Changes on validity of the undisclosed guarantee of a public company

To protect the interests of the minority shareholders, the regulators and exchanges ask a public company to follow certain provisions and requirements of internal approval and information disclosure on the guarantee. The “undisclosed guarantee” used in practice refers to the guarantee that is made without following the internal approval and public disclosure processes as provided for and required. A commonly seen “undisclosed guarantee” is the case where the actual controllers or majority shareholders of a public company, by taking advantage of their control over the company, issue guarantee documents with the stamp of the company for the debts of their own or any affiliated party. The public company might be called to perform the guarantee obligation when the debtor is insolvent – as a result, the assets of the majority shareholders are occupied, and the interests of the company and the minority shareholders are jeopardized.

The Company Law has laid down provisions as to the process by which a guarantee is made in Article 16, as follows:

(1) where the company invests in other companies or makes guarantee to others, the matter shall be decided by the resolution of the board of directors, the shareholders or the shareholders’ meeting as per the articles of association; where the articles of association have made limits to the total amount of the investments or the guarantees, or to the amount of single investment or guarantee, the limits shall not be breached;

(2) where the company makes guarantee for the shareholders of the actual controllers of the company, the matter shall be decided by the resolution of the shareholders or the shareholders’ meeting;

(3) the shareholders provided for in the preceding item, or the shareholders dominated by the actual controllers provided for in the preceding item, shall not participate in the resolution, and the matter will pass by the majority votes of the remaining shareholders with voting rights.

Wu Jiejang is a partner and Hua Han is a paralegal at Jingtian & Gongcheng.