Whether the “Priority Purchase Right “could be Applied among the Shareholders?

The “Priority Purchase Right “(“PPR”) refers to while a shareholder plans to transfer its equity, provided all conditions are equal, the other shareholders shall have PPR to purchase the equity. This is an arrangement in consideration of the nature of a limited liability company as a personal company.

Article 71 of “Company Law” has stipulated that while a shareholder plans to transfer its equity, provided all conditions are equal, the other shareholders shall have PPR to purchase the equity. But for the transfer among the shareholders, Article 71 just prescribes that the shareholders may transfer all or part of their equity among them. In view of these, the relevant laws and regulations have not authorized PPR to shareholders for the transfer among shareholders. “The Opinions on Hearing the Cases related to the Priority Purchase Right of the Shareholders of a Limited Liability Company ” (“Opinions”) issued by the second civil tribunal of Shanghai High Court has confirmed this opinion. Article 1 of Opinions has prescribed while the shareholders may transfer all or part of their equity among them, the court would not support any shareholders to claim for PPR.

However, in practice, before the establishment of a limited liability company, the equity ratio of each shareholder has been well designed, because the equity ratio would affect the balance of each shareholder’s authority and interest. If there is no limitation for the equity transfer, then the well-designed equity ratio may become futile. In addition, for some companies, especially venture companies, in order to control the development, it would be better for the founding shareholders to maintain PPR. Regard of this, whether the shareholders could make an agreement on PPR among shareholders?

The answer is positive. According to paragraph 4 of Article 71 of “Company Law”, where the articles of association of the company otherwise provide for transfer of equity, such provisions shall prevail. Therefore, the shareholders of a limited liability company could prescribe PPR among the shareholders in the articles of association, including: who shall have PPR; how to implement PPR, and so on.

In practice, there are several issues shall be paid attention to while implementing PPR:

Firstly, the notice of share transfer shall prescribe the specific contents of the “equal condition “, such as the investment, business cooperation, debt assumption and so on. In fact, take the Opinions for example, if the main transfer conditions have not been clearly stated in the notice, the notice may not been deemed as the written notification as required by “Company Law”.

Secondly, if the other shareholders who have approved the transfer, it would be better for them to issue a declaration on waivering PPR.
Thirdly, if the article of association has not prescribed the reply period for implementing PPR, it would be better to state the specific reply period in the notice, and according to “Company Law”, such reply period shall not be less than 30 days.