Insights

Ningbo Divorce: 4-step identification of equity holding interests.

Ningbo Author：LuXu WANG

Although the name does not appear in the business registration records, the funds have indeed been invested in the company—such arrangements are quite common in the business world. When a marriage reaches its end, the party who has remained anonymous often finds themselves in a dilemma: to assert their rights, they must first prove the existence of that hidden relationship; yet if they do not, hundreds of thousands—perhaps even millions—of yuan in contributions may quietly remain registered under someone else’s name. First of all, the conclusion is that whether the holding rights can be divided in the event of divorce depends on whether the four-step judgment can go through-one is to prove the real holding relationship, the other is to verify whether the source of capital contribution is the common property of the husband and wife, the third is to determine whether the equity form is equity or creditor's rights, and the fourth is to choose between discount compensation and change registration. Any step of chain breaking, division claims may fail.

1. Why does nominee holding become a difficult point in division?

Article 1062 of the Civil Code of the People's Republic of China lists the income from production, business operations, and investments as joint marital property; the determining factor is whether the capital contribution comes from joint property, rather than whose name is on the register. The difficulty lies in the fact that nominee arrangements typically consist only of a written agreement, or even just a verbal understanding; both the registration records and the certificate of contribution list someone else’s name. The first hurdle in seeking a division of assets is to bring this underlying relationship into the open. There are two layers of relationships in the proxy structure: externally, the company only recognizes the registered nominal shareholders; internally, there is a contractual relationship between the actual contributor and the nominal shareholders, agreeing who will bear the contribution and who will enjoy the proceeds. Article 24 of the (III) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law confirms that the actual investor of a limited liability company enters into a contract with the nominal investor and agrees that the actual investor will contribute and enjoy the investment rights and interests. If the contract does not violate the mandatory provisions of laws and administrative regulations, the contract is valid; but the actual investor requests the company to change the shareholder registration and issue the capital contribution certificate without the consent of more than half of other shareholders of the company, the People's Court did not support it.

advocates that the party who has a proxy should bear the burden of proof, and the court will not accept it only based on oral rumors. It needs to form a complete chain of mutual corroboration of capital contribution certificate, proxy agreement, dividend record and participation in business. Without one link, it may be regarded as ordinary loan or even gift. According to the causes of nominee holding, there are three types of scenarios in practice, with different emphasis on evidence: first, co-entrepreneurial nominee holding, which is mostly found in the founder's nominee employee shareholding or equity incentive arrangement. The core evidence is the company's internal resolutions, incentive documents and actual capital contribution records. The party advocating division should focus on proving that the corresponding capital contribution of such nominee holding originates from the common property of the family; Second, pure investment nominee holding, the investor is anonymous due to identity, convenience and other reasons. The core evidence is the holding agreement and the flow of funds. Both parties often have a clear agreement on dividends. The claimant should lock in the whereabouts of dividends over the years. Third, relatives arrange a type of holding on behalf of each other. One party registers the property rights and interests in the name of his parents or brothers and sisters, which usually occurs before and after the marriage change. The court will focus on examining the relationship between the time of the contribution and the marriage change and the registration, if it constitutes a concealment or transfer of the common property of the husband and wife, in accordance with article 1092 of the Civil Code, it may be requested that the transferring party be divided less or not.

2. the first step: proving the real existence of the subrogation relationship

The primary types of admissible evidence include: first, written agreements on nominee shareholding or memoranda regarding equity arrangements; second, payment vouchers with remittance notes clearly indicating that the funds are for investment, share capital, or contributions; third, confirmation letters issued by the nominal shareholder along with records of dividend distributions over the years; and fourth, chat logs and meeting minutes that acknowledge the hidden shareholder’s identity. The most compelling evidence is a written agreement coupled with financial documentation that corroborates the agreed-upon amount and timing. When there is no written agreement, it can be reversed from the flow of funds: the large amount of money transferred on the day of capital contribution, the obvious lack of capital contribution ability of nominal shareholders themselves, and the long-term participation of actual investors in the company's business decisions can all form indirect confirmation; The other party's admission of "your share" in SMS or WeChat is often more important than the contract.

3. the second step: verify whether the source of capital contribution is common property

After the establishment of the representative holder, what really determines the scope of the division is where the money comes from. If the capital contribution occurs during the existence of the marriage relationship and the evidence of personal property derived from premarital marriage cannot be obtained, it is generally presumed to be a joint capital contribution, and the corresponding rights and interests shall be treated according to the joint property of the husband and wife; if the capital contribution comes from the premarital deposit and the capital chain is complete, it belongs to personal property, and the other party can only claim rights on the operating income. On the other hand, there are mirror situations: one party registers the shares of the common property in the names of parents, brothers and sisters or friends, creating the illusion that there are no assets in the name, while the other party may apply for access to the articles of association, resolutions of the shareholders' meeting and capital contribution information, and make claims in combination with the time of capital contribution and the flow of family funds; If it can be proved that it belongs to hidden or transferred common property, the transferor according to article 1092 of the civil code, the transferor the transferor the transferor the transferor the transferor.

