Key Points:

  • A transferee may request to terminate an equity transfer agreement (ETA) and claim for damages if the transferor fails to apply for approval for the ETA
  • The court may ascertain the status of an anonymous shareholder according to certain conditions
  • If the shareholder has not completed its obligation of capital contribution, the associated equity interest may be restricted

The Supreme People’s Court of the PRC (SPC) issued the Rules Concerning Several Issues of Judging Foreign Invested Enterprises’ Disputes (the Rules) on 5 August 2010, which went into effect on 16 August 2010. The Rules focus on the application of laws for establishing and changing foreign-invested enterprises (FIEs) including issues related to the effectiveness and legal consequences of ETAs without administrative approval, equity transfer and equity pledge. In terms of issues related to the liquidation and dissolution of FIEs, the SPC plans to prepare another set of rules to interpret the application of laws on disputes involving these issues. Neither the Rules nor the rules to be drafted will cover disputes arising in mergers and acquisitions by foreign investment, as SPC stated that these disputes are more complicated and the legal basis is inadequate to map out judicial interpretations for them.

The main issues addressed in the Rules include the following.

Effectiveness of the ETA Without Administrative Approval

If the transferor does not perform its obligation of applying for the approval of the ETA with the relevant authorities after the ETA is executed by the parties, the transferee may (a) request to terminate the ETA and claim for damages or (b) request the transferor to perform its obligation of applying for approval of the ETA, and the court shall sustain such requests. The damages may cover the loss of the price difference of the equity interest, proceeds of the equity and other reasonable losses suffered by the transferee.

Status of the Anonymous Shareholder

According to the Rules, the court may ascertain the status of the shareholder whose name is not specified in the approval certificate of the FIE issued by the approval authority (i.e., an anonymous shareholder) provided that (a) the anonymous shareholder has actually made an investment in the FIE; (b) shareholders other than the nominal shareholder recognize the shareholder status of the anonymous shareholder; and (c) the court or the anonymous shareholder has obtained approval to change the status of the anonymous shareholder to shareholder. Regarding the entrustment agreement between the nominal shareholder and anonymous shareholder, the court will confirm the agreement is valid provided that the content of the agreement does not violate any PRC laws or regulations.

Responsibilities of Shareholders on Capital Contribution

In the case of capital contributed by properties such as land use rights and buildings, the shareholder neither delivers the properties to the FIE as capital contribution nor completes a title registration for the contribution. Such a contribution will be deemed as failure to complete the obligation of capital contribution, and the associated equity interest will be restricted. If the properties have been used for the FIE without completing title registration procedures, the court will deem that the shareholder has completed its capital contribution obligation provided that the shareholder completes the registration procedures within the time period required by the court.