How to handle shareholders opposing a corporate restructuring plan

A corporate restructuring plan is a strategic step that shapes the future of a company. However, when faced with strong opposition from shareholders themselves, the entire process may go off track. How can companies equip themselves with sufficient legal knowledge to effectively deal with shareholders opposing a corporate restructuring plan? Let NPLaw provide a comprehensive analysis of shareholders’ rights and obligations, potential legal risks, and effective solutions to help enterprises confidently overcome such challenges.

I. Common legal risks relating to shareholders opposing a corporate restructuring plan

In practice, common legal risks arising when shareholders oppose a corporate restructuring plan include:

• Suspension or delay in implementation of the restructuring plan: Strong opposition, especially from major shareholders or organized shareholder groups, may prevent the General Meeting of Shareholders from approving the relevant resolution or place pressure on the Board of Directors to reconsider the restructuring plan.
• Court disputes: Dissenting shareholders may initiate legal proceedings against the company or the Board of Directors, requesting the Court to invalidate the resolution of the General Meeting of Shareholders approving the restructuring plan or claim damages if they believe such resolution violates the law or the company’s charter and causes harm to them.
• Requests for the company to repurchase shares: It is a right protected by law for dissenting shareholders and may create substantial financial pressure on the company, particularly where numerous shareholders exercise such right and the company lacks sufficient financial resources.
• Damage to reputation and share value: Prolonged internal disputes, especially when publicly disclosed through the media, may reduce investor confidence and negatively affect the company’s share value and capital mobilization capability.
• Risks arising from related transactions: Corporate restructuring plans are often accompanied by transactions such as acquisitions, mergers, divisions, or consolidations. If shareholder opposition results in a lack of transparency or legal violations, such transactions may be declared invalid.

II. Understanding shareholders opposing a corporate restructuring plan

1. What significance does shareholder opposition to a corporate restructuring plan have for company operations?

Shareholder opposition to a corporate restructuring plan carries significant implications and may profoundly affect company operations in various ways, including:

• Warning signal of potential risks: Opposition may indicate that the restructuring plan contains unreasonable elements, has not been clearly communicated, or involves risks that management may not have fully anticipated. It compels the company to review and reassess the feasibility and benefits of the plan.
• Pressure on management: Opposition may place pressure on the Board of Directors and executive management to reconsider, amend, or even cancel the restructuring plan.
• Impact on approval of resolutions: In order for a restructuring plan to be implemented, approval by the General Meeting of Shareholders is generally required with a specified voting ratio. If opposition is sufficiently significant, the resolution may fail to be adopted.
• Additional costs and delays: Addressing shareholder opposition may require substantial time for meetings and negotiations, or incur legal advisory costs if disputes escalate into litigation.

2. In what circumstances might shareholders decide to oppose a corporate restructuring plan?

• The restructuring plan directly harms shareholder interests, for example if the plan reduces share value, dilutes ownership ratios, or affects dividend distribution capacity.
• Disagreement with strategic direction: Shareholders may believe that the restructuring plan is misguided, inconsistent with the company’s long-term vision, or unlikely to produce the expected benefits.
• Lack of information or transparency: The company may fail to provide adequate information regarding the restructuring plan, its objectives, risks, and potential benefits, causing shareholders to become skeptical or distrustful.
• Conflict with management: Opposition may reflect deeper conflicts between shareholders and the Board of Directors or executive management regarding corporate governance and operational methods.
• Concerns regarding control: The restructuring plan may alter ownership structures or voting rights, leading shareholders to fear losing influence or control over the company.
• Perceived unfairness: Shareholders may believe that the restructuring plan benefits certain shareholder groups (for example, major shareholders) while disadvantagering others (such as minority shareholders).

3. Do shareholders opposing a corporate restructuring plan have the right to initiate legal proceedings against the company, and under which regulations?

