I. Validity of Company Capital System

1.【Principles and Status of Company Capital System】 The company capital system is the cornerstone of the company system. The principles of the company capital system include: the principle of capital certainty (enrichment), the principle of capital maintenance, and the principle of capital immutability. Theoretically, they are collectively referred to as the 'three principles of capital', which are not intended to ensure that the registered capital is equivalent to the company's actual assets or the company's solvency, but rather emphasize regulating the investors' payment of capital contributions and regulating the company's legal person's operation or adjustment of its own assets, so that the company has and demonstrates independent property, independent interests, and independent personality, so that creditors can transact with a sufficiently independent civil subject.

The 'three principles of capital' focus on two types of dynamic processes of 'capital contribution': one is the 'right transfer process' in which the investor transfers specific property to the company's name; the other is the 'asset change process' in which the capital under the company's name changes with the company's operation. The former mainly involves the causes of action of 'shareholder capital contribution dispute' and 'company capital increase dispute', specifically including false capital contribution, insufficient capital contribution, overdue capital contribution, and withdrawal of capital contribution; the latter mainly involves the causes of action of 'dispute over liability for damage to company interests', 'dispute over liability for damage to company creditor interests', 'dispute over liability for damage to company related transactions', and 'dispute over company capital reduction'.

2.【Capital Maintenance in Shareholder Withdrawal】 Shareholder withdrawal involves the withdrawal of capital contribution, which in turn involves the reduction of the company's capital. Therefore, based on the protection of creditors' interests, the company capital system imposes certain restrictions on shareholder withdrawal: (1) If shareholders withdraw their shares with the consent of the company's shareholders' meeting, or withdraw their shares by claiming the right of dissenting shareholders to request repurchase (Article 74 of the 'Company Law'), they must go through the statutory capital reduction procedure to protect the interests of the company's creditors (Article 177 of the 'Company Law'); (2) If shareholders withdraw their shares through the dissolution of the company, they must go through the statutory liquidation procedure to protect the interests of the company's creditors (Article 183 of the 'Company Law'); (3) Shareholders withdraw from the company by transferring all of their shares, which does not involve a reduction in the company's capital and is not subject to company capital control, but if the transferring shareholder transfers the shares without fully contributing capital, they are still obligated to make up the capital contribution (Article 18 of the 'Interpretation of the Company Law III').

3.【Capital Maintenance in Equity Transfer】 The two parties to an equity transfer contract are the equity transferor and the equity transferee. The target company is not a party to the contract, and the target company should not bear the obligation to pay the equity transferee's payment. If the parties to the contract agree that the target company shall perform the payment obligation, or agree that the target company shall bear the guarantee responsibility or provide guarantee for the equity transferee's payment obligation, it may directly reduce the assets of the target company, which becomes a disguised withdrawal of capital contribution, which violates the principle of company capital maintenance and ultimately damages the independent property and creditor interests of the target company. Therefore, the people's court may determine that such an agreement is invalid based on the circumstances of the individual case.

However, if the target company has performed the corresponding procedures with reference to the relevant provisions of the Company Law on the company's provision of guarantees (Article 16 of the 'Company Law'), and there is no obvious damage to the interests of the target company's creditors, it should not be deemed invalid.

4.【Distinction between Company Damage and Shareholder Damage】 If a third party outside the company damages the company's interests, causing the company's assets to depreciate, which in turn causes the value of the shares held by the company's shareholders to depreciate objectively, the shareholder has no right to directly sue the infringing party for compensation for losses. As an independent legal person, shareholders cannot directly enjoy the free disposal rights of the company's property, and the law does not allow the commingling of property. Therefore, the company itself suffering illegal damage is not equal to the shareholders also suffering illegal damage, and the shareholders do not directly enjoy independent litigation rights in this regard, unless the shareholders file a derivative lawsuit.

According to Article 152 of the "Company Law", directors and senior managers within the company who violate laws, administrative regulations, or the company's articles of association, thereby harming the interests of shareholders, or shareholders who abuse their rights and cause losses to other shareholders (Article 20 of the "Company Law"), the affected shareholders have the right to independent legal action.

5. [Differences in the Basis of Claims for Recovery of Withdrawn Capital Contributions] Article 12 of the "Interpretation of the Company Law III" stipulates that both the company and its shareholders may sue relevant shareholders for withdrawing capital contributions. However, the legal relationship and basis of claims for the company's lawsuit and the shareholders' lawsuit are different: For the company's lawsuit, the capital contribution completed by the shareholders belongs to the company's independent legal property, and the act of shareholders withdrawing capital contributions is essentially an infringement of the company's independent property. Therefore, the basis of the company's claim is essentially a tort claim for damages; for the shareholders' lawsuit, shareholders form a continuous capital contribution legal relationship with each other based on the joint legal act of jointly establishing the company. Therefore, shareholders have the right to supervise each other and request the performance of capital contribution obligations. Therefore, in the former legal relationship, the plaintiff should be the company; in the latter legal relationship, the plaintiff should be the company's shareholders.

When the company and shareholders file a lawsuit at the same time, the people's court should pay attention to clarifying and fixing the status of the parties and the claims. If both only sue to recover the withdrawn capital contribution and return it to the company, the company and shareholders can be combined as joint plaintiffs for trial; if the shareholders also sue for relevant breach of contract liabilities or the company also sues for compensation for relevant losses caused by the withdrawal of capital contribution, the people's court should pay attention to explaining to the parties and let them choose one of the lawsuits.

When the company and shareholders jointly sue a specific shareholder for untrue capital contribution, insufficient capital contribution, false capital contribution, or overdue capital contribution (Article 13 of the "Interpretation of the Company Law III"), attention should also be paid to the difference in the basis of the claim, and the handling method should refer to paragraph 2 of this article.

II. Legal Effect of the Company's Articles of Association

6. [Hierarchical Validity] The articles of association reflect strong contractual attributes, but acknowledging the contractual attributes of the articles of association does not mean equating them completely with general civil contracts; there are still differences between the two. The articles of association essentially have three different levels of legal effect: first, the relationship of rights and obligations in the sense of a contract; second, the basis of claims in the sense of tort liability; and third, the scope of autonomy in which the judiciary should not directly intervene.

The content of this section (Articles 7 to 10) may not be limited to the understanding of the text of the articles of association, but rather extended to understand the legal relationships and rights and obligations between the parties in the entire corporate governance structure.

