5.4.4 Summary of the oppression remedy

It is a widely observed phenomenon in China that majority shareholders in close companies often use their controlling power to extract benefits for themselves at the expense of minority shareholders. But previously, so long as the conduct did not breach the requirements in law, the majority shareholders were free from liability.1 The new company law shows the influence of development in the western countries that majority shareholders owe fiduciary duties to minority shareholders. With the provision embodied in Article 20 of the Company Law 2006, the free exercise of legal rights by the majority is constrained to avoid harm to the interests of minority shareholders. Essentially, therefore, this remedy is partially a counterpart to the oppression remedy in the US and the unfair prejudice remedy in the UK.

As in the UK and US, Article 20 does not specify the exact contents or requirements of the duties owed by the majority shareholders. This remedy in China, though recognised as a progress in the company law reform, also suffers the problem of legal certainty and poses more challenges to the courts which are rooted in the civil law culture. It therefore makes sense to ask the SPC to provide interpretations and guidelines for the application of this remedy. In light of the similarity of problems in close companies and the same goal of this remedy, experiences gained in the UK and US are useful for the SPC in drafting the interpretations.

Despite different wording in s.14.30 of the RMBCA and s. 994 of the UK Company Act, the construction of "oppressive" and "unfairly prejudicial" resembles each other. In both countries, it is interpreted as enhanced fiduciary duties and reasonable expectations, with necessary limitations on application for the purpose of balancing protection of minority shareholders' interests and fostering the entrepreneurial spirit of majority shareholders.2

In addition, types of allegations made by minority shareholders are similar across jurisdictions, and certain types of oppression are frequently recurring. The English Law Commission had proposed a new form of remedy based on the most litigated claim but the proposal was not adopted. To make the remedy more feasible, I think the proposed model is a realistic approach for present-day China. Its general wording does not undermine the flexible and broad nature of the remedy, and its list of statutory rebuttable situations enhances legal certainty. Moreover, members in the company will have a better idea of what kinds of actions are subject to litigation, and thus pay closer attention to the relevant area and to their fiduciary duties.

Last but not least, no matter how wisely the court can interpret the legislative terras, without a proper form of relief, the remedy will not be able to solve the plight suffered by minority shareholders properly. In light of the research topic of this book, what concerns me most is the absence of exit relief in this remedy. The only form of relief provided in this remedy is compensation, but as explained, compensation alone is not adequate for shareholder protection in a close company; at a certain point, a `divorce' is necessary and more even sensible.3I therefore suggest exit through a buyout for this remedy, and with the introduction of exit relief, issues of valuation studied in Chapter 3 and Chapter 4 will be of interest to the Chinese legislators as well.

All in all, after research and examination, the conclusion is that the oppression remedy in China has yet to be established. My suggestion is to move the current remedy, Article 20 to the main body of the company law instead of in the general principle part of the company law. In the meantime, I also recommend that indications of judicial standards, a list of rebuttable situations, relief in the form of exit, and valuation principles be added to the remedy.