Key words: Dormant partner, dissolution of company
Main points of judgment: In accordance with the Company Law of the People’s Republic of China and its judicial interpretation, the subject who should have the right to bring a lawsuit for dissolution of company is the company’s shareholder, which refers to the shareholder registered on the register of shareholdersaccording to the general legal principles of the People’s Republic of China. Therefore, Plaintiffs, as dormant partners of Defendant Shenzhen Hongmei Hardware & Plastics Co., Ltd. (“Hongmei Company”), are not listed in the register of shareholders and thus shall not file the suit for dissolution of the company.
Applicable Articles of Law
Article 119 of the Civil Procedure Law of the People’s Republic of China and Article 208(3) of theInterpretation of the Supreme People’s Court on Application of the Civil Procedure Law of the People’s Republic of China
Case Index
First-instance Trial: Paper of Civil Ruling ([2015] Shen Qian Fa She Wai Chu Zi No. 73) entered by the People’s Court of Qianhai Cooperation Zone, Shenzhen,
Basic Facts
Plaintiffs SHEN, Fenfang and YE, Weiguang filed a suit, claiming thattwo Plaintiffs are Defendant’s actual contributors, and LIU, Yulan and PAN, Yongchao, who were not involved in this case, are the dormant shareholders of Defendant’s. To confirm their qualification as the actual contributors of Defendant, Plaintiffs filed a suit before the court. The Civil Rulings([2011] Shen Bao Fa Min Si Chu Zi No. 121)entered by the People’s Court of Baoan District, Shenzhen and ([2014]Shen Zhong Fa She Wai ZhongZi No. 19)entered by the Intermediate People’s Court of Shenzhen affirmed Plaintiffs’ qualification as the actual contributors of Defendant. And the Civil Ruling ([2014]Shen Zhong Fa She Wai Zhong Zi No. 19) has taken effect since January 19, 2015. Defendant Hongmei Company was incorporated by Plaintiffs on July 6, 2006 with LIU, Yulan and PAN, Yongchao, who were not involved in this case, being registered as the shareholders.From the end of 2008 and the beginning of 2009, Plaintiffs and dormant partners LIU, Yulan and PAN, Yongchao, who were not involved in this case, started to have more and more intensified conflicts, resulting in Plaintiffs’ loss of control over Hongmei Company. To protect their rights and interests, Plaintiffs filed several suits with the causes of action being disputes over property ownership, stock rights and confirmation of stock rights against Defendant(s) or third party(parties) LIU, Yulan, PAN, Yongchao and Hongmei Company, the corresponding case numbers of which are[2009] Shen Bao Fa Min Yi Chu Zi No. 2698 (withdrawn), [2010] Shen Bao Fa Min Er Chu Zi No. 2948 (withdrawn), [2011] Shen Bao Fa Min Si Chu Zi No. 121 (first-instance judgment announced) and [2014] Shen Zhong Fa She Wai Zhong Zi No. 19 (second-instance judgment announced). The first-instance and second-instances trials of the case ([2011]Shen Bao Fa Min Si Chu Zi No. 121) were both served to Defendant Hongmei Company and LIU, Yulan by public notice. Defendant Hongmei Company has discontinued operation since January 2010. The official seal and seal for finance of said companywere still under LIU, Yulan’s and PAN, Yongchao’s control. The conflict between Plaintiffs and the dormant partners of Defendant Hongmei Company, LIU, Yulan and PAN, Yongchao over the rights and interests of the company wasirreconcilable and thus the continuing existence of Defendant Hongmei Company would severely infringe the rights and interests of Plaintiffs’ as the actual contributors. Plaintiffs held that Defendant Hongmei Company has met the conditions of dissolution, and hereby filed the suit for dissolution of Defendant Hongmei Company, pleading for judgment of dissolution of Defendant Hongmei Company.
Though legally summoned to this court, Defendant Hongmei Company and third parties LIU, Yulan and PAN, Yongchao did not appear in court to reply, nor did they present any written reply.
Based on the trial of the case, the court found the facts as follows: Defendant Hongmei Company was incorporated on July 6, 2006 with the registered shareholders LIU, Yulan’s and PAN, Yongchao’s ratio of contribution being respectively 51% and 49%. On January 19, 2015, the paper of civil ruling ([2014]Shen Zhong Fa She Wai Zhong Zi No. 19)entered by the Intermediate People’s Court of Shenzhen took legal effect, which affirmed that both Plaintiffs were the actual contributors of Defendant Hongmei Company.
Ruling
On November 12, 2015, the People’s Court of Qianhai Cooperation Zone, Shenzhenentered the civil ruling ([2015]Shen Qian Fa She Wai Chu Zi No. 73)specifically as follows: The action brought by Plaintiffs SHEN, Fenfang and YE, Weiguang shall be dismissed.
