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Disputes over Shareholders’Preemptive Right in Limited Liability Companies

Q:   What are the key facts and disputes of the related case?

A:    In 2010, the Supreme People’s Court initiated the retrial procedure to hear the dispute

among Mianyang Hongri Industry Co., Ltd., Jiang Yang and Mianyang Gaoxin District

Technology Innovation Industry Co., Ltd. over the validity of a resolution adopted by the

shareholders’ meeting with concerns the company’s capital increase ((2010) Min Ti Zi No. 48, the “Supreme Court Case”).

In that case, Mianyang Gaoxin District Technology Innovation Industry Co., Ltd. (“Technology      Innovation Co.”) failed to offer its original shareholders the option to exercise their

preemptive right to subscribe to the increased amount of capital; instead, the shareholders’

meeting directly resolved to let third parties subscribe to the entire amount of new capital by following the capital majority rule, thus infringed the original shareholders’ priority to

contribute to the new capital in proportion to their capital contributions.

The disputes focused on: (i) whether the Shareholder Resolution on the increased capital to

Be subscribed by the third party and the Agreement of Capital Subscription are valid; (ii)

Whether could the infringed original shareholders exercise the preemptive rights?

The court finally held that the portion of the new capital on which the original shareholders could have exercised their preemptive right shall be null and void on the ground of the infringement, whereas the Agreement on Subscription with the third party was regarded as effective.

Furthermore the court considered that the infringed original shareholders did not exercise their

Preemptive rights, and therefore denied their requirement of exercising preemptive right.

Q:   What are the implications of this case?

A:   The Supreme Court Case is a rather typical dispute in regard to the infringement of

shareholders’ preemptive right in limited liability companies during the process of capital

increase. This case has fully illustrated that shareholders’ preemptive right is protected by law, and that such right cannot be deprived of or restricted, albeit the capital majority rule abused by the company.

Nonetheless the upholding of the Agreement of Subscription reflects the legal principle that

Flaws of internal procedures cannot be used against the third party of bone fide.

The most import implication of this case is regards the exercise period of preemptive right.

The opinion of the Supreme Court serves guidance where there lacks clear regulation on this point. In this case the Supreme Court considered that the original shareholders’ preemptive right to subscribe increased capital of a Company is a kind of right of formation, and it should be exercised within a reasonable time limit to safeguard security and stability of economic


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