7. [Contractual Effect between Shareholders and the Company: Bilateral Contractual Relationship] The bilateral contractual legal effect of the articles of association is reflected in:

(1) Effect of requesting payment. On the one hand, the company has the right to sue shareholders to perform their capital contribution obligations, specifically including: ① Requesting shareholders to pay their respective subscribed capital contributions as stipulated in the company's articles of association on time and in full. If contributing in currency, requesting full deposit into the company's bank account; if contributing in non-monetary property, requesting the completion of property rights transfer procedures in accordance with the law; if contributing in property such as houses, land use rights, or intellectual property rights, requesting actual delivery; if it has been delivered to the company for use but has not completed the change procedures, requesting the completion of ownership change procedures within a specified reasonable period (Article 28 of the "Company Law", Article 10 of the "Interpretation of the Company Law III"). ② If the non-monetary contribution is overvalued, or if the contribution is made with objects that do not have legality, transferability, and evaluability, such as labor, credit, natural person's name, goodwill, franchise, allocated land use rights, or property with security set up, or if the contribution is made with the equity of other companies but does not meet the statutory conditions for valuation and contribution, or if the shareholder withdraws capital contribution or withdraws share capital after the company is established, it shall be deemed that the shareholder has not performed or has not fully performed the capital contribution obligation, and the company has the right to request it to make up or return the capital contribution and interest (Articles 27 and 35 of the "Company Law", Article 14 of the "Company Registration Management Regulations", Articles 8, 9, 11, 12, and 14 of the "Interpretation of the Company Law III"). ③ Even if the shareholder transfers the equity, as long as it has not performed or has not fully performed the capital contribution obligation, the company still has the right to request it to continue to perform the capital contribution obligation (Article 18 of the "Interpretation of the Company Law III"). On the other hand, shareholders have the right to sue the company to satisfy the realization of their shareholder rights. Specifically including: right to request dividend distribution (Articles 34 and 166 of the "Company Law"); right of first refusal to subscribe for new shares (Article 34 of the "Company Law"); right to request distribution of remaining property (Article 186, paragraph 2 of the "Company Law"); right to request dissent and repurchase (Article 74 of the "Company Law"); right of first refusal (Articles 71 and 72 of the "Company Law"); request to confirm shareholder qualifications, request to issue capital contribution certificates and record them in the register of shareholders, request to change company registration (Articles 31, 32, and 73 of the "Company Law", Articles 22 and 23 of the "Interpretation of the Company Law III"); and so on.

(2) Effect of reciprocal payment. Specifically manifested in three kinds of connection: ① Connection in establishment, that is, when one party's debt is invalidated or revoked and disappears, the other party's debt also disappears accordingly, which involves the issue of fundamental breach of contract and termination of the contract. Specifically manifested as: if a shareholder of a limited liability company fails to perform the obligation to contribute capital or withdraws all capital contributions, the company may, after notice and a reasonable period, terminate the shareholder's shareholder qualification through a resolution of the shareholders' meeting (Article 17 of the "Interpretation of the Company Law III"); if a subscriber of a joint stock company fails to pay the share payment for the subscribed shares on time, the promoters of the company may re-raise the shares after notice and a reasonable period (Article 6 of the "Interpretation of the Company Law III"); if the shareholder cannot obtain the consideration for the capital contribution, that is, the shareholder qualification or shareholder rights, the shareholder has the right to request the return of the capital contribution. According to Article 89 of the "Company Law", if the company fails to complete the fundraising and establishment, the subscriber has the right to request the return of the principal and interest of the share payment. ② Connection in performance, that is, the lack or defect in one party's performance will reduce the party's right to request the other party to perform, which involves the right of simultaneous performance and prior performance defense. Specifically manifested as: before the shareholder replenishes its subscribed capital contribution, its equity will be subject to certain restrictions. For example, the shareholder's right to request profit distribution and the right of first refusal to subscribe for new shares are enjoyed according to the proportion of its "paid-in" rather than "subscribed" capital contribution (Article 34 of the "Company Law"); if the shareholder fails to perform or fails to fully perform the obligation to contribute capital or withdraws capital contribution, the company has the right to make corresponding reasonable restrictions on its shareholder rights such as the right to request profit distribution, the right of first refusal to subscribe for new shares, and the right to request distribution of remaining property, according to the company's articles of association or the resolution of the shareholders' meeting (Article 16 of the "Interpretation of the Company Law III"); the shareholder's capital contribution shall be actually delivered, and the failure to actually deliver may result in the inability to enjoy the corresponding shareholder rights, but the completion of the actual delivery but the failure to complete the ownership change registration can still enjoy the corresponding shareholder rights (Article 10 of the "Interpretation of the Company Law III"). ③ Connection in survival, that is, whether the other party's payment obligation is affected after one party's payment is reduced or lost due to reasons not attributable to the parties, which involves the issue of risk burden. The risk burden rule for bilateral contracts generally adopts the "delivery doctrine" (Article 604 of the "Civil Code"). The shareholder's capital contribution shall transfer ownership and be actually delivered. As long as the shareholder completes the obligation to deliver the capital contribution, the risk is transferred to the company. Even if the property delivered to the company is reduced or lost, the shareholder has the right to require the company to recognize its shareholder qualification and pay the corresponding shareholder rights.

(3) Effect of inherent rights. The autonomy boundary of the company's articles of association lies in at least maintaining the consideration or bilateral nature of the capital contribution legal relationship. The company's articles of association shall not exclude the inherent rights of shareholders, and the equity provided by the company to shareholders shall retain the most basic property attributes, specifically reflected in: the right to transfer equity shall not be excluded; the shareholder's right to know shall not be excluded.

8. [Contractual Effect Between Shareholders: Joint Legal Act] With regard to the shareholders' capital contribution obligations in the company's articles of association (including the amount of capital contribution, method of capital contribution, time limit for capital contribution, etc.), it involves a joint legal act between shareholders, which essentially originates from the incorporation agreement or capital contribution agreement between the promoters, reflecting the joint consensus between the promoters. The effect of this joint legal act is reflected in:

(1) A promoter refers to a person who signs the company's articles of association for the purpose of establishing the company, subscribes for capital contributions or shares to the company, and performs the duties of establishing the company, including the shareholders at the time of establishment of a limited liability company (Article 1 of the Interpretation of the Company Law III).

(2) The promoters and shareholders are jointly and severally liable for the obligation to contribute capital, which includes monetary and non-monetary property forms, but non-promoter shareholders are not jointly and severally liable with other shareholders (Article 30 of the "Company Law", Article 13 of the "Interpretation of the Company Law III").

(3) If the promoter fails to perform or fully perform the capital contribution obligation, it constitutes a breach of the promoter agreement, and the promoter who has paid the capital contribution on time has the right to request it to continue to perform the capital contribution obligation and bear the liability for breach of contract in accordance with the promoter agreement or articles of association (Article 28 of the "Company Law", Article 13 of the "Interpretation of the Company Law III").

(4) Becoming a new shareholder through company capital increase or equity transfer can also be regarded as joining the promoter agreement or capital contribution agreement, but the subsequent shareholder does not have to bear joint and several liability with other promoters.

(5) The promoters shall be jointly and severally liable for the debts, expenses and damages arising from the establishment of the company; they shall be jointly and severally liable for the return of the subscription money and interest paid by the subscribers (Article 94 of the "Company Law", Articles 2 to 5 of the "Interpretation of the Company Law III").

(6) For the term of business or other reasons for dissolution of the company agreed upon by the shareholders in the articles of association, any shareholder may request the people's court to compulsorily liquidate the company (Article 183 of the "Company Law", Article 7 of the "Interpretation of the Company Law II").

9. [Basis for Claims in the Sense of Tort Liability] In addition to the contractual attributes, the basis for tort liability claims contained in the company's articles of association mainly involves:

(1) With regard to the powers or duties of directors, supervisors and senior managers in the company's articles of association, it involves the relationship between the company and the directors, supervisors and senior managers, and the relationship between shareholders and the directors, supervisors and senior managers. This content originates from the fiduciary duty of the directors, supervisors and senior managers, namely the duty of loyalty and the duty of diligence (Articles 148 and 149 of the "Company Law"). When they violate the fiduciary duty and damage the interests of the company or the interests of shareholders when performing their duties, the company or shareholders have the right to claim damages from them.

