5.2.2.2.1 Staying and making efforts to correct misconduct

Article 22 provides that resolutions by the shareholders' meetings or by the board of directors can be declared void or revocable by the court onder certain circumstances. The resolution shall be null and void if it has violated any law or administrative regulation, and revocable if it has procedural errors, or the resolution is in violation of the articles of association of the company. In this article, substantive control is confined to illegal resolutions; unfair resolutions are not included. In case the resolution is against the principle of fairness, the possible solution for minority shareholders is Article 20 which deals with "abuse of rights" by shareholders.1

To protect the interests of the company and the interests of minority shareholders, Company Law 2006 has also introduced derivative actions, whereby if the performance of directors, supervisors or the senior management personnel violates laws, administrative regulations or the articles of association of the company, shareholders may initiate legal proceedings at the people's court.2 This is a new form of litigation in China.

According to the provision of this remedy, not only directors, supervisors, senior officers but also other parties, such as controlling shareholders, debtors and administrative bodies can be defendants as wel1.3 Shareholders holding at least 1 per cent of the shares for a consecutive period of 180 days or more are qualified petitioners in the case of public companies; such requirements do not apply to shareholders in close companies. Chinese company law has also transplanted the demand rule from the USA.4 Nevertheless, in the event of a risk of unrecoverable damage to the interests of the company, shareholders may circumvent the demand rule and file a lawsuit directly at the court.

Apart from the derivative action mentioned above, shareholders can also initiate a direct action for compensation where their interests are damaged either by other shareholders though abuse of rights or by any director or senior manager by violating laws, administrative regulations or the articles of association.5 Compared to derivative actions, direct actions are more effective for minority shareholders in remedying the breach of fiduciary duties by shareholders or directors in close companies.6 Further discussions on direct actions against shareholders (Article 20) and directors (Article 153) will be found in Section 5.3, where I try to analyze whether the two articles taken together could be an equivalent of the unfair prejudice remedy or the oppression remedy in China if a buyout remedy is added to the current provisions.