This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
The transfer of ownership of shares in a Chinese limited liability company is a common source of disputes in China as the Chinese Company Law does not clearly set out the mechanism for such transfer.
The Company Law of the People's Republic of China (PRC Company Law) includes provisions on Chinese limited liability companies (Chinese LLC) and Chinese stock corporations 2.
Chapter III of the PRC Company Law deals with the transfer of shares in a Chinese LLC.
Transfer of a share by contract
Article 72 PRC Company Law sets out the rules for the transfer of shares between shareholders of a Chinese LLC and for the transfer of shares from shareholders to non-shareholders. The transfer of shares between shareholders is not subject to any restrictions. If, however, a shareholder of a Chinese LLC intends to transfer his share to a non-shareholder, certain requirements have to be met. First, the transfer requires approval by more than 50% of the other shareholders. The shareholder intending to transfer his share must notify the other shareholders in writing. If the other shareholders do not object to the transfer within 30 days of receipt of the notice, their approval is deemed to be given. If at least 50% of the other shareholders oppose the transfer, they are obliged to purchase the share, otherwise their approval is also deemed to be given. Further, Article 72/2 PRC Company Law sets out a pre-emption right of the other shareholders in relation to the share to be transferred. Once the transfer is approved, the other shareholders may exercise their pre-emption right under the same conditions3.
The PRC Company Law does not state when the purchaser acquires ownership of the share. Hence, in China the transfer of shares in a Chinese LLC is a common source for disputes4. Unlike in Austria, signing a transfer agreement is not sufficient to transfer a share. In addition, the new shareholder has to be registered in the list of shareholders of the Chinese LLC and at the registration authority, the Administration for Industry and Commerce (AIC). Registration in the list of shareholders only has an effect on the relationship between the old and the new shareholder and the Chinese LLC: between them, the transfer of the share becomes effective upon registration of the new shareholder in the list of shareholders. In relation to third parties, the new shareholder replaces the old shareholder only upon registration with the AIC.
Transfer of a share by the people's court
Pursuant to Article 73 PRC Company Law the people's court may transfer shares on the basis of enforcement proceedings provided for by law. In case of such transfer, the other shareholders have a pre-emption right in respect of the shares. The people's court must notify the company and all shareholders of the transfer and the shareholders may exercise their pre-emption right under the same conditions within 20 days from the court's notice. Otherwise, they are deemed to have waived their pre-emption right.
Purchase of own shares
Pursuant to Article 75 PRC Company Law the shareholder of a Chinese LLC is entitled to request the Chinese LLC to purchase his share in the company if he opposes a shareholders' resolution on any of the following matters:
- that there will be no distribution of profits to the shareholders, provided that the Chinese LLC has not distributed any profits to the shareholders for five consecutive years despite having made profits during such period and provided that the profit distribution requirements set out in the PRC Company Law are met;
- a merger, de-merger or transfer of main assets of the Chinese LLC;
- an amendment of the Chinese LLC's articles of association to continue the Chinese LLC (e.g. because the duration of the Chinese LLC as set out in the articles of association has expired).
The Chinese LLC must pay a reasonable purchase price for the share. The shareholder and the Chinese LLC have to agree on the terms and conditions of the transfer of the share within 60 days from the passing of the shareholders' resolution. If they do not, the shareholder has another 30 days to refer to the people's court for a decision.
The PRC Company Law does not state when the purchaser acquires ownership of the share. Hence, in China the transfer of shares in a Chinese LLC is a common source for disputes.
This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
Footnotes
1 The author is a German and Chinese native speaker.
2 The amended PRC Company Law entered into force on 1 January 2006.
3 Pursuant to Article 72/4 PRC Company Law the articles of association may contain deviating provisions on the transfer of shares.
4 Yuanshi Bu, Einführung in das Recht Chinas (2009), § 18, Rz. 71.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
