One of the judicial dissolution requirements stated in Article 183 of the Amended Company Law is that the applicant must “represent 10% of all the voting shares” of the company. This requirement is comparatively clear for limited liability companies; while the applicant is a minority shareholder, they must hold at least 10% of the company’s outstanding shares stated in the company bylaws.
However, applying this requirement to CJVs that do not have a shareholders’ registry is more complex. Although CJVs are limited liability companies consisting of parties that contribute to the whole and that register their proportion of the contributions with the relevant authorities, CJVs do not have shareholders’ meetings to cast votes to exercise their rights. Instead, management rights within a CJV reside with the board of directors and the board of directors vote to protect the shareholders’ interest. The proportion of capital contribution is not directly related to the profit and loss ratio within a CJV. How shall the shareholders’ voting rights be interpreted?
Some believe that the "shareholders’ voting rights" in CJVs is equivalent to the proportion of seats of the appointed directors at the board meeting based on the following reasoning: First, a fact to support this view is that CJV directors are usually appointed by corresponding shareholders and each director has the right to cast one vote. So the number of directors that one shareholder can appoint is consistent with his/her proportional capital contribution compared to the total capital investment. Secondly, since CJVs have a special organizational structure, it is possible that a shareholder who is not sufficiently represented by the board of directors compared to that shareholder’s capital contribution can use its de facto right to cause an increase in board seats to appoint an appropriate number of directors to the board to represent the corresponding equity interest. However, the preceding equalization alternative is subject to further consideration. As a shareholder voting right is a legal concept, it is determined based on the ratio of capital contribution, rather than de facto rights, unless otherwise provided in the company bylaws. Therefore, it is not appropriate to simply equate the shareholder voting right to the ratio of board seats. Second, Article 183 of the Amended Company Law sets the minimum requirement to exercise shareholder voting rights to request judicial dissolution at “not less then 10% ownership of voting rights” is intended to prevent the abuse of judicial dissolution by minority shareholders. Shareholders who hold less than 10% of voting rights are required to collaborate with others to satisfy the minimum requirement; this demonstrates the capital contribution character of the limited liability company. If “shareholders’ voting rights” corresponds to the ratio of board seats, the required voting proportion will be lost in the CJV organizational structure, which may allow a shareholder contributing less than 10% of total capital contribution to appoint at least one director. Since the board directors in CJVs usually consist of less than 10 directors, even appointment of one director provides a minority shareholder sufficient power to satisfy the Article 183 minimum of 10% voting rights. Such application will not prevent abuse of judicial dissolution of CJVs and there is no scientific basis to correspond the “shareholders’ voting rights” to the ratio of board seats, which is contrary to the legislative intent of Article 183 of the Amended Company Law.
If the voting percentage is decided based on the ratio of capital contribution, then how can shareholders with less than 10% capital contribution enjoy de facto rights of more than 10%? Often in CJVs a minority shareholder may provide important business assistance and receive in exchange increased rights in management, operation and profit sharing.
If Article 183 cannot be interpreted broadly, then CJVs need to implement preventive measures to protect the rights of minority shareholders. For example, CJVs can incorporate into the joint venture contracts or company bylaws practical terms that range from controlling board management to daily decision-making activities, avoidance of potential disputes, termination of joint cooperative contracts, asset liquidation upon dissolution, fair assumption of liability and asset distribution. When such preventive measures fail -- or when a CJV has reached a point necessitating efficient liquidation, equitable assumption of debt and distribution of bankruptcy assets – the parties to the CJV may seek dissolution through litigation or arbitration. The litigation or arbitration results will specify the specifics of general liquidation or specific liquidation of a CJV. If necessary, the litigation or arbitration process may be engaged to apply for termination of a joint cooperative contract. “Other alternative mechanisms” can be provided in addition to regular or special liquidation. This is further discussed in section three.
