Supreme People’s Court to issue opinions on the application of the PRC Company Law

In December 2006, the Supreme People’s Court issued a draft of the Several Issues Concerning the Application of the Provisions (No. 2 and No.3) (the “Draft Provisions”) for comments. The Draft Provisions are expected to be promulgated in the first half of 2007. The Draft Provisions provide guidance on a number of issues, including disputes arising in relation to nominee shareholder arrangements and transfer of equity interests in limited liability companies (LLCs).

Nominee shareholder arrangements

Under a nominee shareholder arrangement, a person or company holds shares on behalf and for the benefit of the de facto investor. In general, while the nominee is the legal owner of the shares, the de facto investor (the “beneficial owner”) expects to remain entitled to receive dividends and the capital growth of the shares.

The Draft Provisions state that the company’s obligations towards shareholders are only owed to those registered on the shareholders roster, and clarify that the People’s Court should reject an action brought by the beneficial owner seeking to compel the company to perform an obligation owed to shareholders. However, the People’s Court should accept such an action if there is a “special agreement between the beneficial owner and the company”. It is expected that the final version of the Draft Provisions will further define what is a “special agreement” but one may suppose that a properly drafted agreement (which does not contravene laws and regulations) should fall within the ambit of this definition.

If promulgated, the Draft Provisions would mark the Supreme People’s Court’s departure from its previous position. In the draft of the Matters Relevant to Several Questions on the Trial of Corporate Disputes Provisions (which were circulated for comments in 2003 but never promulgated), the Supreme People’s Court stated that nominee shareholder arrangements were not binding on the company unless (1) the nominee shareholder arrangement was legal and (2) more than half of the company’s other shareholders knew that the nominee shareholder’s contribution to the company’s registered capital was actually paid by the de facto shareholder. The Shanghai High People’s Court also issued opinions in December 2003 describing the circumstances in which courts would enforce nominee shareholders arrangements.

Transfer of equity interests

Under article 72(2) of the PRC Company Law, a shareholder of an LLC (without foreign-invested enterprise status) must secure the consent of more than half of the other shareholders before transferring its equity interests to a person other than a shareholder. If more than half of shareholders do not consent to the transfer, dissenting shareholders must purchase the equity interests to be transferred; otherwise they are deemed to consent to the transfer. The transferring shareholder must disclose to non-transferring shareholders information on the potential buyer and the main provisions of the equity transfer contract to be entered into with the potential buyer. Non-consenting shareholders must purchase the equity interests within a “reasonable period of time”.

The Draft Provisions also introduce the possibility that non-consenting shareholders be allowed to purchase the equity interests at a lower price than the price initially agreed between the transferring shareholder and the potential buyer. The Draft Provisions require that non-consenting shareholders and the transferring shareholder agree upon a price. If they cannot agree upon a price, the Draft Provisions state that the price should be determined through valuation by a qualified valuer.