Reason for Ruling
The effective judgment made by the court holds that, in accordance with Article 182 of the Company Law of the People’s Republic of China,“Where acompany hasso serious difficulty in its operation andmanagement that theshareholders’interests will beseverely damagedif the company continues to be in operationand in case thatsuchdifficulty cannot be resolved by any other means, the shareholders who hold ten percent or more of the voting rights of all the company’s shareholders may plead with the people’s court to dissolve the company.” and according to Article 1 of the Regulations of the Supreme People’s Court on Several Issues concerning the Application of the Company Law of the People’s Republic of China (II), “Where a shareholder or shareholders that hold ten percent or more of the voting rights of all the company’s shareholders files a suit pleadingwith the people’s court to dissolve the company due to one of the following causes……, which is in compliance with Article 182 of the Company Law of the People’s Republic of China, the people’s court shall accept and hear the case”, whichindicates that the subject who shall have the right to file a suit for dissolution of company should be the shareholder of the company, who, in accordance with the general legal principles of the People’s Republic of China, refers to the shareholder listed in the register of shareholders. Therefore, Plaintiffs, as the actual contributors of Defendant Hongmei Company, also known as the dormant partners, are not listed in the register of shareholders of Hongmei Company, for which Plaintiffs shall not file the suit for dissolution of the company. Given the above, the suit filed by Plaintiffs, who are unqualified, should be dismissed by the court.
Notes to Case
The issue concerning this case is the right boundaryof the actual contributor, i.e. the dormant partner.An actual contributor refers to the investor who actually subscribes for the company share and enjoys the corresponding investment interests, yet is not recorded in the articles of association, the register of shareholders or the enterprise’s industrial and commercial registration, i.e. dormant shareholder as acknowledged through common practice. In general, a shareholder is dormant for the purpose of evadinglegal responsibility or due to other reasons, who founded the company by using another person’s name or making contribution of capital in the name of another person, namely the registered shareholder. As to the dormant shareholder’s legal status and its relationship with the registered shareholder and with the creditor outside the company, the theorists holdvarious theories of the issue and practices regarding the same are not completely consistent.As provided in the Regulations on Several Issues concerning the Application of the Company Law of the People’s Republic of China (III) promulgated by the Supreme People’s Court on February 16, 2011 (the “Interpretation (III) of the Company Law”), the principle of settling the aforesaid issue is“double standards with adjustment for internal and external company disputes”. The dispute over the investment interests between the registered shareholder and the dormant shareholder shall be internal dispute and settled following the principle of executing contract out of free will and autonomy of will. Since the agreement made by the registered shareholder and the dormant shareholder is in essence consistent with the general civil contract, as long as no interest of any third person as outsider of the company is involved, the rights and obligations of the two parties shall be settledin compliance with the general principle of contract and affirmed according to the true intention of the two parties.In case that any third person outside the company is involved, such issue shall be dealt with pursuant tothe effectiveness of publicity of the company registration system based on the principle of RechtsscheinTheorie of commercial affairs. In numerous complicated market transactions, time and efficiency are key elements determining the economic benefit yielded therefrom, and thus convenient and swift transaction modeare the essential conditions that a commercial subject has to meet forpursuing profit. In that case, it is unrealistic to require both parties to the transaction to spend plenty of time and energy investigating into each other’s real conditions at large prior to the transaction, and it is impossible for a third party outside the company to have as much detailed knowledge about the conditions of the company asthe shareholders of the company do. And if a third party acting in good faith is requested to assume the liabilities of much strict discrimination, it will inevitably suffer the increase of transaction cost and lose enthusiasm in making transaction, in which circumstance inactive transactions and stagnant resources will go against the accumulation of social wealth.In a dispute involving parties outside the company, we shall place particular emphasis on protecting the outsider third person’s trust on the content of corporate registration and even the registration system, as well as protecting the economic exchanges occurred based on such trust. By reason of the foregoing, the registered shareholder listed in the industrial and commercial registration of the companyshall be the qualified subject while the dormant shareholder is unqualified for filing a lawsuit claiming for dissolution of company.
