The negative impacts to the company whose legal person shareholder is deregistered without notification.

Company A had three legal person shareholders, one of which was deregistered without notifying A. Due to the absence of this shareholder, and the director appointed by it, A faced many challenges, including the effectiveness of resolutions of the shareholders’ meeting and the board of directors, as well as the procedures for business registration, and etc.

With the slowdown of economic growth, and the amendment on the paid-up capital system as stipulated in the revised “Company Law” in 2024, A’s challenges may become more and more common. However, the current and the revised “Company Law” provide rules in dealing with the death of a natural person shareholder, that is upon the death of a natural person shareholder, the lawful successor of him/her may succeed the shareholder’s qualifications, unless otherwise provided by the articles of association of the company. Neither the current nor the revised “Company Law” provides rules in dealing with the deregistration of a legal person shareholder. Therefore, where the shareholders have not made an agreement on the rules in dealing with the deregistration of a legal person shareholder, the aforementioned challenges become hot potatoes.

Some people propose that the rules in dealing with the death of a natural person shareholder could be referred to, that is, the successor of such legal person shareholder may succeed its qualifications. In judicial practice, there are very few judgments hold such opinion, such as (2019) Ji 05 Min Zhong No.1949. In some cases, the courts hold that a one-person limited liability company could refer to the rules in dealing with the death of a natural person shareholder, such as (2020) Yue 0391 Min Chu No. 442. However, the mainstream viewpoint is that the rules in dealing with the death of a natural person shareholder could not be referred to directly, because a company is a combination of human and capital, especially where the deregistered shareholder has multiple shareholders, the circumstance may be more complex.

It is recommended to take different measures to deal with those challenges case by case.

If the deregistered legal person shareholder fails to fulfill its capital contribution obligations or withdraws all of its capital contributions, according to the current “Company Law”, it is recommended to urge this shareholder to pay or return in accordance with Article 17 of the “Supreme People’s Court’s Provisions on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III)”. If the shareholder fails to pay or return within a reasonable period of time, the shareholder’s qualification shall be terminated by a resolution of the shareholders’ meeting. After the application of the revised “Company Law”, according to Article 52, the board of directors may issue a written notice after the shareholders’ meeting has made the resolution, and then proceed with the reduction of capital and cancellation of corresponding equity.

If the deregistered legal person shareholder does not have any defects in capital contribution, the above measure could not be implemented. Some people propose that the company could bring a lawsuit against this shareholder, and require the court to order the shareholder to withdraw its capital contribution. However, this proposal could not be implemented. On the one hand, such lawsuit is lack of legal basis. On the other hand, according to the “Company Law”, the legal person shareholder enjoys corresponding property rights, which have not been disposed of during liquidation, from the perspective of protecting the rights and interests of relevant parties, the court should not directly order the shareholder to withdraw its capital contribution.

In order to solve this challenge, it may be considered to fix the successor of relevant capital contributions, and require the court to decide the party who should succeed the shareholder’s qualifications.

Specifically, the company could contact the liquidation team or the shareholders of the legal person shareholder, and require them to fix the successor of relevant capital contributions, upon which the company could require the court to rule that the successor could succeed the shareholder’s qualifications. In judicial practice, there are judgements holding such opinion.

In practice, there are occasional special circumstances where the deregistered legal person shareholder has transferred its equity to partial of its shareholders or third parties without authorization of the shareholders’ meeting of the company during the liquidation process. Under such circumstance, unless otherwise agreed in the articles of association of the company, such transfer would be deemed as invalid, because it has violated the relevant provisions of the “Company Law” or articles of association of the company regarding the preemptive rights of other shareholders. The company or other shareholders could claim of invalidity, or require the transferee to transfer relevant equity to other shareholders of the company, or recognized third parties (when other shareholders have no intention of exercising the right of first refusal).

Finally, in order to avoid those challenges, we suggest companies to manage such circumstance from two aspect, that is, (1) to clarify the rules in dealing with such circumstance in the articles of association; and (2) to keep an eye on the shareholders, including checking the registration information of shareholders periodically, contacting shareholders regularly, and follow up with the abnormal rumors related to shareholders timely, and etc.