Silicon Valley Legal Bible（13）Are unanimous actors actually invalid?

Silicon Valley Treasure Trove Forty-Two Chapter Sutra, a legal encyclopaedia tailored for founders. I'm Xiaoxiao Liu, a US attorney.

In some startups, the shareholdings of several founders are relatively dispersed, and there is not an overwhelming majority shareholder. In order to prevent some of them from turning against each other, and in order to enable several founders to be united in their efforts to fight for the common good, many people will think of the concept of "parties acting in concert". But is the "concert party" really as magical as we think? Why are concerted parties ineffective in the United States? And why do concert parties not work so well in China?

Today we will talk about concert parties.

1.Is a "concerted action agreement" valid in China?

The mainstream view of the Chinese courts is that as long as the concerted action agreement is the true intention of the parties, then the agreement is legal and valid. However, if there is a significant change in the objective situation, the agreement may be cancelled. And after the breach of contract, whether it can be directly in accordance with the agreement of the concerted party agreement, the courts around the world also have different opinions, confusing.

1.1 Arbitrary cancellation right

Firstly, let's see whether the concert party agreement can be cancelled arbitrarily. The shareholders of a company often act in concert for the common good, and the agreement may be dissolved if various conflicts arise in subsequent operations, resulting in some shareholders being unwilling to act in concert with other shareholders any longer.

The signing of the "concerted action agreement" is essentially a transfer of the voting rights of the shareholders, that is, a shareholder agrees to delegate his voting rights to another shareholder within a certain period of time, and then when the principal does not want to continue to allow the delegate to travel on their own voting rights, can be terminated at any time.

1.2 Liability for breach of contract

For breach of contract, there are two types of compensation, one is the continuation of performance, or in English called specific performance, that is to say, the penalty for failure to perform is performance. There is also a monetary compensation, in English called liquidate damage, that is, how much you lose, I discounted into money to you on the line.

However, it should be noted that all breaches of contract can be compensated by monetary damages (liquidate damage), but not necessarily by continuing to perform (specific performance) to make up for, for example, when you sign a labour contract with an employee, you say that the company will support the employee to obtain a master's degree, and that the employee will need to work in the company for at least five years after obtaining the master's degree, but the employee will need to work in the company for at least five years after obtaining the master's degree. For example, you signed an employment contract with an employee that said the company would support the employee's master's degree and that the employee would be required to work for the company for at least five years after receiving the master's degree. So can you continue to honour this breach of contract by continuing to do so? No, because it is a person's freedom to do what he wants to do and where he wants to work, and if you force a person to do what he wants to do and which company he wants to work for, then it is slavery. So in this case the only way to make up for it is through monetary compensation (liquidated damage).

Often, when a contract is tied to property rights, it is easy to make up for the damage through monetary compensation (liquidate damage). Contracts with personal rights, on the other hand, are difficult to make up for through specific performance after breach. The same is true for the right to vote, as a shareholder, I vote for whoever I want, which is something that can't be bought for that amount of money. So if one of the shareholders is not willing to act in concert one day, no one else can force him to vote the way he wants.

2.Are unanimous shareholders valid in the United States?

On this issue, I really have some say, why, because I have been actually involved in an equity dispute case, is the company several shareholders, in accordance with China's unanimous agreement directly translated a copy over to the U.S. company to use. Later, a dispute arose, the fight to the Northern California Superior Court, the results, the court directly do not consider the effectiveness of the concert party agreement.

Why? In fact, it is similar to the concept of personal rights mentioned earlier, there are some rights that you can say that you transferred to whom, for example, I sell goods to earn money, the right to income I transferred to the Zhang San Li Si's. But for example, a person's right to honour, the right to reputation, and the right to be heard. But for example, a person's right to reputation, this kind of I can say I don't want the right to reputation, I transfer my right to reputation to Zhang San Li Si, this is okay? The right to vote as a shareholder is a basic right of shareholders, just like what are our most recent rights as human beings, such as eating, drinking and breathing, can I say that I will transfer these rights to Zhang San Li Si?

In Chinese court judgements, the more conservative courts, taking into account the non-transferable nature of personal rights, will also consider the concerted action as a kind of voting proxy right. However, in the United States, which places more emphasis on each individual's sense of independence, the effectiveness of concerted action is not recognised at all.

3. Can directors, supervisors and executives sign a concerted action agreement?

Note that our previous concerted action person, are between shareholders, and some people will ask, so the directors and supervisors can sign a concerted action person? Directors and supervisors are directors, supervisors, and executives, and there is this supervisor in China, but there is no supervisor in the U.S. So let's talk about directors and executives.

If the validity of a concerted action between shareholders is subject to divergent views, then we can say with an iron hand that a concerted action between directors and executives is invalid!

Why? Because unlike shareholders, the basic obligation of directors and executives is the fiduciary duty to the company, that is to say, the reason why the company chooses you as directors and executives, that is to let you be responsible for the company, if the directors and executives give up their own independent judgement and standpoints, the right to vote beforehand to give up the right to other people, only to be the head of other people, so this is obviously lost! Fiduciary Duty to the company.

Moreover, have you noticed that we have never heard of any famous company using this legal tool of concerted action, and from the court judgements I have researched, they are all cases of some small companies.

So see here you should understand, the concerted action person is not as fabled so god, in many of the big right and wrong, the so-called "concerted action agreement" is also so pale and powerless, unbeatable. Founders should not rely too much on such a "magical" document, but to do a good job of the company's equity distribution, there is a healthy shareholding structure, rather than any fancy agreement is much more useful.

Silicon Valley's 42 chapters, a legal encyclopaedia for founders. I'm U.S. attorney Xiaoxiao Liu.