A company's failure to pay dividends for several years does not automatically entitle a shareholder to a buyout. For a Chinese limited liability company, the dissenting-shareholder remedy and the remedy for controlling-shareholder abuse under Article 89 of the Company Law must be examined separately. A dividend claim, a transfer to another purchaser and an acquisition by the company are different legal routes.
1. What does the five-year dividend rule require?
Article 89(1)(1) requires five consecutive years without profit distributions, profitability throughout those five years and satisfaction of the statutory conditions for distributing profits. Voting against the relevant shareholders' resolution is also an important condition of this route. Growing revenue, a substantial bank balance or a shareholder's belief that the business is profitable is insufficient by itself.
The evidence should cover annual financial statements, audit materials, prior losses, reserve allocations and actual distributions. Article 210 regulates loss recovery, reserves and distribution of remaining after-tax profits. Zero corporate income tax payments may reflect tax relief or differences between tax and accounting treatment; that fact alone does not establish an absence of accounting or distributable profits. Conversely, tax payments do not prove that all profits are available for distribution.
2. Preserve the dissent and calculate the deadline
Keep the distribution proposal, meeting notice, minutes, voting records and evidence of delivery, so the dissent can be linked to the challenged resolution. Under Article 89(2), if no acquisition agreement is reached within 60 days after the resolution, the shareholder may sue within 90 days after that resolution. Both periods run from the resolution date: the 90 days are not added to the 60 days.
If the company refuses to convene a meeting, disclose documents or otherwise permit the exercise of shareholder rights, the remedy must address that conduct. Sending a buyout demand alone does not establish the statutory conditions. Negotiations and inspection requests should not be assumed to suspend the statutory deadline.
3. Controlling-shareholder abuse is a separate route
Article 89(3) allows other shareholders to require the company to acquire their equity at a reasonable price where a controlling shareholder abuses shareholder rights and seriously harms the company or other shareholders. The five-year dividend condition should not be mechanically imported into this route. However, the claimant must establish abusive conduct, serious harm and the connection between them; ordinary business disagreements are not necessarily serious harm under the statute.
Related-party transfers of benefits or prolonged exclusion of minority shareholders coupled with harm to their financial interests require examination of transaction substance, fund flows, governance records and actual loss. The timing and rules applicable to a paragraph 3 claim require separate analysis. Neither mechanically applying the 60/90-day procedure associated with paragraph 1 nor assuming an unlimited period is appropriate.
4. What should inspection and valuation establish?
Article 57 gives shareholders of a limited liability company information rights. A request to inspect accounting books and vouchers must be made in writing and state its purpose; a refusal can be challenged in court. Obtaining records is often useful for assessing profitability and valuation, but winning an inspection lawsuit is not a universal prerequisite to every buyout claim.
A reasonable price is not automatically the registered capital, current net asset value or the shareholder's own quotation. Assets, liabilities, ongoing operations, contingent liabilities, the valuation date and supporting evidence should inform negotiations or appraisal. Under Article 89(4), equity acquired through these statutory routes must be lawfully transferred or cancelled within six months.
5. Identify who must purchase the equity
A contractual purchase by another shareholder differs from an acquisition by the company itself. The former requires analysis of the contract, transfer rules and ability to perform; the latter also involves capital maintenance and creditor protection. Merely replacing five years with two years in the articles of association does not establish an unconditional company buyout obligation. If a valid dividend resolution already exists but remains unpaid, a distribution claim should also be considered.
Start by deciding whether the objective is payment of dividends or an exit, then prepare a profit evidence schedule, a resolution timeline and a valuation proposal. This article addresses the current Company Law. Legal facts arising before 1 July 2024 require a separate temporal-applicability analysis.
Authority: Company Law of the People's Republic of China, Articles 57, 89, 210 and 212.