(2) With regard to the provisions in the company's articles of association that shareholders shall not infringe upon the interests of the company, it involves the company's right to claim damages from shareholders after the shareholders abuse their shareholder rights and cause losses to the company. This remedy right originates from the independent property rights of the legal person and essentially belongs to the property rights tort legal relationship (Article 20 of the "Company Law").

(3) With regard to the provisions in the company's articles of association that shareholders shall not infringe upon the interests of other shareholders, it involves the right of the damaged shareholders to claim damages from the shareholders who abuse their rights after the shareholders abuse their shareholder rights and cause losses to other shareholders. This remedy right originates from the property rights attributes of the equity and the contractual relationship formed between the shareholders based on the joint capital contribution in a concurrent manner (Article 20 of the "Company Law").

10. [The Boundary Between Company Autonomy and Judicial Intervention] The company's articles of association can be divided into two categories of matters recorded in the articles of association: one category is matters that clearly contain the basis for claims, such as shareholders' capital contribution obligations, shareholders' individual rights and their realization rules, and the powers and duties of directors, supervisors and senior managers; the other category is institutional rules, procedural rules, operating rules or other descriptions of the company's situation regarding the company's internal governance. For the latter, in principle, no judicial intervention is required, and no direct request can be made to the people's court for enforcement; only ex post judicial remedies are provided, that is, for shareholder meeting resolutions or board resolutions that violate the company's articles of association in terms of content or procedure, shareholders have the right to request the court to revoke or confirm that they are not established within the statutory time limit.

III. Relevant Rules of Corporate Governance

11. [The Boundary Between Shareholder Meeting Resolutions and Judicial Intervention] In principle, resolutions made by the shareholders' meeting on matters of company operation and management shall not be directly requested by the shareholders or the company to the people's court for confirmation and enforcement. The company's shareholders' meeting is the company's highest authority, and it has the ability to realize its own affairs plans and arrangements, and generally does not require judicial intervention.

The circumstances that require intervention as an exception mainly include: (1) When the relevant company property, certificates, account books, documents, etc. involved in the resolution are improperly occupied, the company or shareholders may request return and compensation by means of a tort lawsuit; (2) In the event that the subject responsible for implementing the shareholders' meeting resolution violates the duty of loyalty and diligence and causes damage to the company, the company or shareholders may sue for relevant damages liability; (3) When the company resolution approves a specific distribution plan, the shareholders may sue for enforcement based on the company's profit distribution dispute (Articles 14 and 15 of the Interpretation of the Company Law IV, Article 4 of the Interpretation of the Company Law V); (4) Other circumstances where the basis for claims is clearly stipulated.

As for the cause of action of "company resolution dispute", it involves whether the company resolution is invalid, revocable or not established, rather than the basis for shareholders or the company to arbitrarily request judicial confirmation of the content of the resolution. The people's court should pay attention to correctly applying this cause of action.

12. [Responsibility Determination When Shareholders and Executives Overlap] When a formally appointed director or senior manager of a company is also a shareholder of the company, the standard for determining his responsibility for losses caused to the company in the process of managing and operating the company shall be the duty of loyalty and diligence stipulated in Articles 148 and 149 of the "Company Law". Shareholders who are not formally appointed by the company, or shareholders whose appointed positions do not match their actual powers, use their actual influence and status, or use the convenience of managing the company's official seal, legal representative seal, etc., and cause losses to the company in the process of managing and operating the company, the standard for determining their responsibility shall also be the duty of loyalty and diligence.

The principle of the above rules lies in the fact that the rights of shareholders are mainly divided into common rights and individual rights. The former is mainly manifested as the right to participate in meetings, the right to vote, the right to know, the right to question and supervise, etc. The latter is mainly manifested as the right to dividend distribution, the right to distribute the remaining property and other property-based beneficial rights. Therefore, the shareholders of the company do not naturally enjoy the power and status to directly manage and operate the company. If a shareholder uses his or her powers, convenience or actual influence and status to damage the interests of the company in the process of managing and operating the company, this is not an abuse of shareholder rights. The occurrence of this behavior is not based on the shareholder's identity but on his or her actual identity as a senior manager of the company, and the alleged misconduct is essentially a dereliction of duty by the company's senior manager.

The above rules are different from the situation where shareholders abuse their rights to damage the interests of the company. The abuse of rights by shareholders is generally manifested as: the controlling shareholder or some shareholders use the majority rule of the shareholders' meeting to pass resolutions of the shareholders' meeting that actually damage the interests of the company.

13.【The Nature of Shareholders' Right to Know】 The shareholder's right to know is the basis for shareholders to exercise other rights. In legal nature, it belongs to the common interest right, which aims to facilitate shareholders to understand the company's situation, participate in the voting of the shareholders' meeting, and supervise the company's operation. The legislative purpose of granting shareholders the right to know is not to directly meet the needs of individual shareholders' interests, but to maintain and promote the overall interests of the company and all shareholders. Therefore, the shareholder's right to know should be limited to a certain boundary, that is, on the premise of not harming the company's legitimate interests.

14.【Methods for Determining the Substantive Competitive Relationship When Shareholders' Right to Know Conflicts with the Company's Interests】 When a shareholder claims the right to know to the company, and the company believes that the shareholder's exercise of this right will damage the company's interests, the people's court should pay attention to allocating the burden of proof between the two parties. First, the shareholder should provide evidence to prove his shareholder status and the right to exercise the right to know. Secondly, when the company refuses the shareholder to exercise the right to know, it should provide evidence to prove whether the company's legitimate interests are damaged. One of the damaged situations is that the shareholder is engaged in or operates a business that has a substantial competitive relationship with the company's main business. The company should provide evidence to prove this. Again, when the company has initially proved that there is a substantial competitive relationship between the two parties' business operations and the company's interests may be damaged, the burden of proof should be shifted to the shareholder who claims the right to know to further prove that he does not have improper motives and that the exercise of the right to consult will not damage the company's interests, so as to prove his innocence.

15.【Situations Where Shareholders' Agreement Conflicts with Equity Registration】 If there is an inconsistency between the share ratio determined by the agreement between the shareholders and the share ratio recorded in the equity registration, the agreement between the shareholders shall prevail when dealing with internal disputes between the company and the shareholders or between the shareholders. The reason is that the agreement between the shareholders on the adjustment of the share ratio or the change of the share ratio has the nature of an equity transfer contract, which can take effect internally and bind the shareholders who are parties to the contract; while the effect of equity registration belongs to the effect of defense, which mainly protects the external bona fide creditors of the company, and it does not necessarily completely coincide with the actual ownership of the equity or the actual share ratio.

16.【How to Determine that the Company's Operation and Management Have Encountered Serious Difficulties in a Company Dissolution Dispute】 When a shareholder requests to dissolve the company, when determining the element of "the company's operation and management has encountered serious difficulties", attention should be paid to judging from two dimensions: (1) comprehensively analyze the current operation status of the company's shareholders' meeting, board of directors or executive directors and other institutions, focusing on whether the shareholders' meeting or board of directors is in a stalemate due to intensified conflicts, resulting in the company's management unable to effectively carry out operation and management. (2) Pay attention to excluding a special situation: even if the shareholders' meeting or board of directors has operational difficulties, the executive director or management can still make normal operation and management instructions, so that the company's daily operation can actually operate normally. The company should have both an internal agency (shareholders' meeting or board of directors) deadlock and a complete paralysis of daily operations to meet the requirements of "serious difficulties in operation and management".

