Equity and M & A
On the rights and risks of dormant shareholders
Date:2019-11-04 17:12:55 | Visits:

On the rights and risks of dormant shareholders

    Under the current socialist market economy in China, the phenomenon of dormant shareholders is still common in the process of company establishment and operation. In general, the dormant shareholder is the actual investor, and the nominal shareholder is the person who enjoys the equity of the company in name because of accepting the contribution of the dormant shareholder. In the third judicial interpretation of the company law, the rights of dormant shareholders are officially recognized.

    The author thinks that the third judicial interpretation clearly stipulates the rights of the former secret shareholders, to a large extent, protects the security of the hidden investors and their investment, but at the same time, the risks of the secret shareholders also exist.

First, in the enjoyment of rights
1. The legal effect of the agreement signed by the dormant shareholder and the nominal shareholder. The judicial interpretation confirms that their agreement has legal effect in the absence of the invalidity of the contract stipulated in the contract law.
2. As the dormant shareholder is the actual investor, according to the agreement between the dormant shareholder and the nominal shareholder, the investment income shall be owned by the dormant shareholder. According to the judicial interpretation, the ownership of investment income is clarified, and it is emphasized that if the nominal shareholders deny the rights and interests of dormant shareholders on the basis of the records in the register of shareholders and the registration of the company registration authority, the court will not support it.
3. Under certain conditions, dormant shareholders can be named. That is to say, the dormant shareholders shall be approved by more than half of the other shareholders (excluding the nominal shareholders) of the company before requesting to change the shareholders, issue the capital contribution certificate, record it in the register of shareholders, record it in the articles of association of the company, and handle the registration or filing with the company registration authority.
4. The effect of the action of disposing the stock rights by the nominal shareholder without permission. The nominal shareholder transfers, pledges or disposes the stock rights registered in its name without the consent of the dormant shareholder. The dormant shareholder can request the court to determine that the action of disposing the stock rights is invalid. If the transferee obtains it in good faith, he may claim compensation from the nominal shareholder for the loss of the dormant shareholder caused by the equity transfer.

Second, there are risks
1. For the legal risks of the agreement signed between the dormant shareholder and the nominal shareholder, both parties shall sign a written agreement to confirm the terms that both parties think should be written clearly, especially in terms of identity and interests. Otherwise, in case of any dispute or accident, there will be no written basis, which is extremely passive to both parties.
2. Under the premise of market economy, the common sense of investment is that investment has risks. Some dormant shareholders are involved in operation and management, some are not involved in operation and management. The former can still control the investment income. If the latter doesn't know the operation situation often, it can't control the investment income, even be cheated, and finally lead to the failure of investment or even the loss of capital.
3. The risks of anonymity. When permitted by laws and regulations, the anonymity shareholders shall go through the procedures of anonymity in time, i.e. industrial and commercial registration of change or filing, and sign a written agreement of anonymity to avoid the hidden risks due to the anonymity stage.

Third, risk prevention and precautions
   Under normal circumstances, dormant shareholders and nominal shareholders are close relatives, friends, fellow countrymen and so on. Some are oral agreements, some are even monarch agreements, without any oral and commitment, let alone written agreements. The author suggests that both parties should sign a written agreement, and try their best to hire professional legal personnel to check the drafting, modification and final signing of the agreement, control their own risks in terms of the agreement, so as to protect the economic interests of both parties, avoid disputes or accidents in the future, which are difficult to be solved through negotiation, and difficult to be handled by the court To apply the terms in force in its agreement.
    The above are the author's views on the rights and risks of the company's dormant shareholders. If there are any improper or even wrong points, please criticize and correct them.

 Yongbin  Ren
Jiangsu dongdazhou law firm