5.4.1 Introduction

The general features of a close company in the UK and US can also be identified in close companies in China, i.e. majority control and illiquidity of shares. As a result of the same features, the same kinds of problems, such as oppression, are also familiar in close companies in China. In fact, the problem of oppression is quite serious in China, and effective remedies are needed to protect minority shareholders from abuse of majority power.

Faced with oppression, the minority shareholders may have two options: to stay in the company and fight for their legitimate interests or to leave the company with the fair value of their shares. To protect the interests of minority shareholders, company law should guarantee that minority shareholders are given possibilities to make such choices. This holds even more for China because without first confirming the existence of the relevant remedies in statutes, the Chinese courts generally will not accept the petitioner's claim (Li'an in Chinese).1 Even if a court decides to accept the case in the belief that the interests of the shareholders have been harmed, when no related remedies can be found in the company law, it is possible that the claim will not be allowed. The following case judged by Shanghai Middle Court serves as a good example. The plaintiff, Mr Zhu, was a minority shareholder owning 16 per cent of the shares in a close company.2 In the course of business operations, the relationship between Zhu and the majority shareholder Wang deteriorated; conflicts between them had escalated from an intense verbal to a physical fight. Bad blood developed and one year later, Mr Zhu was dismissed from his position as vice manager without any reason offered. Zhu therefore wanted to leave the company. Considering the situation in the company, however, he could not find a third party willing to buy his shares at a reasonable price. So he petitioned the court and asked to have his shares repurchased by the company. It was obvious that the petitioner had been seriously oppressed by being excluded from management, and onder the English unfair prejudice remedy or the US oppression remedy, he would be entitled to leave the company with the fair value of his shares. The Chinese court did not allow his claim on the ground that there were no provisions in the Chinese Company Law (1993) or interpretations by the SPC for any relief in case of oppression. Moreover, exit relief through buyout in a close company was not allowed by law. Zhu thus had to stay locked in the company and continued to be oppressed because Chinese company law offered no such remedy as the oppression or unfair prejudice remedy which allows a minority shareholder to challenge a legal action and also to leave the company. This case was just one of the examples reflecting the deeply felt lack of an oppression remedy in practice, especially the lack of a way out in close companies in China.

This chapter undertakes the task to explore the current situation in this area after the amendment of company law in 2006. It starts with the question whether a remedy which constrains majority power has been introduced, or other ways to tackle the oppression problem have been provided. After examination, it shows that Article 20 together with Article 153 provides a similar remedy in the Chinese company law. This assumption is based on the fact that the remedies derived from these two articles employ general wording to constrain majority power (Article 20) as well as the conduct of directors (Article 153), and give the courts ample discretion to address fairness. For instance, Article 20 prohibits shareholders from `abusing the rights' to prejudice the interests of other shareholders. The same as the oppression and unfair prejudice remedy, this remedy is standard-based.

As this is a relatively new remedy with an undefined scope, few cases have been litigated before the court. This section therefore does not intend to conduct a detailed comparison of court judgments based on this remedy, but aims to point out the major differences of the oppression remedy in China from those in the UK and US, and further explore the major problems faced by this remedy in China. Given the similarity of problems in these remedies resulting from the similarity of problems occurring in close companies, the laffer part of this section attempts to answer the question: To what extent might the insight into such remedies of the UK and US law make sense in the context of Chinese corporate law?