Pursuant to Clause 1, Article 151 of the Law on Enterprise 2020, shareholders or shareholder groups prescribed in Clause 2, Article 115 of this Law have the right to request the Court or arbitration tribunal to review and invalidate resolutions of the General Meeting of Shareholders where such resolutions were adopted in violation of procedures or where the contents violate the law or the company’s charter. It constitutes the most important legal basis for dissenting shareholders opposing restructuring plans approved through resolutions of the General Meeting of Shareholders.

Where shareholders can prove that the restructuring plan (or the company’s conduct during implementation thereof) has directly caused damage to their interests due to breaches of contract, violations of law, or violations of the company’s charter, they are entitled to claim compensation for damages under Articles 360 and 361 of the Civil Code 2015.

Disputes between shareholders and the company shall be resolved by the People’s Court in accordance with Articles 30, 31, and 32 of the Civil Procedure Code 2015 concerning the jurisdiction of the Court.

III. Legal regulations relating to shareholders opposing a corporate restructuring plan

1. How does the law regulate the rights of shareholders opposing a corporate restructuring plan?

Under the Law on Enterprise 2020, in order to protect minority shareholders against corporate restructuring decisions (such as division, separation, consolidation, merger, or conversion of enterprise type), the law establishes three important groups of rights as follows:

• First, the right to request the company to repurchase shares. Pursuant to Clause 1, Article 132 of the Law on Enterprise 2020, shareholders voting against a resolution on corporate reorganization have the right to request the company to repurchase their shares.
• Second, the right to request invalidation of resolutions of the General Meeting of Shareholders. Pursuant to Article 151 of the Law on Enterprise 2020, within 90 days from receipt of the meeting minutes, shareholders or shareholder groups prescribed in Clause 2, Article 115 of this Law have the right to request the Court or arbitration tribunal to invalidate a resolution where procedures for convening meetings or adopting resolutions violate this Law or the company’s charter.
• Third, the right to attend meetings and vote. Pursuant to Clause 1, Article 115 and Article 148 of the Law on Enterprise 2020 (as amended in 2022), shareholders have the right to attend meetings and vote against proposed resolutions. Such dissenting vote is a prerequisite condition for establishing the right to request share repurchase mentioned above. In addition, holders of voting preference shares possess enhanced voting rights and may veto restructuring plans if they hold a sufficiently large voting ratio.

2. What legal consequences may arise when shareholders oppose a corporate restructuring plan?

- For the company:

• Suspension or cancellation of the restructuring plan: If opposition is sufficiently significant, the relevant resolution may fail to be adopted or may subsequently be invalidated by the Court upon request of dissenting shareholders under Article 151 of the Law on Enterprise 2020.
• Legal costs and compensation liabilities: The company may incur litigation expenses, legal advisory fees, and compensation obligations where the Court determines that the company committed violations causing damage to shareholders.
• Reputational damage: Prolonged internal disputes may undermine the confidence of the market, business partners, and investors.

- For dissenting shareholders:

• Loss of time and financial costs: Participation in litigation and negotiations may require significant expenditures of time and money.
• Risks relating to share repurchase value: If shareholders request the company to repurchase their shares, the repurchase price may not meet expectations or accurately reflect the true value of the shares at that time.
• Loss of business opportunities: If the restructuring plan is ultimately successful, dissenting shareholders may miss opportunities to benefit from the company’s future growth.

- For management (Board of Directors and Directors): Management personnel may be held liable if restructuring decisions violate the law or cause serious damage to the company or shareholders under Article 165 of the Law on Enterprises 2020 concerning obligations of company managers.

IV. Questions regarding shareholders opposing a corporate restructuring plan

1. In cases where shareholders oppose a corporate restructuring plan without providing reasonable grounds, what may the company do?

First and foremost, the management board should proactively engage in dialogue and provide clearer explanations regarding the benefits of the restructuring plan in order to seek consensus. 

If the General Meeting of Shareholders is convened in accordance with proper procedures and the resolution on corporate reorganization is approved by at least 65% of the total voting shares of attending shareholders, such resolution shall remain legally binding upon all shareholders, including dissenting shareholders.

