Protection for Interests of Dormant Shareholders
Protection for the Rights & Interests of Dormant ShareholdersAuthor: sinolinkconsulting
The form of dormant investment is quiet frequent now in economic life, which is beneficial to gather the idle funds for social production, resolving the operator's pressure for fund demand, and promoting economic development. At the same time, however, the legal protection on the interests of dormant investor is still not clear-cut for the reason that China has not established the system of dormant shareholders so far. This article aims to introduce the meaning of dormant investor?the conditions which can authenticate the identity of dormant investor and the ways to achieve the protection on their rights and interests.
Dormant investor refers to the actual investors who set up company or invest under written or verbal agreement in the name of others, and are not documented by commercial registration, on register of shareholders or on any other publicity materials, in order to circumvent the law or due to some other reasons.
Correspondingly, nominal investors, whose names are recorded in publicity materials, yet do not invest in practice. According to Paragraph 4 of Article 33 of the Company Law , "Company shall register the names of shareholders and the amount of capital contributions of the shareholders with the company registration authority and, in the event of any change thereof, apply for alteration registration. Unless duly registered, the above-mentioned items and any changes thereof shall not be a defense against a third party." It can be seen that China doesn't completely negate the phenomenon of dormant investment.
Generally speaking, dormant shareholders won't be eligible for status of shareholders. But it doesn't mean that the nominal investors would be identified as shareholders under any circumstances. According to the above explanations of dormant shareholders, several conditions need to be considered generally when authenticate the identity of dormant shareholders:
1. Whether the dormant investors have invested the funds, shared the rights & obligations of shareholders or not.
2. The dormant and nominal investors should conclude an agreement, which are the true notions of both sides. The contract on rights and obligations reached between dormant investors and nominal investors makes no essential difference from the general civil contract. The contract theory of general civil law is fully applicable to such an agreement between shareholders. For the company, such contract does not involve the interests of a third party, merely changes the rights and obligations distributing of the shareholders in this company. Therefore, as long as the contract is established on the basis of agreement and goodwill of both sides, the legal effect of such contract should be confirmed.
3. Whether the dormant investors have gained recognition of the invested company or other shareholders of the company. This is specific to limited companies, because the LLC is characterized for its collaboration of human resource, and the tacit understanding as well as the trust between shareholders is the basis of the orderly operation of the company. The listed company with greater liquidity of its shares will not be considered under normal circumstances.
4. Certification of the shareholder's identity and the balance of the internal and external relationships of the company. When the affirmation of shareholder's identity involves the interests of a third party beyond the company, it should stick to publicity and Rechtsschein theory (theory of appearance), and protect the reasonable trust of the third party. That is, the shareholders recorded in commercial registration, articles of association, register of shareholders, investment certification and such legally proved materials are regarded as statutory shareholders, so as to maintain the safety and efficiency of transactions.
5. Whether dormant investment itself is for the illegal purposes to circumvent the mandatory provisions. If the illegal purposes do exist, the identity of the shareholder should not be authenticated.
On all accounts?certification of dormant shareholder's qualifications should be treated differently. And it should follow the principle of "double standards and differentiated".When deal with the dispute on internal relationships, we should follow the rule of freedom of contract and autonomy of the will. While handle with the external legal relationships between the corporation and the third party, we should follow the publicity and Rechtsschein theory.
From the present situation of legal system in China, if the dormant shareholder wants to put his own rights and interests under the protection by the existing legal framework, he should not only have various aforementioned element conditions before and after the contribution, but also needs to take judicial litigation about confirmation of the shareholding ownership. And at last the shareholder's identity in the corporation will be authenticated by the court. Since the assumpsit between dormant shareholders and nominal ones does not have effectiveness on the corporation, the actual investor can not claim shareholder's rights in the corporation, so s/he has to institute judicial litigation about confirmation of the shareholding ownership in the first place.
It is hoped that with the consummation of legal system the system for dormant shareholder could be established in our country officially. If so, it will enhance investors' investing enthusiasm, promote economic development and create utmost social wealth.About the Author:
Sino-Link Consulting is a comprehensive consulting firm based in Beijing, aiming at providing the full spectrum of international business and legal consulting services for clients interested in manufacturing, investing, or opening an office or factories in China. The One-Stop services provided by Sino-Link are recognized as convenient, efficient, and effective.
Article Source: http://www.articlesbase.com/law-articles/protection-for-the-rights-interests-of-dormant-shareholders-955449.html