another. These phenomena, in turn, conceal the essence of the problem. Uncovering this essence is a shared task for corporate law scholars. As for this research topic, it merely attempts to address one aspect as a foundation for exploring this fundamental issue.
Since the shareholders' meeting is the highest power organ of the company, its resolutions represent the company's highest decision, and once made, they bind the company, shareholders, the board of directors, managers, and others. This research topic focuses on the defects of shareholders' meeting resolutions, aiming to elucidate the principles that should guide the meeting, namely fairness, justice, and legitimacy in both the procedures and the content of the resolutions. From a normative perspective, the shareholders' meeting is composed of all shareholders, the meeting should be attended by all shareholders, and the resolution should represent the will of all shareholders. However, from a realist perspective, the shareholders' meeting is not attended by all shareholders, and the resolution does not necessarily represent the will of all shareholders. The contradiction between the normative and the realist is the starting point for this research.
How to ensure the legal convening of the shareholders' meeting while protecting shareholder interests at the lowest possible cost? How to uphold the principles of shareholder equality and share equality in the meeting without harming the interests of minority shareholders? How to resolve conflicts and coordinate resolutions of the shareholders' meeting with the articles of association and resolutions of the board of directors? How to provide remedies for defects in shareholders' meeting resolutions? How to improve the provisions in China's company law regarding procedural and substantive defects in shareholders' meeting resolutions? These are the theoretical and practical issues this research aims to address, as well as the theoretical and practical significance of its findings.
This research will adopt comparative legal studies, empirical analysis, and normative analysis as its methodologies to further explore the following questions: First, the fundamental principles underlying the legal structure of shareholders' meeting resolutions. Modern company law is dominated by the principle of "separation of ownership and management," which has adjusted the power structure of the company and clarified the boundaries of authority among its organs. Under this context, the scope of matters subject to shareholders' meeting resolutions, whether the articles of association can expand or retain the authority of the shareholders' meeting, and whether the board of directors should execute shareholders' meeting resolutions or whether it can submit matters within its authority to the shareholders' meeting for resolution—all remain unresolved issues. Second, since company law is a special law of civil law, and shareholders' meeting resolutions are special civil legal acts, whether the theories of civil law regarding legal acts can be applied to shareholders' meeting resolutions, including whether the theory of defects in expressions of intent can be applied to defects in shareholders' meeting resolutions, warrants exploration. Third, what are the fundamental connotations of defects in shareholders' meeting resolutions? What principles underpin the procedural basis emphasized by company law in shareholders' meetings? Can procedural justice be meaningfully upheld in the context of equal shareholder rights? Theoretically, this requires reflection. Fourth, this research will examine the evaluation system for the effectiveness of defects in shareholders' meeting resolutions and, based on this, construct a remedial system for such defects. In litigation involving defective resolutions, the retroactive effect of judgments and the protection of bona fide third parties are crucial aspects in maintaining the stability of corporate legal relationships. Similarly, the extent of judicial intervention in shareholders' meeting resolutions, the necessity and scope of discretionary revocation systems, are also critical issues in the remedial system. Fifth, Article 111 of China's Company Law provides the basis for judicial intervention in shareholders' meetings or judicial review of shareholders' meeting resolutions. The problems with this article and how to reform it for improvement are issues that arise in the revision of company law. This research aims to make breakthroughs in this area. Sixth, conventional theories hold that modern company law adopts a "board-centric model." Through the study of defects in shareholders' meeting resolutions, this paper offers a fresh perspective on the value orientation of modern company law. The central question is: Can shareholders' meeting resolutions overturn board resolutions or require the board to act in accordance with shareholders' meeting resolutions? Or can the board of directors submit matters within its authority to the shareholders' meeting for resolution? These questions have not been adequately addressed in traditional corporate law theory.
Finally, it must be noted that the research subject of this paper is the issue of defects in shareholders' meeting resolutions of joint-stock companies.