5.2.2.1.1 Restraints on majority power

In the new company law, majority power is restricted by inserting a general rule targeting the "abuse of power",1 and another two specific rules to control occasions which can easily give rise to self-interested conduct.2

Article 20 of the Company Law provides that a shareholder owes fiduciary duties to other shareholders. Besides abiding by laws, administrative regulations and the articles of association, a shareholder shall not abuse his rights to damage the interests of the company or other shareholders, and shall assume liability for compensation if he does so. Violation of the requirement embodied in this article results in a derivative action if shareholders cause damage to the company, and a direct action ensues when the interests of individual shareholders are harmed. Considering the fact that the new company law offers many default rules and more discretion in management, such a requirement, at the first sight, has the function of alleviating the problem of abuse of power by the majority in a close company. We should nevertheless not be too optimistic about the effect of this article, because at this stage the contents of the duties are unclear and need to be developed. Such uncertainty will discourage minority shareholders from seeking protection by using this remedy. I will discuss this article further as the oppression remedy in China in the laffer part of this chapter.3

Two more restrictions on the exercise of majority power which have been introduced in the Company Law 2006 are Article 16 and Article 21. Article 16 prevents shareholders from voting in a shareholders' meeting when the company provides security to them. Article 21 prevents the use of connections to harm the interests of the company.4 But the conduct giving rise to the claim of "use of the connection relationship" is yet to be determined.