A One-Page Guide to Article 125 of the Company Law — Proxy Attendance and Liability for Resolutions in Joint-Stock Companies

Article 125: Board meetings shall be attended by directors in person. If a director is unable to attend due to legitimate reasons, he or she may appoint another director to attend on his or her behalf by written proxy; such proxy letter must specify the scope of authorization. Directors bear responsibility for board resolutions. Where a board resolution violates laws, administrative regulations, the company’s articles of association, or shareholders’ meeting resolutions—and thereby causes serious losses to the company—the directors who participated in adopting the resolution shall bear compensation liability toward the company. However, a director who has demonstrated dissent during the vote and whose dissent is recorded in the minutes of the meeting may be exempted from such liability. Interpretation 1. Principle of Personal Attendance and Restrictions on Proxy Representation The first paragraph of this article establishes the principle of personal attendance and its exceptions: (i) the principle of personal attendance—“directors shall attend board meetings in person”; and (ii) restrictions on proxy representation—where a director “is unable to attend due to legitimate reasons,” he or she “may appoint another director to attend on his or her behalf by written proxy.” This paragraph imposes three key restrictions on proxy representation: (i) the proxy must be in writing; (ii) the proxy agent must be “another director” (non-directors may not be appointed to vote—a critical distinction from Article 118 governing shareholder proxies); and (iii) the proxy letter must “specify the scope of authorization.” This provision is mandatory: any proxy arrangement violating any of these restrictions is invalid. 2. Director Liability for Illegal Resolutions The first part of the second paragraph prescribes directors’ compensation liability for illegal resolutions. The essential elements are: (i) illegality of the resolution—“violation of laws, administrative regulations, the company’s articles of association, or shareholders’ meeting resolutions”; (ii) resulting harm—“causing serious losses to the company”; and (iii) liable parties—“directors who participated in the resolution,” encompassing three categories: first, directors who voted in favor; second, directors who voted against or abstained but failed to have their dissent recorded in the minutes (deemed as having participated in the resolution); and third, directors who neither attended nor appointed a proxy (unless continuing to serve under Article 70(2), otherwise deemed to have abandoned their duties). 3. Dual Requirements for Exemption from Liability The latter part of the second paragraph sets forth statutory grounds for exemption from liability. Two cumulative conditions must be satisfied: (i) subjective requirement—“having expressed dissent during the vote”: merely voicing oral opposition during the meeting but ultimately voting in favor does not constitute valid dissent; casting a vote against—even without articulating reasons—is valid dissent; casting an abstention vote generally does not satisfy the subjective requirement of “expressing dissent”; and (ii) objective requirement—“the dissent being recorded in the minutes”: the director’s expression of dissent must appear in the official minutes. This is an exemption clause: satisfying both conditions relieves the director from civil compensation liability arising from illegal resolutions—but such exemption applies only to civil compensation liability and does not preclude other liabilities (e.g., administrative, criminal, or liability for breach of fiduciary duty). 4. Normative Significance of “Specifying the Scope of Authorization” in the Proxy Letter The requirement that “the proxy letter must specify the scope of authorization” (first paragraph) is central to proxy representation. Such scope must clearly state: (i) the specific agenda item(s) covered; (ii) voting instructions (e.g., “vote in favor/against/abstain”); (iii) duration of the proxy (e.g., “valid only for this board meeting”); and (iv) signature or seal of the principal. An ambiguously worded scope may be construed as a “general authorization,” permitting the proxy director to vote at his or her discretion—though such votes still count toward the principal director’s voting rights. 5. Systemic Coordination with Articles 188 and 189

A One-Page Guide to Article 124 of the Company Law — Voting Rules and Meeting Minutes for Board Meetings in Joint-Stock Companies

