Legal Risks and Prevention of Nominal Shareholders and Actual Shareholders under the New Company Law

Author | Attorney Chen Xuan

Introduction

ZHIHENG

In corporate operations, nominee shareholding is a common practice. While it may appear mutually beneficial, both the nominal shareholder and the actual shareholder face numerous legal risks throughout the process. This article provides a brief analysis of the legal risks faced by nominal and actual shareholders, as well as corresponding preventive measures.

1

Legal Risks of Nominee Shareholders

1. Risk of accelerated maturity of capital contribution obligations: Article 54 of the new Company Law provides: “If a company is unable to pay its due debts, the company or the creditors of matured claims shall have the right to require shareholders who have subscribed for contributions but whose contribution deadlines have not yet arrived to make their contributions in advance.” The nominal shareholder, as the shareholder registered with the administrative authority for industry and commerce, is the party obligated under the law.

Even if the nominee agreement stipulates that the actual shareholder is responsible for making the capital contribution, creditors still have the right to seek recourse directly from the nominal shareholder. The nominal shareholder must first fulfill the capital contribution obligation to the company or its creditors and may then seek reimbursement from the actual shareholder pursuant to the shareholding proxy agreement. If the actual shareholder is unreachable or has no assets, the nominal shareholder will suffer losses.

2. Risk of liability for breach of capital contribution obligations: If the actual shareholder fails to make contributions on time and in full, the nominal shareholder, as the registered shareholder, shall bear contractual liability or indemnification liability to other shareholders, the company, and even creditors.

3. Risk of joint and several liability for the company’s debts: If the nominal shareholder becomes excessively involved in the company’s management or commingles their personal assets with the company’s assets, resulting in the “piercing of the corporate veil,” the court may order the nominal shareholder to bear joint and several liability for the company’s debts.

4. Tax Risk: When a company distributes dividends or in the event of a future equity transfer, the tax authorities typically treat the nominal shareholder registered with the business registration authority as the taxpayer and levy income tax accordingly. When the actual investor fails to pay taxes, the nominee shareholder may face tax collection and penalties from the tax authorities.

5. Default risk of the actual shareholder: The actual shareholder may fail to contribute the agreed-upon capital as scheduled, or, after receiving dividends, may fail to pay the nominal shareholder the agreed-upon remuneration; they may even refuse to bear the taxes and losses incurred by the nominal shareholder as a result of the shareholding agency arrangement.

Two

Risk mitigation measures for nominal shareholders

1. Execute a comprehensive Shareholding Proxy Agreement: This is the most important preventive measure. The agreement must explicitly stipulate:

Obligation to contribute capital

It is clarified that the capital contribution shall be made by the actual shareholder, with the nominal shareholder acting solely as an agent for payment.

Liability recovery

The agreement provides that, if the nominal shareholder is held liable to third parties due to capital contribution issues, it shall have the right to seek full reimbursement from the actual shareholder, and a substantial liquidated damages clause has been stipulated.

Liability for Breach of Contract

Specifically stipulate the liability for breach of contract in cases where the actual shareholder fails to contribute capital or pay remuneration.

Dispute resolution

A clearly specified court of jurisdiction or arbitration institution.

2. Proof of obtaining the consent of more than half of the other shareholders:

Article 24 of the Third Interpretation of the Company Law and Article 28 of the Minutes of the Ninth National Judicial Conference both stipulate that the “formalization” of a nominee shareholder requires the consent of more than half of the other shareholders. Obtaining this consent in advance not only facilitates future disclosure of the beneficial ownership but also, in the event of a dispute, serves to demonstrate that the company and other shareholders were aware of the nominee arrangement, thereby, to a certain extent, mitigating some of the risks borne by the nominal shareholder.

3. Preserve all evidence:

Properly retain all communication records with the actual shareholder, proof of fund transfers (with annotations such as “capital contribution” or “contribution for nominee shareholding”), dividend transfer records, and other relevant documents.

4. Require the actual shareholders to provide a guarantee:

The actual shareholder may be required to provide collateral or pledge assets such as real estate or equity interests, or a third party may be required to provide a joint and several guarantee, to ensure that the shareholder will be able to fulfill its capital contribution and indemnification obligations in the future.

5. Carefully select the nominee and the company:

Avoid serving as a nominee shareholder for companies with excessively high registered capital, overly extended subscription periods, or significant operational risks.

