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Arbitrability of intra-company disputes | Review of business law in China

IIntra-company disputes are usually resolved by the courts in China, but the absence of special procedural rules in the Civil Procedure Law leads to lengthy and laborious settlements, with the parties either unable to reach a satisfactory result, either loser more than winner due to the long and uncertain process.

In this light, arbitration can be a useful alternative to resolve these disputes, as it is both more professional and efficient, contributing considerably to the improvement of the business environment.

SEIZE ARBITRATION

China has made some progress in arbitrating intra-company disputes. Article 5, paragraph 2, of the notices on the legal conduct of the pilot program on arbitration in the securities and futures industry, jointly published in 2021 by the China Securities Regulatory Commission and the Ministry of Justice, provides that in securities or futures disputes, civil compensation, if an arbitration clause is included in the contract or agreement between the investor and the aggrieved party, or is included in the articles of the company, the investor may request arbitration in accordance with these clauses.

Thus, although the notices apply primarily to investment-related compensation disputes, they provide that consent to arbitration can be established by including an arbitration clause in the articles of association, which is an important signal.

At the same time, article 7 of the Preliminary clauses of the articles of association of companies seeking to be listed outside provides that recourse to arbitration is one of the means of resolving intra-company disputes. Section 163 clearly states that the clause by which any dispute arising out of the articles of association shall be submitted to arbitration must be incorporated into the articles of association of any company wishing to be listed in Hong Kong.

For example, the bylaws of Fortune 500 real estate developer Vanke, with a respected reputation on governance structures, provide for arbitration for the resolution of intra-company disputes. Article 268 of its articles of association states directly: “If any dispute or claim concerning the activity of the company on the basis of the rights or obligations provided for in the articles of association of the company, or in company law, or other laws or administrative regulations arise between a holder of foreign investment shares listed outside the People’s Republic of China and the company, between a holder of foreign investment shares listed outside the People’s Republic of China and a director , a supervisor, director or other senior management of the company, or between a holder of foreign investment shares listed outside the People’s Republic of China and a holder of domestic investment shares, the parties involved will submit the dispute or claim to arbitration. »

As the benefits of arbitration are gradually understood and accepted, not only companies seeking to list on stock exchanges outside of China, but also domestic companies have begun to incorporate arbitration clauses into their articles of association, as asserted and supported by opinions.

It can therefore be expected that the opinions will further promote the arbitration of intra-company disputes.

RELEVANCE OF ARBITRATION

Generally, the key factor in assessing whether an intra-company dispute can be settled by arbitration depends on its compliance with the arbitrability requirements.

First, is there a valid arbitration clause or agreement with real intent? The key question here depends on whether the articles of association can be treated as a contract.

From the practice of arbitration of intra-company disputes, it is generally considered that the statutes of an association have both organizational and contractual attributes, and can be assimilated to a contract. Also, in practice, it is not uncommon for the shareholders of a limited liability company to govern the company by adopting the shareholders’ agreement. Therefore, there is nothing in theory or in practice to prevent the statutes from being treated as a contract.

Second, how can “affected persons” – ie other shareholders and the company who were not presented as parties to the arbitration proceedings – be protected? Taking as an example a dispute over the validity of a corporate resolution, when a shareholder files a request for the resolution to be revoked, how is it possible to protect the others concerned and avoid a possible conflict between different awards when other shareholders initiate another arbitration procedure?

As a remedy, arbitration institutes should consider the special nature of intra-corporate disputes when designing complementary rules for corporate law disputes, including: (1) ensuring that other affected persons are informed of the progress of the arbitration procedure; (2) ensure that other affected persons have an equal opportunity to participate in the arbitration process; and (3) ensure that all disputes relating to a particular shareholder resolution are resolved in the same arbitration case, which means providing a consolidated arbitration mechanism to avoid conflicting decisions. Generally, where expressly provided for in the arbitration rules, there are no procedural barriers to resolving multi-party intra-corporate disputes through arbitration.

The final questions: Is the question of the capacity of a company as a legal person (for example, dissolution) arbitrable? And how can other stakeholders, such as creditors, be protected?

A cautious attitude must be adopted with regard to these questions. The main obstacle is that arbitration institutes currently do not have the power to appoint a liquidator, and the confidential nature of arbitration leaves no possibility of informing other stakeholders, such as creditors, by public announcement. .

For example, in the dispute relating to the dissolution of China BlueChemical vs. Yangpoquan Coal Mine and Shanxi Hualu Thermal Power (2016)the Supreme People’s Court ruled that a shareholder could apply to the people’s court rather than an arbitration institute to dissolve the company, indicating that current judicial practice in China tends not to recognize arbitration jurisdiction in the event of the dissolution of a company.

However, the impossibility of directly dissolving a company does not prevent the arbitration institute from hearing contractual disputes relating to the existence of the company. Indeed, article 103 of the law on general partnerships also provides that any intra-partnership dispute may be submitted to arbitration.

Currently, the arbitration institutions represented by the Beijing Arbitration Commission/Beijing International Arbitration Center have explored many interesting experiences in resolving intra-company disputes of private equity funds (in the form of partnerships) , which will also be applicable to the resolution of intra-company disputes. disputes in the future.

In conclusion, when a company’s articles of association stipulate that intra-group disputes must be settled by arbitration, this is feasible in theory as well as in practice.

However, when internal company disputes involve other shareholders, their rights to be informed and to participate in the arbitration procedure should be protected before the start of such a procedure. Improving the special rules for arbitration in the future will go a long way towards resolving these disputes satisfactorily.


Li Mi is a case manager at BAC/BIAC

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