The “one-vote veto” of the board of directors is a common contractual clause and mechanism in the practice of equity investment and financing. This mechanism balances the right to speak of both investors and financing parties (large and small shareholders) At the same time, it has had a great impact on the traditional "one person, one vote" voting mechanism of the board of directors. "one-vote veto" can be arbitrarily agreed? What should we pay attention to in terms of its effectiveness, clause design, applicable boundaries, trap prevention, etc.? This article discusses these issues in conjunction with the introduction of terms, laws and regulations, and judicial cases.
01 Introduction to the “one-vote veto” of the board of directors
“The one-vote veto of the board of directors” generally refers to the shareholders’ investment agreement and the company’s articles of association. Or the unanimous consent of several directors can be effectively passed, that is, one or several directors have the right to veto the matters resolved by the board of directors.
The "one-vote veto" clause can also be called the "protective clause", which can be said to be a standard clause in the venture and equity investment agreement. Under the equity investment model, financial investors generally do not require the control of the target company's operations. After completing the investment, they generally do not send personnel to participate in the daily operation and management of the target company. They usually participate in the decision-making of major issues of the target company by appointing directors. And supervision. Because financial investors occupy a minority of seats on the board of directors, it will not form a majority advantage. Therefore, investors generally require a "one-vote veto" clause in the investment agreement.To protect our own rights.
The content of the one-vote veto clause is generally that the investor is required to have a veto when the target company’s shareholders meeting or board of directors vote on specific resolutions (generally related to their own interests) right. The one-vote veto clause is set up to enhance the voice of investors as small shareholders, protect the interests of investors, and prevent large shareholders and their management teams from abusing their voting rights.
02 Design example of terms
The capital investment (increasing) is completed, and the board of directors of Party A (the target company) is composed of 3 persons, including Party B (the original shareholders) nominated Director, Party C (investor) nominates 1 director.
Party A’s board of directors shall determine the authority for foreign investment, acquisition and sale of assets, asset mortgages, external guarantees, entrusted wealth management, and related transactions, and establish strict review and decision-making procedures. Prior to the successful IPO of the target company, the following matters shall be reviewed and approved by the company’s board of directors or the shareholders’ meeting in accordance with the company’s articles of association. The resolutions of the board of directors must be confirmed by the vote of at least one investor’s director before a resolution can be formed; for the resolutions of the shareholders’ meeting, The shareholder representative of the investor must agree to form a resolution:
(1) Formulate the company's annual financial budget plan and final account plan;
(s ) Plan to reduce registered capital and issue corporate bonds;
(3) Formulate plans for company merger, division, change of company form, and dissolution;
(4) The company’s main business changes;
(5) Appoint or dismiss the general manager of the company;
(6) Employ or replace the accounting firm that is audited by the company;
Determines the cumulative loan balance of span13span Or loans or borrowings of more than 5 million yuan;(8) Any external equity investment of the company;
(9) The company has reached or exceeded the company's cumulative amount in 12 consecutive months Acquisition and sale of assets of 20% of net assets in the most recent period;
(10) Related transactions between the company and related parties; _span13 span
(11) Develop a plan to amend the company's articles of association.
03 The effect of the “one-vote veto” of the board of directors
// The legal effect of the one-vote veto of a limited liability company _span0 p2p _span0 Article 42 of the "Company Law" stipulates that shareholders of a limited liability company shall exercise their voting rights in accordance with the proportion of their capital contributions at meetings of the shareholders' meeting of a limited liability company, unless otherwise stipulated in the company's articles of association. Article 48 of the "Company Law" stipulates that the discussion methods and voting procedures of the board of directors of a limited liability company shall be stipulated by the company's articles of association, except as provided in this law. Therefore, after a limited liability company has made a special agreement on the voting method of the shareholders meeting and the board of directors through the company's articles of association, the directors and shareholders can exercise one-vote veto power. Cases concerning the one-vote veto power of the board of directors, for example: Qihoo 360 Software (Beijing) Co., Ltd. vs. Shanghai Laoyouji Network Technology Co., Ltd., Jiang Mouwen, etc. 2014) Hu Er Zhong Min Si (Shang) Zhong Zi No. 330 Civil Judgment), Beijing Golden Crown Automobile Service Co., Ltd. and Donglian Technology Co., Ltd. Resolution Dispute Revocation (Beijing Higher People's Court (2009) Gao Min Zhong Zi No. Civil Judgment No. 1147).