The fact that a shareholder is excluded from participating in the company's daily management due to differences with other shareholders does not necessarily mean that the company's operation and management has encountered serious difficulties. The shareholder's equity does not necessarily include the power to control the company. The situation that some shareholders cannot participate in daily management belongs to the scope of autonomy among shareholders. If it involves infringement of shareholders' rights, such as the right to participate in meetings, the right to vote, and the right to know, there are other legal remedies or dissenting shareholders' exit mechanisms, but the shareholders have no right to directly request the dissolution of the company.

4. Equity Transfer of Limited Liability Companies

17.【The Difference Between Equity Transfer Contract and Equity Change】 The effect of equity change is not equal to the effect of equity transfer contract. The equity transfer contract itself belongs to the cause of the change of rights, and its direct effect is to bind the contracting parties to carry out the transaction as agreed, rather than naturally produce the transaction effect or achieve the transaction purpose. Therefore, the effective time of the equity contract is not equal to the time of equity change, and whether the equity can be changed as agreed does not affect the establishment and effectiveness of the transfer contract.

18.【Judgment of the Time Point of Equity Change】

After the equity transfer contract is established and becomes effective, the equity change effect shall occur when the company recognizes the new shareholder's qualification, unless otherwise stipulated by laws and administrative regulations for equity transfer that shall go through approval procedures. The principle is that equity is mainly a relative right, a right in personam rather than a right in rem, and must be specifically claimed to the company or other shareholders. Therefore, the equity transferee must enter into the capital contribution legal relationship with the company and other shareholders in a substitutive manner, and should go through the knowledge or confirmation link of the company and all shareholders before the transferee can fully obtain the shareholder membership qualification, fully exercise the equity rights and assume the shareholder obligations.

In individual cases, the time when the company confirms the equity transfer shall be the time point of the change. The specific time point is generally the company's commencement of changing the company's register of shareholders, changing the matters recorded in the company's articles of association, handling industrial and commercial change registration, and issuing capital contribution certificates to the new shareholders; or in individual cases, the new shareholder has actually begun to exercise shareholder rights, which can also be regarded as the company's confirmation of the new shareholder's membership qualification, and this shall be the time point of equity change.

Although the company's change of the register of shareholders is not the only time point or formal requirement for the effect of equity change, if the name or title of the equity transferee has been changed and recorded in the company's register of shareholders, it can be determined that the transferee has obtained the equity.

19.【Situations Where the Equity Transfer Contract Clearly Stipulates the Time Point of Equity Change】 Once the equity transfer contract is established and becomes effective, it can bind both parties to the contract. When the parties clearly agree on the time point of equity change, generally speaking, the time point can be either the payment of the equity payment or the payment of a certain period of equity payment and other contract performance behaviors, or it may be consistent with the time when the company confirms the equity transfer, such as changing the company's register of shareholders and handling industrial and commercial change registration. If the parties agree that the time point of equity change is earlier than the company's confirmation of the equity transfer, then only a certain transfer of rights and interests effect occurs between the two parties to the contract. At this time, the specific effects that the equity transferee can obtain include:

(1) The right to request to go through the change procedures. That is, the right to request the company to change the register of shareholders, issue capital contribution certificates, and handle industrial and commercial change registration;

(2) Equity income rights. That is, the right to request the equity transferor to pay the property rights that the transferor still obtains from the company after the equity transfer time.

20. [Effect of Equity Change] Industrial and commercial registration change is not a necessary condition for the effectiveness of equity change, that is, equity change does not necessarily wait until the industrial and commercial registration change is completed. The real effect type of industrial and commercial registration is the effect against bona fide third parties, which means that the equity transferee can prevent the original shareholders or the company from infringing on their acquired rights with third parties after the industrial and commercial registration change. The completion of industrial and commercial registration change by a company generally means the final completion of the equity transfer transaction.

21. [Impact of Other Shareholders' Consent on External Transfer] If a shareholder of a limited liability company transfers its equity externally, the transferring shareholder must obtain the consent of the majority of other shareholders, which is one of the necessary conditions for the equity transfer to take effect. This condition is an additional condition for the external transfer of equity compared to the internal transfer.

Whether this requirement is met does not affect the establishment and effectiveness of the equity transfer contract in accordance with the law. If the transferring shareholder fails to obtain the consent of the majority of other shareholders, the transferee may claim breach of contract against the other party based on the valid transfer contract; if the transferring shareholder obtains the consent of the majority of other shareholders after completing the relevant equity transfer change procedures, the equity change shall take effect from the time of obtaining the consent.

22. [Methods of Expressing Consent by Other Shareholders] The expression of other shareholders' consent to the transfer may be diverse in form. In addition to explicit expression, it may also implicitly express their acceptance and recognition of the new shareholders through joint participation in meetings and joint resolutions. The people's court may determine the fact that other shareholders implicitly agree based on the circumstances of individual cases.

However, as far as the external relationship of the company is concerned, Article 32, Paragraph 3 of the "Company Law" shall still be followed, that is, those who have not been registered or changed shall not be able to defend against bona fide third parties.

23. [Impact of Waiving the Right of First Refusal on External Transfer] If a shareholder of a limited liability company transfers its equity externally, other shareholders shall have the right of first refusal, but this right does not guarantee direct access to the transferred equity, and this right does not have the effect of compulsory contracting, and cannot directly form a transfer contract relationship with the transferring shareholder. At this time, the transferring shareholder may choose or not choose to transfer the equity to the shareholder who exercises the right of first refusal; however, even if he does not choose, he shall not transfer the equity to a third party under the same conditions.

Whether other shareholders waive the right of first refusal does not affect the validity of the equity transfer contract. If the purpose of the transfer contract cannot be achieved due to other shareholders exercising the right of first refusal, the equity buyer may claim breach of contract against the other party based on the valid transfer contract.

The fact that other shareholders waive the right of first refusal is not a necessary condition for the equity change to take effect, but the exercise of the right of first refusal by other shareholders should be regarded as a statutory condition for the equity change to take effect: when other shareholders issue an offer of first refusal to the transferring shareholder and the latter promises, when the equity has not been changed to a third party, the equity should be changed to the shareholder first; if the equity has been changed to a third party, the effect of the change shall be terminated. The reason for choosing this type of effect is that, under the circumstances of Article 21 of the "Interpretation of the Company Law IV", there may be a "vacuum period": when the transferring shareholder does not clearly notify other shareholders or damages other shareholders' right of first refusal by fraud or other means, the bona fide third party as the transferee may participate in and integrate into the company's governance more quickly after entering into the equity transfer contract, on the one hand, the third party's status as a "new shareholder" may disappear at any time due to other shareholders exercising the right of first refusal, on the other hand, it may have begun to exercise the right of participation, voting and other common interests, as well as the right of distribution of dividends and other self-interests. If the issue of shareholder qualifications during this period is not properly handled, there will be a "vacuum period" in which the relevant shareholder rights have nowhere to belong or the validity of the resolution is undecided. Therefore, interpreting the effect of exercising the right of first refusal as a condition for the termination of equity change, and recognizing the validity of the equity change to a bona fide third party during this period, can better solve the "vacuum period" problem.