4. the third step: determine whether the equity form is equity or debt

This step directly determines what you’ll ultimately obtain. If more than half of the other shareholders consent to the recognition of the undisclosed party’s shareholder status, the matter is treated as a shareholding dispute, and the object of division is the value of the equity interest. If such consent is not obtained, or if the company has already been dissolved, the claim is typically recharacterized as a creditor’s right against the nominal shareholder, with the object of division becoming the capital contribution and any associated returns. The valuation methodologies and implementation complexities of the two approaches differ significantly: the equity route requires an asset valuation and is subject to the company’s operating performance, whereas the debt route is relatively straightforward but typically limits recovery to the principal investment plus a reasonable return. Before filing a lawsuit, it is advisable to conduct a preliminary assessment based on the company’s operations, shareholder composition, and the terms of the shareholding proxy agreement, and, if necessary, seek professional advice to avoid choosing an inappropriate legal claim.

5. Step four: Choose between discounted compensation or registration amendment.

Article 1087 of the Civil Code stipulates that the common property in divorce shall be dealt with by agreement between the two parties. If the agreement fails, the people's court shall make a judgment according to the specific situation of the property and the principle of taking care of the rights and interests of the children, the woman and the innocent party. When it comes to nominee interests, the most common is for the holding party to retain an interest and pay a discount to the other party, which avoids undermining the company's human nature and is easy to enforce. If it is really necessary to change part of the rights and interests to the spouse's name, attention should be paid to the personality of a limited liability company: According to Article 84 of the Company Law (Revised in 2023), shareholders who transfer equity to persons other than shareholders shall transfer the quantity, The price, payment method and time limit and other matters are notified in writing to other shareholders, and other shareholders have the right of preemption under the same conditions. Skip the notification procedure; even if the court rules in your favor, the business registration change may still be stalled at the registration stage.

6. Common misconceptions

  • Misunderstanding 1: Only oral agreement is enough.Without any written evidence, once the other party denies the arrangement, it is almost impossible to reconstruct the actualCapital contribution arrangement, and the difficulty of gathering evidence increases exponentially.
  • Myth 2: It doesn't matter if you don't write the purpose of the transfer. The postscript of large sum is blank, which is easy to be interpreted as loan, transaction or even gift. When transferring money, it is stated that "investment money/contribution money" is the fixed evidence method with the lowest cost.
  • Misunderstanding 3: Ignoring the threshold of prominence. The claim of direct change of registration without the consent of a majority of the other shareholders is often rejected and can only be returned to the claim path.
  • Myth 4: Missing the valuation point and preservation time. The company starts the evaluation only during the business decline period, and the value of the rights and interests may shrink significantly; if it is found that the other party is prepared to transfer the rights and interests on behalf of the company but still does not apply for preservation, the risk of failing the execution after the judgment is very high.
  • Misconception 5: Omitting the allocation of dividends. If dividends have been transferred out or consumed over the years, it will be difficult to recover the evidence if it is not fixed in time.
  • Misunderstanding 6: I think the name of the person who is registered is the name of the person.The registered appearance of ownership only has priority effect in transactions with bona fide third parties; within the marital relationship and between the actual investor and the nominal shareholder, the source of funds and the agreement on nominee holding are the substantive criteria for determining ownership.

List of 7. materials and evidence

For the party who advocates the division of the interests' interests, it is suggested to organize the following materials according to the timeline and submit them by number:

  1. Proof of consensual holding: written holding agreement, stock rights arrangement memo, confirmation letter issued by nominal shareholders, arrangement of no written materials, WeChat chat, emails, and the recognition of anonymous identity in meeting minutes;
  2. Evidence of capital contribution: the bank receipt of transfer to the company or nominal shareholders, the postscript indicates the best of "capital contribution/investment", and if necessary, the company's capital verification report and entry voucher shall be obtained;
  3. Evidence of the nature of jointly owned property: proof of marital status at the time of contribution, and bank statements showing the flow of family joint funds, to demonstrate that the funds originated from the couple’s joint property;
  4. Evidence of the exercise of rights and interests: the records of participation in shareholders' meetings and business decisions, and the flow of dividends paid into my account;
  5. Evidence of the company’s status: articles of association, register of shareholders, and business registration information (obtained through the National Enterprise Credit Information Publicity System), used to assess the company’s operations and equity value.
  6. The clue of the transfer of the other party: the large amount of water transferred out intensively before and after the marriage change, and the proof that the registrant has no ability to contribute, are used to claim to hide and transfer the common property.

8. Frequently Asked Questions

Is the proxy agreement still valid without notarization?

Notarization is not an effective requirement. As long as the agreement is the true intention of both parties and the content does not violate the mandatory provisions of the law, it is generally recognized as valid.

If the other party registers the shares in the name of his parents, can I directly sue for division?

You may raise this claim concurrently in the divorce proceedings and request the court to subpoena the documents related to the capital contribution and registration. If the evidence proves that the contribution comes from the joint property of the husband and wife, the court will include the corresponding rights and interests in the scope of division.

