Anonymous investment in foreign investment enterprises

The Supreme People’s Court Several Issues Concerning the Trial of Disputes Involving Foreign Investment Enterprises Regulations (1) were issued in May and implemented on 16 August. This article examines the provisions on anonymous investments in the Regulations.

Legal action in confirmation of rights

The approach of the courts to the question of whether disputes involving anonymous investments can be resolved through civil procedures has been inconsistent.

In 2002, in an equity dispute case between Hong Kong Green Valley Investment and Green Valley (International) Investment of Canada, the Supreme People’s Court held that a dispute involving an anonymous investment in equity should be settled through an administrative reconsideration procedure or administrative procedure.

In December 2007, in a shareholder rights case between Xi Peifen (the anonymous shareholder) and Shanghai Overseas Chinese Commercial Affairs Company (the nominee shareholder), the Shanghai Municipal Higher People’s Court overturned a judgment at first instance that employed the same reasoning as that in the Green Valley Case. The higher court set a time limit for the nominee shareholder to carry out the approval and registration procedures necessary to make the anonymous shareholder a shareholder of the company.

However, in the minutes of the 2008 National Court Conference on Hong Kong and Macao-related Commercial Trials, it was again expressly stated that claims by anonymous shareholders requesting confirmation of their status as shareholders of and their shares in the equity of foreign investment enterprises should be rejected.

Following an investigation by the Supreme People’s Court involving courts at every level, article 14 of the Regulations specifies that if an anonymous shareholder satisfies the following three conditions, his claim “for confirmation of his status as a shareholder or a change in shareholder” can be upheld by the court: (1) he has actually made the investment; (2) the shareholders other than the nominee shareholder recognize his status as shareholder; and (3) while the action is pending, the people’s court or the concerned party secures the approval of the foreign-invested enterprise’s approval authority for his becoming a shareholder. This is a big step forward.

Anonymous shareholders

Pursuant to the Regulations, the court will reject any claim by an anonymous shareholder who attempts directly to assert shareholder rights against a foreign investment enterprise in order to request his share of the profits based on his agreement with the nominee shareholder.

The first paragraph of article 1 of the Shanghai Municipal Higher People’s Court Handling of Several Issues Concerning the Trial of Cases Involving Companies Opinions (1), which specifies that, “the actual investor may not assert the exercise of his shareholder rights against the company; he may only first institute a legal action for the confirmation of his rights”, gives some guidance on how the anonymous investor can resolve the issue. First, provided that he satisfies the three conditions set forth in article 14 of the Regulations, he may first secure his status as a shareholder through legal action for the confirmation of his rights. Following this, he can directly exercise his shareholder rights against the foreign investment enterprise. Second, even if the anonymous shareholder is unable or unwilling to institute legal action for the confirmation of his rights or if his claims in such a legal action are rejected, he may still, pursuant to article 15 of the Regulations, request that the nominee shareholder pay him the benefits derived from the foreign investment enterprise, provided that the anonymous investment contract is valid.

Determination of the parties

The anonymous shareholder is usually the party asserting rights in the case, and thus is the plaintiff. The nominee shareholder is usually the defendant.

Referring to the first paragraph of article 2 of the Shanghai Municipal Higher People’s Court Handling of Several Issues Concerning the Trial of Cases Involving Companies Opinions (2), the company can be named as a third party in a legal action for the confirmation of rights.

As the acceptance of the anonymous shareholder’s status as a shareholder by the other shareholders of the company is one of the three conditions necessary for the confirmation of the anonymous shareholder’s status as specified in the Regulations, in a legal action for the confirmation of rights, the court should add the other shareholders of the company as third parties either pursuant to an application by the anonymous shareholders and other shareholders or at its own discretion.

Evidence to be submitted

Taking the three conditions set forth in article 14 of the Regulations as the benchmark, the anonymous shareholder should endeavour to collect evidence substantiating his status as a shareholder. This should include the following six items:

1. the investment contract between the anonymous shareholder and the nominee shareholder;
2. evidence of the actual capital contribution;
3. proof of participation in the operations of the company in the capacity of shareholder;
4. evidence that the other shareholders were aware of and accepted his status as an anonymous shareholder;
5. other relevant evidence; and
6. evidence showing that the approval authority of the foreign-invested enterprise agrees to the anonymous shareholder becoming a nominal shareholder.

Harming interests of the state and others

Where an anonymous investment contract is judged invalid because “the anonymous shareholder and nominee shareholder maliciously colluded to harm the interests of the state, a collective or a third party”, the people’s court is to recover the property so obtained for the state or return it to the collective or the third party.

In practice, where foreign investors aim to enter industries in which the PRC government prohibits foreign investment, such as postal services, telecommunications services, radio stations, television stations and online game operations, and exercise control over the operation and management of wholly Chinese-owned enterprises in these industries by way of anonymous investments, this could be deemed “malicious collusion to harm the interests of the state or a collective” and expose them to the attendant legal consequences.

Yvonne Lu is a senior associate at Martin Hu & Partners (MHP Law Firm)