24. [Exceptions to the Presumption of Fulfillment of Conditions Precedent] If the equity transfer contract stipulates that a certain transaction link or transaction step requires both parties to cooperate to complete, for example, it is agreed that both parties should jointly verify the creditor's rights and debts of the target company before the equity transfer in order to determine the final total equity transfer price, this type of agreement belongs to the terms with conditions precedent. The particularity of this type of agreement is that even if one party improperly prevents the fulfillment of the condition for its own benefit, it is difficult to simulate the results of joint cooperation, and it is not appropriate to directly determine that the attached condition has been fulfilled, and the party's liability for breach of contract should be investigated in accordance with the principle of good faith.

V. Capital Increase of Limited Liability Companies

25. [Necessary Prerequisites for Completing Capital Increase] The necessary prerequisite for a company to complete a capital increase and share expansion is the fact that there is a consensus on the capital increase between the relevant parties: first, the company or shareholders have the intention to increase capital and the intention to accept or recognize the status of new shareholders; second, the investors have the intention to invest in shares or subscribe for shares. Only when the expression of intent, behavior or related events between the parties can reflect these two aspects of the expression of intent, can the necessary prerequisite for the company's capital increase be completed; otherwise, even if there are behaviors such as paying relevant funds, delivering and transferring property, changing the register or industrial and commercial registration between the parties and the company, if these two expressions of intent are not reflected in an explicit or implicit manner, the new shareholder qualification of the parties should not be recognized.

26. [Judgment Method for Completing Capital Increase] In the case where the parties have a consensus on the capital increase, the law does not specifically stipulate the time point for the completion of the capital increase and the effectiveness of the new shareholder status. The company's capital increase and absorption of new shareholders usually show three stages: first, the company and the investors enter into an investment agreement or a share subscription agreement; second, the investors pay capital or share payments to the company in accordance with the law, or deliver and transfer non-monetary property; third, the company completes the legal procedures for absorbing and recognizing new shareholders for the investors in accordance with the law. The legal procedures in these stages specifically include: the company's resolution on the capital increase matters is passed by a shareholders' meeting representing more than 2/3 of the voting rights or 2/3 of the voting rights held by those present at the meeting; issuing capital contribution certificates to new shareholders and amending the company's shareholder register; completing the change registration with the company registration authority in accordance with the law; and so on. From a single point of view, not every one of these legal procedures is a necessary condition for increasing capital and absorbing new shareholders, but they are all substantial changes to important matters of the company's shareholders, and the company's overall completion of the capital increase effect should be comprehensively judged in combination with the handling of these procedures or formalities and the subscription or paid-in situation.

27. [Typical Ways to Complete Capital Increase] Company capital increases may take four forms in practice:

(1) First, the company's shareholders' meeting shall make a resolution on external capital increase, and then the company shall conclude an investment and shareholding agreement or equity subscription agreement with the specific investors accordingly. Subsequently, both parties shall perform their obligations to subscribe or pay up capital, issue capital contribution certificates, modify the register of shareholders, and complete the change registration in accordance with the agreement.

(2) The investor and the company shall first conclude an investment and shareholding agreement or letter of intent, and the company's shareholders' meeting shall make a resolution on the capital increase matter. Subsequently, both parties shall subscribe or pay up capital in accordance with the agreement, and continue to complete the remaining statutory change procedures.

(3) After the controlling shareholder or major shareholder concludes an investment and shareholding agreement with the investor on behalf of the company, the investor shall start to subscribe or pay up capital, and the company shall subsequently perform the statutory change procedures for the capital increase, but the company has never convened a shareholders' meeting and made a resolution on the capital increase matter.

(4) The investor has neither concluded an investment and shareholding agreement or related letter of intent with the company, nor has the company convened a shareholders' meeting and made a resolution on the capital increase matter, but there are acts between the investor and the company that comply with the capital increase procedures, such as payment and acceptance of funds, delivery and transfer of property, and modification of the register or business registration.

With regard to methods (1) and (2), the expression of intent between the investor and the company's shareholders' meeting may be completed in sequence. In this regard, the expression of intent that occurs later shall be taken as the starting point, and then combined with the performance of the capital increase or the completion of statutory procedures to specifically determine the time point when the investor obtains equity, that is, shareholder status.

With regard to methods (3) and (4), it involves the judgment of the parties' implied expression of intent. The company, shareholders, and investors may, in the relevant capital increase change procedures or the company's internal governance process, reflect the objective appearance that the investor intends to contribute capital and the company intends to accept new shareholders. The people's court must comprehensively determine this in combination with relevant facts. For example, the company's shareholders' meeting deliberates and votes on the shareholder change matters of the company's articles of association, the investor clearly expresses the purpose of capital contribution when paying the funds, the investor starts to participate in the company's shareholders' meeting resolutions and exercises the common interest rights according to the relevant equity ratio, and the company starts to distribute dividends to the investor according to the relevant equity ratio, and so on. In short, the key facts reflecting the implied expression of intent should be found in such individual cases, and then combined with the relevant performance acts to determine the time point for completing the capital increase.

28. [Substantive Judgment of Investment Behavior to the Company] When shareholders or investors directly invest in the company or invest in projects under the company's name, but without going through the statutory capital increase procedures, the people's court shall pay attention to the following reference points when determining whether the behavior belongs to capital increase:

(1) Whether the funds enter the company's account or the property is transferred to the company's name, whether the funds are not recorded as the company's liabilities, whether the project invested by the new funds obviously forms the new property appearance of the target company, and whether the project is operated and contacted externally in the name of the company;

(2) Whether the newly invested shareholders or investors actually exercise the common interest rights or self-interest rights according to the new investment amount and the new equity ratio structure;

(3) Whether the shareholders, investors, or shareholders' meeting have made agreements, statements, or resolutions on the use, nature, income method, risk undertaking, etc. of the new investment.

When more of the above situations are met in individual cases, it can be determined that the shareholder or investor has actually completed the capital increase to the company. The shareholder or investor cannot directly withdraw the corresponding assets from the company like recovering a loan. If the shareholder or investor wants to recover the corresponding investment, they must complete the capital reduction procedure, otherwise it may constitute a withdrawal of capital contribution.

When fewer of the above situations are met in individual cases and it is impossible to determine that the payer has increased capital to the company, the people's court can guide the parties to sue for relevant rights based on the loan relationship or partnership relationship through explanation.

VI. Applicable Rules for Hidden Capital Contribution (Shareholding on Behalf)

29. [Qualitative Analysis of Hidden Capital Contribution Relationship]

Regarding the qualitative analysis of the relationship between the nominal shareholder and the actual contributor, there are roughly two types of statements or definitions in theory and practice: namely, the 'hidden capital contribution' relationship or the 'shareholding on behalf' relationship. The former tends to the 'formal requirements theory' and the latter tends to the 'substantive requirements theory'. The fundamental difference is that the former insists on mainly defining the hidden capital contribution based on the contractual relationship, and recognizes the shareholder qualification of the nominal shareholder; the latter recognizes that the hidden shareholder is the real owner of the equity and denies the shareholder qualification of the nominal holder.