However, regardless of whether the grounds for objection are reasonable, once a shareholder votes against the resolution on corporate reorganization, such shareholder automatically has the right to request the company to repurchase their shares in accordance with Article 132 of the Law on Enterprise 2020. Accordingly, the company must prepare sufficient financial resources to fulfill its share repurchase obligations if requested, rather than refusing on the basis that the shareholder’s objections are unreasonable.

2. What procedures must be implemented when shareholders oppose a corporate restructuring plan in order to ensure the protection of their rights and interests?

In order to protect the rights and interests of dissenting shareholders and minimize litigation risks, the company should implement the following procedures:

• Step 1: Ensuring transparency of information prior to the meeting. The company must send meeting notices together with detailed documents relating to the restructuring plan to all shareholders. It ensures that shareholders have sufficient information to decide whether to approve or oppose the restructuring plan.
• Step 2: Ensuring the right to request share repurchase. At the meeting, if the restructuring resolution is approved, the company should clearly record dissenting opinions in the meeting minutes. If shareholders voting against the resolution request the company to repurchase their shares, the company must instruct them to submit a written request within 10 days from the date the resolution is adopted in accordance with Clause 1, Article 132 of the Law on Enterprise 2020.
• Step 3: Fulfilling payment obligations. Within 90 days from the date of receipt of a valid request, the company must repurchase the shares held by dissenting shareholders at the market price or at a mutually agreed price under Clause 2, Article 132 of the Law on Enterprise 2020.

3. Are there any legal provisions requiring the company to clarify the reasons why shareholders oppose a corporate restructuring plan?

From a legal standpoint, the Law on Enterprise 2020 does not contain any provision requiring the company to investigate or clarify the reasons why shareholders oppose a restructuring plan. Voting rights are independent decision-making rights vested in shareholders.

However, under the procedure for requesting share repurchase prescribed in Clause 1, Article 132 of the Law on Enterprise 2020, shareholders submitting a written request for share repurchase must specify their name, address, and the reasons for requesting the company to repurchase the shares. Accordingly, the company has the responsibility to receive and review such requests. Although the company is not obligated to agree with the stated reasons, understanding those reasons serves as an important basis for the parties to enter negotiations regarding the repurchase price of the shares (based on the principle of mutually agreed pricing within 90 days).

4. What measures are commonly adopted by companies to address shareholder opposition to corporate restructuring plans?

• Firstly, conducting dialogue and negotiating the repurchase price. Rather than allowing disputes to escalate, companies often proactively negotiate with dissenting shareholders to reach agreement on the share repurchase price. 
• Secondly, engaging professional valuation organizations. If the parties cannot agree on a price, the company shall introduce at least three professional valuation organizations for the shareholders to choose from, and the final decision shall be made in accordance with Clause 2, Article 132 of the Law on Enterprise 2020. It constitutes the most objective method for ensuring that the repurchase price is fair and for minimizing future disputes.
• Finally, preparing legal defense strategies. If shareholders initiate legal proceedings seeking annulment of the restructuring resolution under Article 151 of the Law on Enterprise 2020, the company should prepare complete meeting minutes, evidence of notice delivery, and voting records to prove that the resolution adoption procedures fully complied with legal requirements before the Court.

V. Are you looking for a reputable and experienced lawyer to assist with issues relating to shareholders opposing a corporate restructuring plan?

Implementing a corporate restructuring plan, particularly when facing opposition from shareholders, presents significant legal and governance challenges. Compliance with applicable laws and the adoption of effective dispute resolution strategies not only help businesses avoid legal risks but also maintain operational stability and investor confidence. However, given the complexity of legal regulations and the diversity of practical situations, independently handling such matters may involve considerable difficulties.

If you are encountering difficulties in developing or implementing a restructuring plan, or require legal advice regarding rights and obligations in situations where shareholders oppose a corporate restructuring plan, please contact NPLaw today for professional assistance.

The above information is provided for reference purposes only. Should you require detailed advice regarding a specific matter, please contact NPLaw Firm for immediate consultation.