The company has already been deregistered. Can the capital contribution held on behalf of someone else still be recovered?

can claim, but the nature is usually converted into creditor's rights. The nominal shareholder may be required to return the capital contribution and any corresponding proceeds; at the same time, attention should be paid to the statute of limitations: the general limitation period for creditor’s rights is three years, commencing from the date when the right holder becomes aware of the infringement of his or her rights.

After the divorce, it is not too late to find out that the other party has the right to hold shares on behalf of the other party?

in time. According to Article 1092 of the Civil Code, if the other party discovers that the other party hides common property after divorce, it may file a lawsuit in the people's court to request another division. According to Article 84 of the (I) Interpretation of Marriage and Family, the limitation period of action is three years. Calculated from the date of discovery.

How to value the proxy holdings and what is the discount? If

can follow the equity path, generally apply to the court to entrust an asset evaluation agency to evaluate the company's net assets or equity value, and the discount is calculated by multiplying the evaluation value by the proportion that should be shared; if the company's accounts are incomplete or have no business essence, it can be determined by the amount of capital contribution plus reasonable income, or by the transfer reference price. If you take the debt path, it is limited to the principal of the capital contribution and the corresponding income, which is usually lower than the appraised value of the equity, and the difference between the two paths should be settled before the prosecution.

The equity is directly registered in the name of one of the spouses. Can the other spouse share half of the equity when divorcing?

You can't simply "half-and-half". Even if the equity in the name of the registered party belongs to the joint property of husband and wife, the division is still subject to the company law: in practice, it is mostly treated by discount compensation. if it is really necessary to directly divide the equity, it must be approved by more than half of the other shareholders (article 24 of the company law interpretation) and the right of first refusal is guaranteed. the registration of the equity change in the name of the spouse is obviously limited in procedure.

If a nominee shareholder unilaterally transfers the equity held on trust, what should the actual investor do?

The actual investor can pursue the nominal shareholder's liability for breach of contract and claim for damages according to the proxy agreement; if the transferee is acquired in good faith, the actual investor can not fight against it and can only claim against the nominal shareholder. The precautionary measure is to state in the nominee agreement that "no transfer, pledge or guarantee for others without the written consent of the actual contributor" and to agree on a high amount of liquidated damages.

9. Lawyer's Practical Insights

When divorcing, trying to divide equity held in a nominee arrangement is difficult because it’s “invisible”—the spouse’s name isn’t on the business registration, yet the money was indeed invested. The advocate party should first put the nominee relationship on the table, relying on the capital contribution records, nominee agreements, intra-company exchanges, dividends to these can be "who pays, who benefits" string together materials. The empty saying "that's our family's money" is hard to be accepted, so it is necessary to consciously collect and fix this evidence from the beginning of the idea. With evidence in hand, this invisible connection finally has a basis for recognition.

The second step is to verify whether the contribution is from common property. If the capital contribution is made in the common property after marriage, although it is registered in the name of another person, it may also correspond to a divisible interest. If it comes from the spouse's personal property before marriage or family funds, the result will be different. There are two levels of relationship to be distinguished here: internally, the agreement between the actual contributor and the nominal shareholder, and externally, the company only recognizes the registered shareholder. Whether you can assert a claim, and to what extent, depends on the timing and the evidence, not merely on the fact of your capital contribution.

When talking, we should think clearly about "asking for equity" and "asking for money" separately. Equity involves the cooperation of other shareholders of the company, business control and change registration, and it is often more difficult to actually get shares than to get compensation. The party claiming rights and interests should think of two sets of plans in advance: if it can change the registration, it should clearly define the steps and time limit for cooperation; If not, compensation shall be claimed according to the assessed value. Only when the agency agreement, capital contribution certificate and dividend record are prepared can the negotiation be confident.

The core conflict in nominee shareholding lies in the misalignment between the actual rights and the formal registration. Whether the division can succeed depends on whether the three strands of evidence—namely, the nominee arrangement, the source of funds, and the nature of the rights and interests—form a coherent and consistent chain. It is suggested that before starting the procedure, the transfer voucher, the agreement text and the dividend record should be sorted into a time axis, and then the two paths of appearance and discount should be evaluated. If necessary, the property preservation should be applied first to avoid winning the documents and not getting the money.For dormant shareholders who are still in marriage, they usually sign a written proxy agreement, transfer notes the purpose, and keep a record of dividends, which is to pre-deposit evidence for possible future disputes. For the other party, the holding clues are often hidden in the anomaly of the family's capital flow-large transfers out, the other party's name has no assets but stable dividends, are the entry point to start the investigation, early detection, early fixation, the greater the initiative to split the claim.

For the entrepreneurial family in Ningbo, the most ideal arrangement is to clarify the relationship between the equity of the company and the family property within the marriage: agree on the ownership of equity and dividends in the marital property agreement, retain the capital contribution and management decision-making records, and avoid directly collecting the company's money from the family account-the clearer the boundary of the equity is, the smaller the impact of the marriage change on the company's operation and financing will be, this is precisely the governance effort beyond the "four-step identification.