Supreme People’s Court Guiding Case No. 10: Li Jianjun v. Shanghai Jiadongli Environmental Protection Technology Co., Ltd. (Case No. (2010) Hu Er Zhong Min Si (Shang) Zhong Zi No. 436) | Dispute over Revocation of a Company Resolution | Shanghai No. 2 Intermediate People’s Court (released by the SPC Judicial Committee on September 18, 2012) Basic Facts: Jiadongli Company was jointly established by three shareholders—Ge Yongle (40% equity), Li Jianjun (46% equity), and Wang Taisheng (14% equity)—who collectively constituted the board of directors, with Ge Yongle serving as chairman. Its articles of association stipulated: “A board meeting is valid only if attended by more than two-thirds of the directors; resolutions on matters discussed at the meeting require approval by more than two-thirds of all directors to become effective.” On July 18, 2009, Chairman Ge Yongle convened and chaired a board meeting by telephone; all three directors attended, and the meeting adopted a resolution stating: “Given that General Manager Li Jianjun used company funds for stock trading on the secondary market without prior board approval—causing enormous losses—the board hereby removes him from the position of general manager, effective immediately.” Plaintiff Li Jianjun filed suit seeking revocation of the board resolution. Judicial Reasoning: The Shanghai No. 2 Intermediate People’s Court (appellate court) held that, regarding procedural convening, the meeting was lawfully convened by the chairman and attended by all three directors—complying with procedural requirements. Regarding voting method, the articles required resolutions to be approved by “more than two-thirds of all directors”; with three directors total, “more than two-thirds” meant at least two. Here, two directors voted in favor—satisfying the charter’s voting threshold. Regarding resolution content, the articles expressly empowered the board to dismiss the general manager; thus, the resolution itself did not violate the articles. Even if the stated grounds for dismissal were unfounded, that would not warrant revocation of the resolution. Accordingly, the appellate court reversed the trial court’s judgment and dismissed Li Jianjun’s claim. The Supreme People’s Court designated this case as Guiding Case No. 10 on September 18, 2012. Key Adjudication Principles: In adjudicating disputes over revocation of company resolutions, people’s courts must examine: (i) whether the meeting convening procedure violated laws, administrative regulations, or the company’s articles of association; (ii) whether the voting method violated laws, administrative regulations, or the company’s articles of association; and (iii) whether the resolution content violated the company’s articles of association. Provided none of the above violations occurred, the factual accuracy of the resolution’s underlying basis or the validity of its stated rationale falls outside the scope of judicial review. This case directly aligns with the core theme of Article 124 of the Company Law—“Board Meeting Attendance and Voting Rules.” The company’s charter prescribed “attendance by more than two-thirds of directors + approval by more than two-thirds of directors,” which corresponds to the new law’s statutory minimum standard of “a majority in attendance + approval by a majority of all directors” (i.e., the new law’s “majority” sets a statutory floor, while charters may impose higher thresholds). [Learning Insights] 1. Verification of the “Dual-Majority” Rule: Paragraph 1 of Article 124 prescribes the “majority attendance + majority approval by all directors” rule as the core procedural standard for board meetings in joint-stock companies. When reviewing the validity of a board resolution, lawyers should verify in sequence: (i) the total number of directors; (ii) the number of attending directors (e.g., at least four out of seven); and (iii) the voting ratio (e.g., at least four affirmative votes out of seven directors). Failure to meet any one criterion may render the resolution void ab initio. 2. Boundaries of Charter-Based Autonomy: When assisting clients in drafting charters for joint-stock companies, lawyers should: (i) verify whether the charter’s voting threshold exceeds the statutory minimum under this article; (ii) allow the charter to elaborate on specific voting procedures, but never permit deviation from the “one director, one vote” principle; and (iii) permit the charter to define specific circumstances requiring recusal of interested directors, but never allow it to undermine the statutory minimum passage threshold prescribed in Article 124. 3. Interconnection Between Board Meeting Minutes and Director Liability: Paragraph 3 of Article 124 mandates “meeting minutes + signatures,” which constitutes both an internal management obligation and critical evidence for allocating director liability. In representing directors in liability disputes or shareholder derivative suits, lawyers must: (i) verify the completeness of the minutes; (ii) verify directors’ signatures; and (iii) verify recording of dissent—checking whether dissenting directors explicitly voiced objections during the vote and requested inclusion in the minutes.

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