In principle, we should adhere to the 'formal requirements theory' and the qualitative analysis of contractual relationships. The reasons are: (1) There is no fundamental conflict between the two definitions in terms of substantive conclusions. The definition of 'shareholding on behalf' is mainly aimed at cases or situations where the company or other shareholders are aware of the shareholding situation, and the disputes involved mainly involve internal company relations. In these situations, the relevant formal requirements under the 'hidden capital contribution' definition can also be weakened. In fact, no matter which definition is adopted, the substantive conclusion is to recognize the substantive effect of the hidden capital contribution relationship or shareholding on behalf relationship in the company's internal governance, and the appearance of registration and display does not have internal resistance effect. (2) Acknowledging that the hidden person has the substantive shareholder qualification does not necessarily fully conform to the real intention of the actual contributor. The so-called indirect investment is to exclude one's own shareholder qualification, which may be intended to reasonably avoid the special requirements of administrative control over the shareholder status of a certain type of company, or it may be based on specific investment purposes or business arrangements. In short, the actual contributor may originally intend to use the private relationship with the display person to achieve specific investment arrangements, and he is fully able to foresee the risks of this investment model. Therefore, adhering to the qualitative analysis of hidden capital contribution mainly based on the contractual relationship is not only a natural reflection of the principle of contractual relativity, but also conforms to market transaction laws. On the contrary, there is also suspicion of excessive judicial intervention. (3) The 'substantive requirements theory' actually confuses the capital contribution legal relationship with the general contractual relationship, which does more harm than good. Based on the entrustment of the actual contributor, the company law capital contribution legal relationship formed by the nominal shareholder with the company and other shareholders is different from the general contractual relationship, and it is not appropriate to simply analogize and apply the agency rules. Otherwise, even if only the shareholder qualification of the hidden shareholder is recognized within the company, the uncertainty of this shareholder qualification is very easy to generalize, which will seriously weaken the stability of the shareholder's collective expression of intent or the company's legal person will, and at the same time destroy the stability of the company's internal operation mechanism and governance model. (4) The real-world appearance of the hidden capital contribution model is relatively diverse. The type of case focused on by the definition of 'shareholding on behalf' is only one of them, that is, the situation where the company is internally aware. This definition may form unfair and unreasonable judgment conclusions in other situations or types; and the definition of 'hidden capital contribution' can not only explain the type of company's internal awareness, but also cover the situation where the company or shareholders are not aware, and then construct a more self-consistent and coordinated rule system.

30. [General Rules for Hidden Capital Contribution]

(1) Issues Concerning the Validity of the Contract. The parties to a nominee investment contract (also known as a shareholding agreement) are the actual investor and the nominee investor. Both parties agree that the nominee investor will be the registered shareholder, but the actual investor will contribute the capital, enjoy the investment benefits, and bear the investment risks. This contract is a non-formal contract and does not require a specific written form. The contract's validity is not conditional upon obtaining the consent of other shareholders; even if the company's articles of association or internal shareholder agreement prohibits shareholders from holding shares for third parties outside the company, this only results in the nominee shareholder bearing corresponding responsibilities to the company or other shareholders. The validity of the contract between the nominee shareholder and the actual investor may still be unaffected.

(2) Issues Concerning Shareholder Qualification. The nominal investor essentially has shareholder qualifications, enjoying shareholder rights and bearing shareholder obligations and responsibilities within the company. In principle, they may not use the nominee investment relationship to resist the company, other shareholders, or creditors from asserting relevant shareholder obligations and responsibilities against them. The actual investor is not a company shareholder in substance, does not enjoy company shareholder rights, and, in principle, may not directly assert shareholder rights against the company based on the nominee investment relationship. They are only entitled to assert contractual rights against the nominee shareholder based on the nominee investment contract or shareholding agreement.

(3) Issues Concerning Corporate Governance. In principle, only the nominee shareholder can directly participate in the company's business management within the company's internal governance. If the actual investor directly signs company documents such as shareholder meeting resolutions in their own name, it may lead to defects in the validity of the company documents.

(4) Issues Concerning Capital Contribution Obligations. In principle, the actual investor should first transfer the contributed property to the nominee shareholder, who then transfers it to the company. The actual investor can fulfill the obligation on behalf of a third party. If they directly transfer the corresponding property rights to the company in the name of the nominee shareholder's capital contribution, the effect of fulfilling the capital contribution can be attributed to the nominee shareholder. However, if there are defects in the contributed property that lead to insufficient or untrue capital contribution, the nominee shareholder should still directly bear the obligation to make up for it.

(5) Issues Concerning the Right to Know. The actual investor does not have shareholder qualifications and, on the surface, has no right to directly assert the right to inspect and copy under Article 33 of the "Company Law"; similarly, the nominee shareholder who has exercised the right to know may not directly transfer the obtained internal company information to the actual investor. However, the nominee shareholder may transfer the inspection and copying results to the actual investor in at least the following two situations: first, with the consent of the company or the majority of other shareholders, that is, the company forms a corporate will and agrees to disclose relevant company information to a specific third party; second, the nominee investment model has been known or recognized by all shareholders, and the actual investor has even been actually participating in the company's business management in the name of the registered shareholder.

(6) Issues Concerning "Conversion from Nominee to Registered". The nominee investment legal relationship does not naturally include whether the actual investor has the right or how to become a registered shareholder. The termination of the nominee investment contract does not mean that the actual investor naturally obtains shareholder qualifications. If the actual investor wants to become a registered shareholder or a true shareholder, it essentially requires the formation of a new equity transfer relationship, that is, the nominee shareholder transfers their equity to the actual investor. There are two specific scenarios: ① If the parties agree in the contract that the nominee shareholder should transfer the equity to the actual investor when the nominee investment relationship is terminated, it can be regarded as both parties having reached an agreement on equity transfer; among them, if the actual investor is not a shareholder of the company, the "conversion from nominee to registered" is essentially an external transfer of equity, so the consent of more than half of the other shareholders should be obtained (Article 24, Paragraph 3 of the "Company Law Interpretation III"), if the actual investor is also a shareholder of the company, the "conversion from nominee to registered" is an internal transfer of equity and does not need to obtain the consent of other shareholders. ② If the parties do not agree in the nominee investment contract on how to deal with the equity of the nominee shareholder when the relationship is terminated, and the parties have not reached a supplementary agreement on this after the termination of the relationship, in principle, the actual investor may not directly request the nominee shareholder or the company to change the equity based on their nominee investment contract rights. The nominee shareholder only bears the compensation or compensation liability in the nominee investment contract to the actual investor; however, this does not apply if it can be inferred from the relevant agreements or behaviors during the existence of the nominee relationship that both parties have an agreement on conversion from nominee to registered.

(7) Issues Concerning the Nominee Shareholder's Disposal of Equity. The nominee shareholder's act of disposing of equity is an authorized disposal. When applying Article 25 of the "Company Law Interpretation III", the people's court should not directly cite the relevant provisions of the bona fide acquisition of property rights, but should pay attention to examining the bona fide situation of the third party. If the nominee shareholder and the third party maliciously collude to use the transfer, pledge, or other methods to deliberately damage the interests of the actual investor, the nominee shareholder's act of disposing of equity can be deemed invalid in accordance with Article 154 of the "Civil Code".