// The legal effect of the one-vote veto of a company limited by shares
It can be seen that the "Company Law" does not allow joint stock companies to grant shareholders and directors one-vote veto power through the company's articles of association. Therefore, there is no corresponding law to establish a “one-vote veto” in a joint stock company. Base.
04 The applicable boundary of the “one-vote veto” of the board of directors
Can the “one-vote veto” of the board of directors be arbitrarily agreed by the parties? If not, where is the boundary? In practice, there are often investment agreements stipulating that directors have one-vote veto clauses on major matters, including "company's capital increase or decrease, amendment of the company's articles of association, company merger and division, profit distribution to shareholders, dividend distribution", etc., which should be exercised by the shareholders meeting. Agreement of powers. How effective is this type of agreement that delegates the responsibilities of the shareholders meeting to the board of directors?
First, the scope of application of the “one-vote veto” of the board of directors cannot exceed the scope of the board of Responsibilities:
(1) convene a meeting of the shareholders meeting and report to the shareholders meeting; (2) implement the resolutions of the shareholders meeting; (3) decide the company's business plan and investment plan; (4) Formulate the company's annual financial budget plan and final account plan; (5) Formulate the company's profit distribution plan and loss recovery plan; (6) Formulate the company's increase or decrease of registered capital and issue corporate bonds; (7) Formulate company mergers and divisions , Dissolve or change the form of the company; (8) decide on the establishment of the company’s internal management organization; (9) decide on the appointment or dismissal of company managers and their remuneration matters,And according to the manager’s nomination, decide to hire or dismiss the company’s deputy manager, financial officer and their remuneration; (10) formulate the company’s basic management system; (11) other functions and powers stipulated in the company’s articles of association.
The key to this question is where is the boundary of "other powers stipulated in the articles of association" in Article 46 (11) of the company? Can the shareholders' meeting delegate all or part of its responsibilities to the board of directors, so that it can be restricted by the board of directors' "one-vote veto" mechanism?
Modern companies, especially the distribution of internal rights of open companies, are clearly stipulated by law based on the principle of "mutual cooperation-mutual restriction-mutual supervision", which should be mandatory in principle. Moreover, this kind of structure is also formed during the long-term development of the market. The effective rights structure has been tested by practice. The company law has fixed this beneficial and effective structure through mandatory regulations. If the parties are allowed to configure at will, it will lead to the collapse of the corporate governance structure. For a closed company, the theory and development trend tend to be arbitrary, because the closed company pays more attention to cooperation and the number of shareholders is small, and most of the shareholders serve as the company’s board of directors and management personnel. , Is familiar with the company’s business decision-making matters, and shareholders can freely arrange the company’s rights structure through mutual negotiation. However, judging from my country's judicial practice and the law enforcement of relevant administrative agencies, my country's relevant understanding is still very conservative. In terms of the rights structure and distribution of the organization of a limited company, when the company's articles of association are registered, the administrative agency generally does not allow the parties to change it arbitrarily, unless the law clearly stipulates it. It is generally believed that the following specifications for closed companies in the company law are mandatory, and the parties cannot arbitrarily agree to change:
(1) The board of directors hiring managers and supervising the management of the legal standards;
(2) Regulations on corresponding mechanisms designed to ensure the exercise of rights by various institutions;Provide preconditions for shareholders to vote on financial data and a disclosure mechanism for major issues.
(3) The specific rights of the shareholders' meeting and its exercise procedures, including the power to modify the company's articles of association, the power to determine major changes in the company's economic structure, and the right to approve specific transactions.
(4) In order to protect the rights and interests of minority shareholders from infringement, specific powers given to minority shareholders. For example, my country's "Company Law" stipulates that the shareholders of limited liability companies have the right to apply for cancellation or to declare the shareholders' meeting, the right to invalidate the resolutions of the board of directors, the right to know, the right to convene shareholders' meetings, the right to purchase shares of dissenting shareholders, and the right to apply for dissolution of the company.
Based on the above judgments, it can be recognized that the shareholders’ meeting can neither authorize the board of directors to exercise its powers in Article 37 of the Company Law, nor has it the right to delegate the powers of the board of directors in Article 46 of the Company Law. The power is raised to the shareholders meeting to exercise. The "other powers and powers" conferred by the articles of association on the functions and powers of the shareholders meeting and the board of directors in the company law should not include the first to tenth powers in Article 37 and Article 46 of the "Company Law".
