"Operational Management Difficulty" and "Operational Difficulty" - Analysis of the Legal Focus Issues in Company Dissolution Lawsuits
Jin Lu, Deputy Director Lawyer of Engda Law Firm, and Lawyer Shen Wei, acting as attorneys for the plaintiff, handled a lawsuit for the dissolution of a company, which went through two trials at the People's Court of Hanyang District and the Intermediate People's Court of Wuhan. The final judgment was recently issued. In this case, the plaintiff's request for the dissolution of the company was supported by judgments from both levels of the People's Court.
According to statistics, cases of company dissolution lawsuits constitute a relatively small proportion of civil cases heard by various levels of the People's Court in Wuhan. Moreover, this case marks the first successful representation of a company dissolution lawsuit by our law firm in recent years. In the trial process of this case, the plaintiff and the defendant fiercely contested the focal issue of "operational management difficulty" versus "operational difficulty." The resulting judicial opinions and legal opinions from the lawyers have a positive reference value for similar cases in the future.
I. Case Background
Company A is a nationally renowned business in Wuhan. It, along with Company B, jointly established Company C (Limited Liability Company), with each contributing 50% of the investment. C Company does not have a board of directors, and its executive director, supervisor, general manager, and other senior management positions are appointed by personnel designated by Company B. There are also a series of related-party transaction contracts between Company A and Company C.
Due to internal governance structure issues within C Company, it has long been effectively controlled by Company B. This has led to C Company, in the performance of related-party transaction contracts with Company A, exploiting loopholes in contract terms to undermine Company A's rights and erode its interests. However, Company A, as a shareholder of C Company, is unable to restrain or stop such behavior. In light of this, Company A sought legal advice from our firm with the aim of dissolving the related-party transaction contracts with C Company.
In the research and analysis of this case, Deputy Director Lawyer Jin Lu and Lawyer Shen Wei believed that Company A's request to terminate the contracts did not meet the statutory and contractual conditions. Asserting termination of the contracts rashly would expose Company A to significant breach of contract risks. Considering the equity structure of C Company, its internal governance structure, and the fact that it had not convened a shareholder meeting for over four years, they strongly advised Company A to file a lawsuit for the dissolution of the company. This would lead to the dissolution of C Company, followed by the liquidation and cancellation of its legal entity, automatically terminating the related-party transaction contracts with C Company. This approach would ultimately achieve the litigation goal of protecting Company A's legal rights.
This perspective of the attorneys received high approval from Company A. Consequently, Company A filed a lawsuit for the dissolution of the company, naming C Company as the defendant and Company B as a third party, before the People's Court.
II. Legal Focus Issues in the Company Dissolution Lawsuit
The legal focus of this case lies in determining whether, under the circumstance where C Company operates normally and is profitable, there is a severe operational management difficulty, thus meeting the statutory conditions for the dissolution of the company.
Article 182 of the Company Law of the People's Republic of China stipulates: "When a company encounters severe operational difficulties, the continued existence of the company will cause significant losses to the shareholders that cannot be resolved through other means, shareholders holding more than 10% of the voting rights of all shareholders may request the people's court to dissolve the company." Article 1 of the Supreme People's Court's Provisions on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II) states: "Shareholders holding more than 10% of the voting rights of all shareholders may file a lawsuit for the dissolution of the company based on one of the following reasons, and if it meets the conditions stipulated in Article 182 of the Company Law, the people's court shall accept it: (1) the company has been unable to convene a shareholder meeting or a general meeting of shareholders for more than two years, and the company has encountered severe operational difficulties; (2) when voting, the shareholders cannot reach the statutory or company-stipulated ratio, and they have been unable to make effective resolutions at the shareholder meeting or general meeting of shareholders for more than two years, and the company has encountered severe operational difficulties; (3) long-term conflicts among the directors that cannot be resolved through the shareholder meeting or general meeting of shareholders, and the company has encountered severe operational difficulties; (4) other severe operational difficulties have occurred, and the continued existence of the company will cause significant losses to the shareholders."
According to the above laws and judicial interpretations, "operational management difficulty" is a crucial condition for determining whether a company meets the statutory requirements for dissolution. However, the concepts of "operational management difficulty" and "operational difficulty" are easily confused, causing some interference and difficulty in the trial of company dissolution cases. The author believes that "operational management difficulty" and "operational difficulty" have both formal and substantive differences.
In formal terms, "operational management difficulty" refers to difficulties at the level of the company's management control by its power structure. It specifically manifests as the company's operational activities not being subject to the legal control of the shareholder meeting, the board of directors (executive director), and the supervisor but rather being controlled by individual shareholders or even third parties. In contrast, "operational difficulty" refers to difficulties in the company's external operational activities, such as losses or a decline in business performance.
In substantive terms, "operational management difficulty" is essentially difficulties occurring "internally" within the company. It means that the company's power structure cannot or does not have the authority to exercise management rights. The company's power structure falls into a paralyzed and disorderly state, and disputes among shareholders, conflicts among directors, etc., causing a deadlock in the company, cannot be resolved through the shareholder meeting or other means, leading to significant losses to one party's interests (including the shareholder's shareholder rights or economic interests). On the other hand, "operational difficulty" is essentially difficulties occurring "externally" to the company. It means losses to the company's interests due to external operational losses or a decline in business performance.
Looking at it dialectically, the occurrence of "operational management difficulty" in a company does not necessarily lead to "operational difficulty," and the absence of "operational difficulty" does not necessarily mean the absence of "operational management difficulty." There is no necessary connection or causal relationship between the two.
In this company dissolution lawsuit, not only was C Company operating normally externally, but it was also profitable, making it unsuitable for the circumstances of "operational difficulty." However, C Company had not convened a shareholder meeting for four consecutive years. After the expiration of the terms of the executive director and supervisor, they were not re-elected through the shareholder meeting. The power structure of C Company was entirely paralyzed. With each of A Company and B Company holding 50% of the investment in C Company, the shareholder dispute between A Company and B Company was evidently unable to be resolved through the shareholder meeting. C Company, controlled by one shareholder, B Company, had caused serious damage to the interests of A Company. All these circumstances fell entirely
