The Risk Prevention of Anonymous Investment

In practice, the anonymous investment is quite common. However, under the existing laws and regulations, the legal risks faced by dormant shareholders are noteworthy, there are mainly as follows:

I. The dormant (“D”) shareholders may not obtain the shareholder status. In practice, there is none unified criteria on dealing with such identification cases, generally speaking, the judges would be strict to such appeal.

II. The nominal (“N”) shareholders may bring risks to the D shareholders. Such as, a N shareholder may transfer or pledge shares at his own discretion, and then a D shareholder can only claim for breach of contract according to the agreement between both parties. The named shares may be judicially frozen or under coercion enforcement due to the liability of the N shareholder.

So, how can D shareholders eliminate such risks? Generally, in order to eliminate such risks, D shareholders can pay attention to following aspects:

Firstly, a valid and rigorous anonymous investment agreement is a must. Provisions of the Supreme People’s Court about Several Issues Concerning the Application of the Company Law of PRC (3) affirms the validity of the said agreement: Where the actual contributor enters into an agreement with a nominal contributor of a limited liability company, which stipulates that the actual contributor shall make capital contributions and enjoy the investment rights and interests, and the nominal contributor shall be the nominal shareholder, and there arises any dispute between the actual contributor and the nominal shareholder over the validity of the contract, if it does not fall into any of the circumstances as prescribed in Article 52 of the Contract Law, the people’s court shall determine the contract valid. Thus the D shareholders should conclude a comprehensive and protective anonymous investment agreement with the N shareholders. Besides, a legal and valid anonymous investment agreement acts as a necessary evidence for the recognition of qualifications of the D shareholders in the disputes.

Secondly, the evidence of contribution shall be appropriately preserved. The capital contribution certificate is the substantial element in the recognition of qualifications of those D shareholders. Also, to safeguard their own rights and interests when having disputes with the N shareholders, the D shareholders shall preserve the original capital contribution certificate.

Thirdly, relevant regulations in Articles of Association shall be appropriate. In order to reduce the risk of the N shareholders on transferring the named shares at their own discretion, the D shareholders can require stipulating restriction articles on non-transition of shares within a specified period in Articles of Association. In addition, the D shareholders can also require stipulating the non-restriction of anonymous contribution in Articles of Association.

Meanwhile, in the recognition of the shareholder status, except from above conditions, the D shareholders shall obtain the consent of more than half of the other shareholders according to the Interpretation hereinabove. In practice, the consent of other shareholders may cover two situations: the D shareholder gets the implied consent of other shareholders by engaging in the company management as a shareholder; the other is to get the written consent from other shareholders. In the former situation, D shareholders should try best to preserve the relevant documents.
Fourthly, in order to prevent the legal risk resulted from behaviors of D shareholders, besides the time limit on transferring shares prescribed in the Articles of Association, pledging share right is another choice. That is, while a D shareholder makes the agreement with a N shareholder, both parties shall sign a loan agreement plus an equity pledge agreement, and file such pledge agreement at the Industry and Commerce Bureau.

In addition, in order to reduce the possibility that shares being judicially frozen or compulsorily executed, D shareholders shall investigate the economic capability and credit of N shareholders in advance, and choose a more reliable person. In addition, to reduce the possibility that shares being judicially frozen or compulsorily executed, D shareholders should investigate the economic capability and credit standing of significant shareholders in advance, and choose the more reliable person as the significant