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Disputes of Shareholders in Real Estate Companies Case Analysis (4): Disputes over the Right to Know

Background outline

After a real estate development company (hereinafter referred to as "B company") is capitalized by Company A, the shareholding structure is as follows:

Company B was originally a sole proprietorship company of Mr. Zhou. In a real estate development project, Company B needs to pay a land payment of 100 million yuan. Mr. Zhou’s cousin Zhao said that his company A could merge with company B. Therefore, Company B and Company A signed the Capital Increase Agreement, stipulating that: Company A will increase capital by 120 million yuan to Company B, holding 60% of the shares, and the registered capital of the company will increase to 200 million yuan. Subsequently, both parties handled the procedures for industrial and commercial change registration. The executive director of the company was represented by Mrs. Zhou and the general manager was represented by Zhao. After Company A became a shareholder, it operated and controlled Company B.

During the project, Company B held a shareholders meeting to make a resolution to introduce a listed company as a sales partner. The real estate project is appointed by the listed company to manage the sales team and use the listed company brand for publicity and sales. At the same time, Company A urged Mr. Zhou to sign a loan agreement of RMB 180 million with the listed company. Mr. Zhou believed that the terms were too harsh and refused to sign the agreement. There was tension between the two parties. At the same time, the two sides disagreed in the direction of the company's development, and they were unable to reach an agreement on the exit of the equity, leading to further escalation of the tension. Therefore, Mr. Zhou and Mrs. Zhou entrusted us with this issue in hopes to regain control of the company.

Case progress

In the second half of 2018, Company B began to pre-sell the property, and the property was high in demand. The first and second phases of the property were sold out. 

In March 2019, Mr. Zhou heard that Zhao of Company A took more than 100 million yuan in cash from the company's account. Mr. Zhou was very worried about whether the company had sufficient funds to support the development of the next few projects. He sent an application to the company and Zhao’s residence to request the exercise of the shareholders’ right to know. The express delivery has been signed, but the company and Zhao did not reply.

Countermeasures

We filed a lawsuit to attain the shareholders' right to know the company's true financial status by consulting the company's accounting books.

In this case, there are two issues that need to be addressed:

1. The shareholder's right to indict a suit should perform the pre-procedure. The application for Mr. Zhou's request to exercise the shareholder's right to know is not signed by the company and Zhao himself. The other party is likely defend against this;

2. Mr. Zhou owns a self-operated construction development company in a province in southwestern China. The other party can claim that “the purpose would not be valid and providing the right may damage the legitimate interests of the company”.

In response to the above two issues, our lawyers had analysed and exhibited the following:

1. A copy of the litigation materials sent by the People's Court may also be considered a written request.

In this case, the court delivered a copy of the litigation documentation to Company B, including Mr. Zhou’s application for the exercise of the shareholders’ right to know. Therefore, the statutory pre-procedure has been completed.

In judicial practice, the courts have mostly adopted this view, as seen in the case of the Supreme Law Bulletin, Li Shujun, Wu Xiang, Sun Jie, Wang Guoxing v. Jiangsu Jiade Real Estate Development Co., Ltd., the second instance of the dispute of shareholders' right to know; Shanghai First Intermediate People's Court heard Haihengyi Electromechanical Technology Co., Ltd. v. Zhang Xuening's shareholder informed consent dispute.

2. The plaintiff’s request for access to the accounting books has no “unfair purpose”.

Article 8 of the Judicial Interpretation 4 of the Company Law (Law [2017] No. 16) stipulates that if a limited liability company has evidence to prove that one of the following circumstances exists, the people's court shall determine that the shareholder is able to enact Article 33 of the Company Law. The "unfair purpose" of the provisions of the paragraph: (1) The shareholders who are self-employed or operate for others to have a substantial competitive relationship with the company's main business...

Mr. Zhou's main business is industrial and civil construction, while Company B's main business is real estate development and operation. Mr. Zhou’s main place of business is in a southwestern province, and the company’s place of operation is in a coastal city in the southeast. The real estate industry has obvious regional characteristics. In judicial practice, when the court judges the “substantial competitive relationship” of the real estate industry, The regional characteristics of the real estate industry are usually given priority, as seen in the case of Lei Hong of the Ningbo Intermediate People's Court and the shareholder's right to know the dispute of Ningbo Hangzhou Bay New District Hongzhaofengye Real Estate Co., Ltd. ((2018) Zhejiang 02 Minsheng 1674).

Therefore, the main business of the two companies has no substantive competition, and Mr. Zhou’s request for access to the accounting books has no improper purpose.

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