31. [Analysis of the Elements of Implicit to Explicit Conversion] Equity transfer is divided into internal transfer and external transfer. Article 24, Paragraph 3 of the "Company Law Interpretation III" stipulates that "if the actual investor requests the company to change shareholders, issue capital contribution certificates, record in the register of shareholders, record in the company's articles of association, and register with the company registration authority without the consent of more than half of the other shareholders of the company, the people's court shall not support it", which essentially belongs to the external transfer rule. If a shareholder is the actual investor of the equity held by another shareholder, and they want to become the registered shareholder of that equity, Article 71, Paragraph 1 of the "Company Law" regarding the internal transfer of equity should be applied, and the consent of other shareholders is not required, and Article 24, Paragraph 3 of the "Company Law Interpretation III" does not need to be applied.

32. [Internal Public Type Anonymous Investment Rules] If the relationship between the actual investor and the nominee shareholder is well-known and recognized by the company and other shareholders, certain adjustments should be made to the relevant internal company rules without denying the shareholder status of the nominee shareholder:

(1) In the internal governance of the company, the rule requiring the actual investor to obtain authorization from the nominee shareholder and act in the name of the nominee shareholder should be appropriately relaxed. The formal procedures for the actual investor to participate in the shareholders' meeting and exercise equity do not need to be strict, especially if the dispute only involves internal company relations, the act of the actual investor directly participating in the internal governance of the company should be recognized as much as possible based on the substantial attribution of equity interests.

(2) In terms of capital contribution obligations, the actual investor can directly transfer the corresponding property rights to the company, and the effect of completing the performance can be attributed to the nominee shareholder; if there are defects in the contributed property that lead to insufficient or untrue capital contribution, the company or other shareholders can directly assert rights against the actual investor.

(3) The nominee shareholder can directly transfer or report the results of exercising the right to know to the actual investor without the consent of the company or other shareholders; conversely, if the company or senior management allows the actual investor to directly inspect and copy relevant materials or books, the people's court should not mechanically determine that the actual investor has damaged the interests of the company or other shareholders due to not having the shareholder's right to know or the company's senior management's dereliction of duty.

(4) The process of an actual contributor's 'hidden to explicit' status can be simplified, especially if more than half of the other shareholders are aware of it. In this case, it is not necessary to specifically obtain the consent of the majority of other shareholders, nor is it necessary for other shareholders to explicitly waive their right of first refusal. When an actual contributor transfers contractual rights to shareholder status through the termination of a hidden contribution relationship, it can be presumed that other shareholders waive their right of first refusal in the 'hidden to explicit' process. Even if there is no written agreement on explicit naming or hidden to explicit transfer between the actual contributor and the nominal shareholder, it can still be determined in individual cases, based on the actual relationship, status, attitude, and tacit behavior between the two parties within the company, that there is in fact a consensus agreement on explicit naming or hidden to explicit transfer, and the actual contributor has the right to sue for explicit naming and change of registration.

(5) When the company directly pays relevant benefits to the actual contributor, the nominal shareholder shall not use the appearance of registration, preparation, or publicity in documents and materials such as the shareholder register and company articles of association to oppose the company or deny the company's actions. The people's court may, based on the substantive effect of the hidden contribution contract or equity holding agreement within the company, restrict the exercise of the nominal shareholder's rights in light of the circumstances of the hidden contribution relationship.

(6) Attention should also be paid to the scope of application when applying the above rules. For example, there may be differences in the awareness and attitude of the initiating shareholders and the subsequently joining shareholders. Therefore, if some of the other shareholders besides the nominal shareholder know or should have known, attention should be paid to treating the other shareholders who do not know or should not have known differently.

33.【Substantial Shareholder Type Hidden Contribution】 When non-company enterprises such as those under ownership by the whole people or collective ownership are restructured into companies, due to the restrictions on the number of shareholders in the company system, a governance model is adopted in which subjects such as company executives, supervisors, or employee stock ownership associations hold shares on behalf of the original enterprise's employees. In this regard, although the majority of employees are hidden in the company's articles of association and industrial and commercial registration, this situation is generally known to the public. Therefore, enterprise employees in a hidden state should be identified as 'substantial shareholders,' that is, truly and directly enjoying shareholder rights and assuming shareholder obligations. In principle, the general rules of the above-mentioned hidden contribution relationship do not apply.

The articles of association or internal rules of such companies often impose certain restrictions or special provisions on the exercise and realization of shareholders' common interest rights or individual interest rights. These provisions are legally binding within the company. Therefore, enterprise employees should exercise their rights in accordance with the relevant company's articles of association or internal rules. The people's court will not support their direct request, based on their shareholder status, for the company to register their explicit naming in accordance with the general provisions of the Company Law.

VII. Liability of Directors and Senior Management for Breach of Duty of Diligence

34.【Scope of Responsible Parties and Substantive Judgment Standards】 The legal subjects of the duty of diligence are limited to: directors, supervisors, managers, deputy managers, financial officers, and the secretary of the board of directors of listed companies and other personnel stipulated in the company's articles of association (Article 216 of the "Company Law").

However, any person who actually enjoys or exercises the powers of a director or senior manager can be a responsible party for the duty of diligence. There are two specific situations: (1) Nominally unqualified but substantially qualified. For example, a person is named as a company department manager (responsible person) or office director (responsible person), but actually enjoys the position or powers of a general manager or deputy manager. (2) Substantially qualified without explicit naming. For example, a shareholder, controlling shareholder, or actual controller is not explicitly named in the company, but actually enjoys control and decision-making power in the company's operation. They substantially exercise the powers of the company's directors and senior managers. Because equity itself does not have the power to directly participate in the company's operation and management, it should not be simply based on Article 20 of the "Company Law" to judge whether they abuse shareholder rights and bear relevant responsibilities, but should use the company law and articles of association regarding the fiduciary and diligent duties of directors and senior managers as the judgment standard.

35.【Exclusion of Collusion Subjects】 Directors and senior managers may not complete infringing acts alone; they may collude subjectively or cooperate consistently in action with personnel other than the legal subjects of the duty of diligence listed in Articles 147 and 216 of the "Company Law." This should be treated differently depending on the method of infringement:

(1) Directors and senior managers are not loyal to the company's best interests and directly infringe on the company's interests by taking advantage of their positions. This kind of behavior is essentially a deliberate tort and is no different from a general tort. If directors and senior managers collude subjectively or cooperate consistently in action with other personnel, the two can constitute a joint tort as stipulated in Article 1168 of the "Civil Code".

(2) Directors and senior managers violate their duty of diligence when performing their duties, causing damage to the company's interests. For other personnel who participate in collusion or assist, such as other general employees of the company, shareholders, or third parties outside the company, they neither enjoy decisive control over the company nor are subject to the regulation or supervision of the duty of diligence. Therefore, they should not jointly bear the responsibility for violating the duty of diligence with the directors and senior managers. Their behavior can be evaluated separately, and the court should judge whether they bear general tort liability based on their fault and causal relationship and other elements.

36.【Specificity of Infringement】 The ways in which directors and senior managers violate their duty of diligence to infringe on the company's interests are specific. It is precisely because they have decisive control over the company's various affairs that exceeds that of other personnel that the specific infringement methods are reflected in the fact that directors and senior managers actually use this decisive control to infringe on the company's legitimate interests.

37.【Basic Basis of Duty of Diligence】 The specific content of the duty of diligence should in principle be limited to the responsibilities and powers stipulated by laws, regulations, and the company's articles of association. However, when applying relevant responsibility norms, the people's court can appropriately expand and refine them through interpretation and analogy, and appropriately add discretionary judgments on the actor's duty of care and duty of attention.