The definition of shareholder has different meanings in different contexts and litigation circumstances. As previously mentioned, in an intra-company dispute, the registered shareholder and the dormant shareholder are like the two sides of a coin, fighting for shareholder’s investment interests, for which both of them can be called the shareholder. However, in ancase involving an outsider of the company, based on the principle of Rechtsschein Theorie, only the registered shareholder is deemed the shareholder of company, in which sense, the dormant shareholder is not considered the shareholder of company. As defined in Item 22, Article 1.40 of the Model Business Corporation Act, the word “shareholder” refers to the stock holder of the company listed in the register of the company. As provided inArticle 67(2) of the AktG, “in consideration of the relationship with the company, only the person listed in the register of shares can be the shareholder of the company.”Though the definition of shareholder is not explicitly made in the Company Law of the People’s Republic of China, it is provided in Article 25 thereof that “A limited liability company shall state the following items in its articles of association: … (4) Names of shareholders”, in Article 33 (1) of the Company Law that“A limited liability company shall prepare a registry of shareholders and record the following information on the registry:(1)The names anddomiciles of all shareholders…”, in Article 33 (2) that “The shareholders listedin the registry of shareholders may, pursuant to the registry of shareholders, claim and exercise the shareholder's rights.”Therefore, the definition of shareholder provided in the Company Law of the People’s Republic of China shall not be interpreted to an expanded degree, and shall refer to the shareholders listed in the register of shareholders. The expression used in the Interpretation (III) of the Company Law is consistent with that in the Company Law of the People’s Republic of China, in whichthe statement of actual contributor is adopted rather than registered shareholder or dormant shareholder, and thus is differentiated from the word shareholder. And in view of systematic interpretation, such statement shows that the shareholder in the provisions of the Company Law of the People’s Republic of China only refers to the registered shareholder. As provided in Article 24 of the Interpretation (III) of the Company Law, “In the event that the actual contributor and the nominal contributorof a limited liability company enter into a contract, agreeing that the actual contributor shall make contribution of capital and enjoy the investment interests while the nominal contributor shall be the nominal shareholder, and that any dispute arises over the effectiveness of said contract between the actual contributor and the nominal shareholder, unless under circumstances provided in Article 52 of the Company Law of the People’s Republic of China, the people’s court shall rule the effectiveness of said contract. In case that any dispute arises over the ownership of the investment interests between the actual contributor and the nominal shareholderas specified in last paragraph, and that the actual contributor claims rights against the nominal shareholder for the reason that it has actually performed the obligation of capital contribution, the people’s court shall support the claim. In case that the nominal shareholder denies the actual contributor’s rights for the reason that it has been listed in the register of shareholders and registered as the shareholder with the company registration authority, the people’s court shall dismiss such denial. In the event that the actual contributor requests change of shareholders of the company and issuance of capital contribution certificate, recording of the changed shareholders in the register of shareholders and the articles of association and registering of the changed shareholders’ names with the company registration authoritywithout consent from more than half of the other shareholders, the people’s court shall dismiss the request.”In the third paragraph of the aforesaid article, the rules of settling the dormant shareholder’s becomingregistered are provided. In that way, is dormant shareholder’s becoming registered an internal dispute or an external one? And in which way should such a dispute be solved? The author holds that such a dispute is actually in between an internal one and an external one, for it goes beyond the limited extent between the dormant shareholder and the registered one and involves another interest body, i.e. the company operated by legal person fiction. The process of a dormant shareholder becoming registered is actually a process of altering the names of shareholders in the register of shareholders and the articles of association, which has to be conducted on the platform of the company and in the name of the company.However, a company is after all a persona ficta, in which any major decisions must be made through resolutions of the board of shareholders. Thus a dormant shareholdercan become registered mainly based on the votes of the other shareholders. Different from the joint-stock company which has relatively distinct character based on capital contribution, the limited liability company lays more emphasis on the character based on people, which requires all the shareholders to establish such a relationship as mutually understanding, friendly and trustful, otherwise a huge barrier would be imposed on the daily business operation of the company. Under the circumstances where there are dormant shareholders, except the registered shareholders acting on behalf of said dormant ones, the other shareholders of the company may not be aware of the dormant shareholders and only regards the registered shareholders as partners; if said shareholders are informed of the fact that their partners are the dormant shareholders, they are quite likely not to allow such dormant shareholders to join the company or to drop out of the company. From this point of view, although the aforesaid dispute is not an external one, it has certain characteristics of the external dispute. The matter of a dormant shareholder’s becoming registered is in nature similar to a shareholder’s transferring stock rights to any person outside the company, which both involve the acceptance of the “new shareholder”, for which the method of dispute settlement provided in the judicial interpretation is similar to that for transferring of stock rights upon approval from more than half of the shareholders shall be obtained. However, different from the transfer of stock rights, in case that the shareholders do not accept the “new shareholder”, they do not need to purchase such stock rights.
Back to the context of this case, the author holds that the case of company dissolution involves a dispute in between the internal and external one and requires the votes of the shareholders and the company’s statement, and that from the discussion above it can be concluded that the qualified subject filing the suit for dissolution of company shall only be the registered shareholders, i.e. the shareholders listed in the articles of association and the register of shareholders, and the dormant shareholders shall not bring such a suit.In terms of the litigation strategy, it may be a better way if both Plaintiffs, as dormant shareholders, could bring the suit for dissolution of the company after becoming registered shareholders through resolution of the board of shareholders of the company or by filing a suit for becoming registered shareholders. Taking it into further consideration, there would be interesting circumstances in such a lawsuit for becoming registered shareholders, in which only two registered shareholders of the company were listed, i.e. the two third persons in this case, and both Plaintiffs are dormant shareholders. Suppose that the plot was developed as this case that both registered shareholders were absent from the court trial and make no clear statements, how would the court decide their intention? In accordance with the law, becoming registered shareholders shall be passed upon approval of more than half of the shareholders of the compnay. In addition, both Plaintiffs are Hong Kong residents, whether they could directly become registered and be listed in the register of shareholders needs to be further contemplated.
Sponsors: Guo Ninghua, Yu Changyong and Nie Haiqin
Author: Guo Ninghua, Presiding Judge of the People’s Court of Qianhai Cooperation Zone, Shenzhen