Therefore, the boundaries of the powers of the shareholders meeting and the board of directors should be determined. The relevant provisions of the company law are mandatory, and arbitrary restrictions or expansions are not allowed. If it is stipulated in the investment agreement that the director appointed by the investor shall have a veto power in the exercise of the functions and powers that should be exercised by the shareholders' meeting, the agreement may be invalid due to violation of mandatory laws and regulations. For example, in the (2013) Huyi Zhongmin Si (Shang) Zhongzi No. 822 Company Resolution Confirmation Dispute, the court of second instance held that “in accordance with the provisions of the Company Law, shareholders receive dividends in proportion to their actual capital contributions. However, all shareholders agree not to receive dividends in accordance with the proportion of their capital contributions, except for those.
It can be seen that asset income is one of the fundamental rights enjoyed by the company’s shareholders. All shareholders of the company should decide the distribution plan of the company’s undistributed profits. Even if there is a situation where dividends are not distributed according to the proportion of capital contributions, it should be established On the basis of the approval of the distribution plan by all shareholders of the company. At 15:00, the shareholders’ meeting resolution generally authorizes the board of directors to decide on the distribution plan of the shareholder bonus for the post, and stipulates that “the shareholders’ meeting has approved the previous and future shareholders’ bonus distribution plan decided by the board of directors”. The content of the resolution did not take into account the future. Whether the company has profit, how much profit, and what is the specific bonus and profit distribution plan for the shareholders of the post, that is, when the shareholders cannot foresee the loss of their own interests and have not been fully discussed by all shareholders, they have not notified the issues for shareholders to analyze the resolution to their shareholders. Whether the interests are harmed, the content of the resolution restricts shareholders’ veto of the unknown bonus profit distribution plan. Once implemented, it is completely possible to terminate or restrict the shareholder’s right to return assets. Therefore, the content of the resolution of the shareholders meeting violates the provisions of the law. Should be confirmed as invalid. "
05 Trap prevention
// Tips to the financing party
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p , Improperly prompting to bet against the achievement or unfulfillment of the conditions of . In the negotiation stage, the financier needs to carefully consider the investor’s “one-vote veto”. If “one-vote veto” is unavoidable, it can be Consider adding corresponding clauses governing investors' improper use of the one-vote veto in the investment and financing documents, such as clearly enumerating or describing in detail the form and scope of the investor's abuse of the one-vote veto. Otherwise, it will be difficult to determine the investment in litigation or arbitration Fang abused the "one-vote veto power."In practice, litigation or arbitration committees often have the following similar views on this issue, which can be used as a reference when it comes to the issue of the "one-vote veto" of the board of directors: The right of veto” also cannot rule out that the objection was made based on normal commercial interests and commercial risks.
There is no contractual basis for the right to claim damages.
(3) The target company’s successful listing will bring investors far more profits than investors can obtain by claiming equity repurchase rights, so investors do not have the right to abuse “one-vote veto” "A motive that deliberately prevents the target company from going public.
(4) Investors appoint directors to participate in the operation and management of the target company, and exercise the “one-vote veto” in accordance with the investment agreement or the company’s articles of association. There are many kinds of things. The shareholders of the target company cannot provide evidence that the deterioration of the target company’s business conditions is caused by investors’ abuse of the “one-vote veto”.
// Reminder to investors
when shareholders vote to set up 11span 11spanBe careful not to exceed the applicable boundaries of such rights and set them as invalid rights.
// Reminders to the company to be listed
, otherwise major changes in the company’s listing rights will not affect the progress of the listing. The company's listing control on the domestic main board and the small and medium board cannot change in the last three years, and the control of the GEM listed company cannot change in the last two years. Therefore, once it is determined that a veto power has led to the formation of joint control of the company, it means that the actual control power has changed, and all listing cycles must be recalculated.
Part of the content of this article is an excerpt from the relevant chapters of the "Gambling Agreement" Practice Book-Operation Guidelines and Judgment Rules by Lawyer Liu Pengfei (published by China Legal Publishing House in 2021, Dangdang, Jingdong , Taobao, etc.)
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