How to Demonstrate ‘The Dormant Shareholder shall be Entitled to Request the Company to Register it as the Registered Shareholder with the Consent of the Majority of Other Shareholders’?

Zhao was the dormant shareholder of Company A, he has made the capital contribution, and attended many shareholders’ meetings. Due to the dispute on the dividends pay-out, recently, he filed a lawsuit on the recognition of shareholder, in which he required the court to order Company A to recognize his identity as a shareholder, and go through the registration formalities. In the hearing, Company A and its 2 registered shareholders admitted Zhao was the shareholder, but refused to go through the registration formalities. They defended that the 2 shareholders refused Zhao’s request, according to the relevant law, the court should not support this request.

The said relevant law is the ‘Provisions of the Supreme People’s Court on Several Issues concerning the Application of the Company Law (III)’ (the ‘Interpretation’), paragraph 3, Article 24, in which it has prescribed that, where, without the consent of more than half of other shareholders of the company, the actual contributor requests the company to change the shareholder, issue a capital contribution certificate, record him in the roaster of shareholders, or record him in the articles of association and go through the registration formalities at the company registration authority, the people’s court shall not support such request.

Then question comes, does Company A demonstrate this article in a right way?

Let’s review the demonstration on the above Interpretation by the Supreme People’s Court firstly.

In the ‘Understanding and Application of Several Issues concerning the Application of the Company Law (III) ’, the former chief judge of the No.2 Civil Court of the Supreme People’s Court, Song Xiaoming has explained this article as, where the actual contributor requests the company to change the shareholder,……go through the registration formalities at the company registration authority and etc., such requests has exceeded the scope of the contract between the actual contributor and the registered shareholder, because the actual contributor would become the internal member of the company. Under such circumstance, the Interpretation has prescribed so, in reference to paragraph 2, Article 72 of the ‘Company Law’, while the shareholder would transfer its equity to the person other than the other shareholders, the shareholder shall obtain the consent of the majority of the other shareholders.

Therefore, paragraph 3, Article 24 of the Interpretation has prescribed based on the ‘Closely Held’ characteristic of a limited liability company, which requires the actual contributor to obtain the consent of the majority of the other shareholders before it could become the internal member of the company. Vice versa, from the view of the ‘Closely Held’ characteristic if the other shareholders have already known the existence of the dormant shareholder, or even have recognized the identity of the dormant shareholder, before the dormant shareholder makes such request, then the dormant shareholder shall be taken as the internal member of the company. In another words, under such circumstance, the dormant shareholder is always the internal member of the company, which means the dormant shareholder shall not have to obtain the consent of the other shareholders.

Or, to put it another way, the Interpretation has taken paragraph 2, Article 72 of the ‘Company Law’ for reference, which sets the same requirements on the dormant shareholder’s request and the equity transfer, but it could not be demonstrated that the form of the consent of the other shareholders shall be the same. For the equity transfer, nobody has made any consent in advance, so the shareholder who wants to transfer the equity to a third party, shall obtain the consent of the other shareholders. But for the dormant shareholder’s request, according to the explanation of the Supreme People’s Court hereinabove, only when the dormant shareholder’s situation is as the same as the third party in the equity transfer, then it shall obtain the consent of the majority of the other shareholders. Because whether the dormant shareholder could become the internal member of the company, it depends on whether the other shareholders have known the existence of the dormant shareholder and recognized the identity of the dormant shareholder.

In the above case, Company A and the other 2 registered shareholders have admitted that Zhao is the shareholder, which shall be deemed that they have known and recognized Zhao as Company A’s shareholder, and this is a kind of ‘consent’. In other words, Zhao’s request has not break the paragraph 3, Article 24 of the Interpretation.

We have found that some of the courts still required the dormant shareholder to obtain the majority consent of the other shareholders for such request, in practice. It is obviously that such courts have misunderstood the Interpretation.