3

Legal Risks of Actual Shareholders

1. Risk of the nominee agreement being deemed invalid due to its violation of mandatory provisions of laws and regulations: For example, if the agreement is used to circumvent foreign investment restrictions or to hold shares in a listed company on behalf of another party, it may be declared invalid, resulting in the beneficial shareholder losing both the equity interest and any associated investment returns.

2. The risk of failing to achieve “nominee status” and thus being unable to become a formal shareholder:Article 24 of the Third Interpretation of the Company Law and Article 28 of the Minutes of the Ninth National Judicial Conference stipulate that for an actual shareholder to be registered as a formal shareholder, the consent of more than half of the other shareholders is required.If this condition cannot be met, the actual shareholder will be unable to obtain shareholder status and may only assert its investment rights against the nominee shareholder pursuant to the shareholding agency agreement, without being able to directly exercise shareholder rights.

3. Risk of abuse of shareholder rights by the nominee shareholder: As the registered shareholder, the nominee shareholder is entitled to exercise voting rights, dividend rights, and the right to transfer equity interests, among others. If the nominal shareholder acts against the wishes of the actual shareholder—such as by casting malicious votes or transferring or pledging equity interests without authorization—the actual shareholder will find it difficult to prevent such actions directly and can only seek to hold the nominal shareholder liable for breach of contract afterward.

4. Risks associated with the disposition of equity by a nominee shareholder: Under the Property Law section of the Civil Code and the doctrine of bona fide acquisition, if a nominee shareholder transfers or pledges the equity to an innocent third party who is unaware of the arrangement, such disposition is generally valid. The actual shareholder will lose equity interests and may only seek compensation from the nominal shareholder.

5. Risk of seizure by the creditors of a nominee shareholder: When a nominee shareholder becomes a party subject to enforcement due to personal debt disputes, the equity interests held in their name—including any equity held on trust—may be frozen and auctioned off by the court. It is extremely difficult for the actual shareholder to file an objection to enforcement, and it is very challenging to recover the equity interest.

6. Risks of disputes arising from the divorce or death of the nominee shareholder: The equity held on behalf of another may be deemed to constitute the nominee shareholder’s marital joint property or estate, thereby becoming entangled in divorce-related property division or inheritance disputes, with the process of establishing ownership being complex and protracted.

Four

Risk mitigation measures for actual shareholders

1. Execute a fully executed Equity Proxy Agreement:

The agreement should strictly limit the rights of the nominee shareholder, stipulating that the exercise of voting rights, dividend rights, disposal rights, and other such rights must be subject to prior written authorization from the actual shareholder.

Agreeing to impose a substantial liability for breach of contract serves as a deterrent to the nominal shareholder.

2. Actual control over the company’s operations and licenses:

To the extent possible, designate the actual shareholders or their trusted representatives as the company’s directors, senior executives, and chief financial officer, and grant them control over the company’s official seal, financial seal, business license, bank accounts, and other critical assets, thereby enabling substantive control of the company and reducing the likelihood of abuse by nominal shareholders.

3. Notify and obtain the consent of the other shareholders regarding the nominee holding arrangement (a key measure):

This is the most effective proactive measure to address the “naming” requirements under the new Company Law. You may request that other shareholders sign the shareholding proxy agreement as witnesses, or provide a written document acknowledging and consenting to the shareholding proxy arrangement. This has removed the obstacles for future recognition.

4. Retain all proof of capital contributions:

Ensure that all capital contributions are made via bank transfer, with the remark “Investment Funds” or “Nominee Contribution,” and maintain a clear evidentiary trail of the funds’ flow.

5. Require the nominee shareholder to pledge their personal assets:

To ensure that the nominee shareholder does not dispose of the equity interests without authorization, you may require them to pledge or mortgage other assets under their name (such as real estate or vehicles) to the actual shareholder.

Author

Introduction

Chen Xuan

Lawyer at Zhiheng (Dongguan) Law Firm

Attorney Chen Xuan possesses a solid foundation in legal theory and extensive practical experience in the legal field. She is proficient in drafting legal documents and specializes in handling various types of contract disputes, private lending matters, corporate disputes, and labor and personnel disputes. She previously served as in-house counsel at a large real estate development company, gaining substantial experience in corporate legal practice.

With a meticulous mind and a rigorous work ethic, I have consistently adhered to the highest standards of professional ethics and practice discipline throughout my career. Upholding the principle of “safeguarding the legitimate rights and interests of clients, ensuring the proper application of the law, and upholding social fairness and justice,” I approach each client and every case with diligence and responsibility, earning unanimous praise from those I have served.

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Zhiheng · Introduction