If a company appoints its director and enters into an agreement with the director with respect to such appointment and his/her rights and duties thereunder, can disputes arising from such agreement be subject to arbitration in accordance with the arbitration clause?

The Answer is NO. In accordance with a final judgment rendered by the Beijing Second Intermediate People’s Court inTang v. Beijing XX Decoration Technology Company (2019), the agreement, at least the part of which in relation to the organizational structure and internal governance matters, may not be arbitrable.

I. The Case

On 11 Sept. 2019, the Beijing Second Intermediate People’s Court found in its second-instance judgment of Tang v. Beijing XX Decoration Technology Company (“the Company”) that “appointing directors and determining directors’ remunerations are internal organizational acts of the company”. (See [2019] Jing 02 Min Zhong No. 10222)

In this case, Tang and the Company signed a Directorship Agreement in 2006, stipulating that the Company appointed Tang as a director, and he could enjoy rights to receive dividends during the directorship term. However, in the resolution of the Company’s shareholders meeting, Tang was appointed as a supervisor instead of a director. Afterwards, Tang filed a lawsuit with the court to obtain the dividends provided in the agreement.

The court of second instance held that: (1) the shareholders’ meeting had the power for the directors appointment and determination of director remuneration, so the directorship agreement would not enter into force until the shareholders’ meeting had passed relevant resolutions; (2) in terms of the relationship between the shareholders’ meeting resolutions and the directorship agreement (as an engagement contract in nature), appointing directors and determining directors’ remunerations were internal organizational acts of the company and did not involve the protection of the interests of third parties in the transaction.

The court of second instance determined that the Directorship Agreement had not yet come into force as no relevant resolution was made in the shareholders’ meeting. Accordingly, the court ruled not to uphold Tang’s claim.

It is noteworthy that the court of second instance made a legal judgment in this case: “appointing directors and determining directors’ remunerations are internal organizational acts of the company and do not involve the protection of the interests of third parties in the transaction”.

This judgment draws our attention to an issue: whether the directorship agreement is arbitrable.

Ⅱ. An Article in People's Court Daily

The court of first instance of the case published in the People’s Court Daily on 14 Jan. 2021 an article titled Director Appointment Agreements without a Valid Resolution of the Shareholders’ Meeting Shall Be Invalid (未经股东会作出有效决议而签订的董事委托合同无效), introducing and analyzing the aforementioned case. The author of the article emphasized that: (1) pursuant to Article 37 of the Company Law, the election and replacement of directors and supervisors who are not employee representatives and determination on the remuneration of directors and supervisors are within the functions and powers of the shareholders’ meeting of a limited liability company; (2) the agreement on the appointment and remuneration of directors signed between the company and the potential directors is a type of engagement contract for the company to entrust the director candidates to perform the duties as a director and deal with the company's affairs.

It can thus be seen that, in the view of the court of second instance, the company’s execution of the agreement on the appointment and remuneration of directors is actually arranged by the Company in accordance with the Company Law and the Articles of Association with respect to its organizational structure and internal governance and other matters, and such matters will not involve any transaction or protection of the interests of the parties to the contract.

Therefore, disputes arising from such director engagement agreements are likely to be regarded by the court as corporate governance disputes, rather than contractual disputes and other disputes over property rights and interests between citizens, legal persons, and other organizations of equal status, which may be submitted for arbitration pursuant to Articles 2 and 3 of the Arbitration Law.

In summary, the author of this post reminds that: based on the opinion of the court of second instance in this case, disputes arising out of director engagement agreements, at least the part relating to the organizational structure and internal governance matters will probably fail to comply with the provisions on arbitrability of the Arbitration Law, and therefore the dispute has to be submitted to the court in accordance with the Company Law and the Articles of Association.

Disclaimer: This post does not represent legal advice by the author on any relevant issues. If you need legal advice or professional analysis, please consult with an attorney.