Shareholders may wish to amend the share structure of their subsidiary in China for several reasons. Specifically, the existing share proportion between shareholders can be amended or ownership of shares can be transferred to an existing shareholder or third party (non-shareholder).
In China, any changes to the share structure shall be filed at the Administration for Industry and Commerce (‘AIC'), otherwise, such changes could not be legally recognised. Often, European headquarters may neglect such administrative procedures for their Chinese subsidiary especially during a share transfer – which can result in share ownership disputes.
For the transfer of shares, shareholders may be transferred in whole or in part and transferred. Below, we outline the permitted circumstances in which the share ownership can be transferred
When the shareholder transfers to a third party
Under the Company Law, the shareholder who wishes to transfer their company shares to a third party shall obtain the consent of the majority shareholders. The shareholder shall submit a written notice to the other shareholders. If there is no response within 30 days from the receipt of the written notice, the transfer is deemed approved.
When the majority shareholders disagree with the proposed third-party transfer
If the majority shareholders oppose the transfer of shares, the opposing shareholders are obliged to purchase the shares. Refusal to purchase the shares shall be deemed as consent to transfer the shares. Under the same circumstances, the other shareholders may exercise their right of first refusal to purchase the shares. If two or more shareholders exercise the right of first refusal, they shall determine the respective purchase percentages by negotiation. In the event negotiation is unsuccessful, the right of first refusal is exercised in proportion to shareholders' respective capital contributions at the time of transfer.
When the transfer of shares is governed by the articles of association
The Company Law also permits the articles of association to regulate the transfer of shares. However, not all provisions in the articles of association are recognized as effective in judicial practice. Commonly, the judicial practice renders that equity transfer provisions in the articles of association must be “reasonable”, and do not excessively restrict or even prohibit the transfer of equity to external persons.
When the company shares are transferred by the People's Court
The People's Court may transfer the share ownership through a mandatory enforcement procedure. In such case, the company shall be notified, and the other shareholders may exercise the right of first refusal. If the shareholders do not exercise the right of first refusal within 20 days of receipt of the court notice, it shall be deemed as a waiver of the right of first refusal.
Once the share ownership is completed, the company must cancel the capital contribution certificate of the original shareholder and issue a capital contribution certificate to the new shareholder. Equally, articles of association and register of a member shall be modified according to the new shareholders and their capital contributions and filed at the AIC.
Without conducting such procedures, parties may dispute the share ownership, hence companies must not overlook the administrative obligations.
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.