38.【Duty of Diligence in Handover】 Directors and senior managers should take the company's best interests as the standard. They are directly responsible for the company's business management affairs. Even if directors and senior managers are in the stage of job transition, they should handle handover matters properly and diligently maintain the company's interests. As far as newly appointed directors and senior managers are concerned, they have a duty of diligence from the time they are appointed, and should actively contact the original incumbents and actively request and handle handover matters. Therefore, newly appointed directors and senior managers have a positive obligation to realize handover behavior; as far as the original incumbents are concerned, they should also maintain the company's interests in their original positions when leaving office. This is a reasonable extension of the duty of loyalty and duty of diligence. They should suspend active business decision-making behaviors and instead focus on preserving existing interests as their main responsibility, and at the same time assist the new incumbents in handling follow-up matters, and have passive obligations such as cooperating with handover, explanation, and care.

The people's court may, based on the above-mentioned handover obligations, properly determine the obligations and responsibilities of all parties in disputes caused by improper handover between new and old directors and senior managers that result in damage to the company's interests.

39.【Causal Relationship Rules】 When determining the causal relationship between job-related actions and losses, the 'substantial causation' rule in general tort liability should generally not be adopted. Instead, the 'factual causation' or 'conditional causation' rule should be mainly adopted, i.e., the decision-making behavior and the company's loss of interest have a direct causal relationship in fact, without the usual or highly probable nature required by 'substantiality'.

40. [Inevitable Nature of Loss of Interest] The premise for assuming liability for breach of duty of diligence is that the company has actually suffered a loss of interest, which refers not only to the actual loss of the company's inherent interests such as property rights and intellectual property rights, but also to the extent that creditor's rights interests have suffered losses.

Creditor's rights interests are creditor's rights that are paid in money or can be converted into money payments. If the debtor of monetary debt temporarily encounters financial difficulties and has no financial capacity to pay, it will only lead to a delay in performance, and there will be no impossibility of payment. Only after the debtor has determined that there is no property or inheritance available for execution, or after determining the bankruptcy property distribution plan or determining the reorganization repayment rate, can the unpaid principal and interest claims have 'inevitability', and it can be determined that the job-related behavior of the relevant directors and senior executives has led to the company's loss of interest, and then the specific amount of the loss can be clarified.

8. Lawsuit for Denial of Corporate Personality

41. [Elements of Constitution] When applying Article 20, Paragraph 3 of the "Company Law", attention should be paid to checking whether the case meets the following four elements:

(1) Subjective element. The plaintiff should be the company's creditor, and the shareholder should not claim denial of corporate personality against the company itself; the defendant should be the shareholder who has abused the company's independent corporate status and the shareholder's limited liability; and should not be other innocent shareholders.

(2) Subjective element. The shareholder who implements the relevant abuse behavior should do so intentionally, and his purpose is to evade debt, and he has obvious subjective fault; if the shareholder has no subjective fault, or the fault is not obvious and is negligent, and does not reach the level of 'abuse', there is no need to deny the company's personality.

(3) Result element. The damage suffered by the creditor as the plaintiff must reach a 'serious' level, that is, not only does the company lose the ability to pay the plaintiff's creditor's rights, but also other legal bases cannot protect the creditor's interests; for example, although the controlling shareholder has relevant abusive behavior, if the company has sufficient assets under its name, it should not be directly sued by the creditor to assume joint and several liability; for another example, if there is evidence clearly showing that the controlling shareholder took 30 million from the company without compensation and did not keep accounts, he should directly sue to recover it. Only when the controlling shareholder and the company's property are completely commingled and it is impossible to calculate the specific amount he has withdrawn from the company without compensation can the corporate personality denial system be applied.

(4) Causation element. Although the creditor suffers 'serious' damage, if it is not caused by the shareholder's 'abuse' behavior, but by other reasons, such as market changes, transaction risks, and poor company management, then the company's independent corporate personality should not be broken through.

42. [Res Judicata Scope of Denial of Corporate Personality] Denial of corporate personality is only based on specific legal facts and legal relationships in specific cases to break through the general rule that shareholders are not liable for the company's debts and exceptionally order them to assume joint and several liability. The res judicata of a judgment in which a people's court denies corporate personality in an individual case only binds the parties to the lawsuit, does not naturally apply to other lawsuits involving the company, and does not affect the continued existence of the company's independent legal personality.

However, if other creditors file a lawsuit for denial of corporate personality, the facts found in the effective judgment can be used as evidence.

43. [Connection between Lawsuit for Denial of Corporate Personality and Bankruptcy Proceedings] If the company enters bankruptcy proceedings after the creditor files a lawsuit for denial of corporate personality, the people's court hearing the lawsuit for denial of corporate personality shall suspend the trial. After the company is declared bankrupt, the people's court shall rule to reject the creditor's claim in accordance with Article 44 of the "Enterprise Bankruptcy Law". However, this does not apply if the creditor changes its claim in the first instance to include the recovery of relevant property into the company's property.

Before the company is declared bankrupt, if the people's court accepting the bankruptcy application rules to reject the bankruptcy application or terminate the bankruptcy proceedings in accordance with the provisions of Article 12 or Article 108 of the "Enterprise Bankruptcy Law", the people's court hearing the lawsuit for denial of the company's personality shall resume the trial in accordance with the law. (Article 21 of the "Interpretation II of the Enterprise Bankruptcy Law")

9. Validity Review of Valuation Adjustment Mechanism (VAM) Agreement

44. [Basic Understanding of VAM Agreement] For equity investment transactions containing the 'VAM' model, the basic legal relationship is still an equity transfer contract, and it is not appropriate to treat the VAM agreement as a separate legal relationship.

In general equity transfer transactions, the stock price and equity share are consideration for each other; however, when a VAM transaction model is included, the contractual consideration corresponding to the stock price is temporarily uncertain at the time of signing the contract. The consideration may include both the transfer of a specific equity share and monetary compensation or premium repurchase, which can only be finally determined when the agreed conditions are met.

The VAM condition exists as a 'contingent debt' and is part of the transaction consideration and part of the main contractual obligation of the share transferor (VAM commitment party).

45. [Nature of Repurchase Clause] If the VAM agreement model is adopted in the equity transfer transaction, the setting of the repurchase clause is usually aimed at withdrawing the investment, that is, recovering the 'loan' or 'financing amount'. The people's court shall conduct a review of the company's capital system level, that is, whether the repurchase complies with the statutory capital reduction procedures, so as to ensure that the interests of all parties behind the withdrawal of capital contribution or the recovery of the 'financing amount' are fairly protected.

However, if the investor requests the target company to repurchase its shares and at the same time sues the target company to perform the capital reduction procedures, the people's court will not support it because the company's capital reduction procedures are a matter of corporate autonomy and judicial intervention will not be allowed.

46. [Identification of Loan in the Name of VAM] If the VAM target is objectively impossible or almost impossible to achieve, the 'uncertainty' of the attached conditions is essentially eliminated, and the agreed liability for breach of contract will inevitably become the result. The income of this part is the fixed income obtained by the investor, and the content no longer meets the nature of 'VAM'. The people's court may determine it as a loan relationship based on the circumstances of the individual case.