Shareholders’ right to information under new Company Law

Shareholders’ right to information grants shareholders the ability to understand a company’s operational and financial status, as well as other matters closely related to their interests. This right is the basis for shareholders to exercise their common interests and assert other individual rights. The new Company Law aligns with practical needs and legislative trends in protecting and enhancing shareholders’ rights.

Right to information

Right to inspect and copy. According to articles 57 and 110 of the new Company Law, shareholders of joint-stock companies and limited liability companies can inspect and copy the companies’ articles of association, shareholder registers, minutes of shareholder meetings, board resolutions, supervisory board resolutions and financial reports.

Additionally, shareholders are entitled to inspect companies’ accounting books and vouchers. However, for joint-stock companies, access to accounting books and vouchers is restricted to shareholders who individually or collectively hold at least 3% of company shares for more than 180 consecutive days (unless individual companies’ articles of association specify a lower shareholding threshold).

Shareholders also have equivalent rights to inspect and copy relevant materials of wholly owned subsidiaries. Furthermore, shareholders may delegate intermediaries to conduct the inspections on their behalf.

Right to obtain financial reports. Articles 129 and 209 of the new Company Law stipulate that limited liability companies must deliver financial reports to shareholders within the period specified in the articles of association. Joint-stock companies must make financial reports available for inspection at the companies 20 days before annual shareholders’ meetings. Publicly listed joint-stock companies must announce their financial reports. Companies must regularly disclose the remuneration of directors, supervisors and senior management to shareholders.

Right to inquire. Article 110 of the new law grants shareholders of joint-stock companies the right to make suggestions or inquiries about company operations.

Application scope

The right of shareholders to inspect accounting vouchers has been a contentious issue in judicial practice. Following the enactment of the new law, several courts have ruled retroactively on disputes concerning shareholders’ right to information.

In a case concerning a shareholder’s right to information, the Tianjin Third Intermediate People’s Court stated: “Accounting vouchers are written evidence recording the occurrence or completion of economic transactions and serve as the basis for bookkeeping. Although Chen’s request to inspect the company’s accounting vouchers and the related civil dispute occurred before the new Company Law came into effect, the full text of the new Company Law was publicly released by the end of 2023. Therefore, the company had a reasonable expectation that Chen would be allowed to inspect the accounting vouchers.” Consequently, the court retroactively upheld the shareholder’s request to inspect the accounting vouchers (For a discussion on retroactivity, see China Business Law Journal, volume 15, issue 7: Case analysis: retroactive application of new Company Law).

Access through penetration

Before the new law, shareholders’ attempts to obtain information through penetration were rarely supported. Most cases held that while a parent company has the right to information about its subsidiary, the shareholders of the parent company, as investors, enjoy shareholder rights only in the company in which they have invested, and have no direct legal relationship with the subsidiary.

The new law expands the scope of shareholders’ information rights to include wholly owned subsidiaries. This provides stronger protection for shareholders to exercise their right to information. Additionally, the new law introduces a “double derivative suit system” which, combined with the exercise of the right to information through penetration, can be used in numerous disputes.

Refusal of inspections

Balancing the interests of shareholders and companies is crucial and the right to information should be limited under certain circumstances. In complex corporate disputes, companies can consider various strategies to appropriately restrict shareholders’ right to inspect accounts.

First, the exercise of the right to information is contingent on shareholder status. Once a shareholder loses qualifying status, the corresponding right to information is also lost. In judicial practice, judgments based on the specifics of individual cases must be made in determining whether former shareholders still have the right to information despite losing their status due to share transfers, removal or forfeiture, significant defects in their contributions, shareholder anonymity, or holding rights in share pledges.

Second, necessary pre-procedures must be followed in lawsuits concerning the right to information. The new law stipulates that shareholders requesting to inspect a company’s accounting books and vouchers must submit written requests to the company stating their purposes. For other documents, no reason is needed for inspection. However, whether shareholders can bypass the company and directly file a lawsuit or correct this in the first instance still requires consideration by relevant legal interests, and judicial practice varies in these situations.

Third, the legitimacy of a shareholder’s purpose is a fundamental criterion for determining the right to inspect a company’s accounting books and vouchers. Article 8 of Company Law Interpretation IV lists examples of “improper purposes”, such as when a shareholder operates or assists in operating a business that substantially competes with the company’s main business, inspects company accounting books to inform others, or has inspected the books within the past three years and disclosed information that harmed the company’s legitimate interests.

Fourth, for listed companies, the exercise of shareholders’ right to know must comply with the Securities Law and other regulations. Information disclosure for listed companies is strictly regulated. For instance, periodic reports disclose only basic information about the top 10 shareholders, while real-time shareholder information is subject to the register maintained by the securities depository and clearing institution. Article 83 of the Securities Law stipulates that information disclosed by the obligor must be simultaneously disclosed to all investors and not leaked in advance.

The new Company Law aims to facilitate shareholders’ convenient exercise of their right to information and resolves several practical disputes. If a company disagrees with a shareholder’s request to exercise this right under the new Company Law, it must provide substantial evidence to justify the restriction.

Yi Xiangming is a partner and He Lingyu is a paralegal at Zhong Lun Law Firm