Litigation and execution in disputes over shareholder qualification

By Wu Zhiqiang, Leaqual Law Firm

Several difficulties plague the execution of equity in limited liability companies and joint stock companies. Equity can be secretive, difficult to value or circulate, but of high monetary value, and therefore will attract the attention of many rights holders. Particularly in disputes over shareholder qualification affirmation caused by nominee shareholding, equity transfer or other acts, even if the case is won, dormant shareholders and other rights holders obtaining equity through derivative acquisition often encounter obstacles to the transfer of equity set up by other shareholders or companies.

To effectively obtain the disputed equity as soon as possible, the rights holder should pay attention to the integration of litigation and execution procedures when initiating litigation, make correct requests and provide relevant evidence.

Difficulties in enforcement

Wu Zhiqiang, Leaqual Law Firm, Litigation and execution in disputes over shareholder qualification
Wu Zhiqiang
Senior Partner
Leaqual Law Firm

Dormant shareholders or other rights holders obtaining equity through derivative acquisition, whether exercising their shareholder rights internally, or demonstrating their shareholder status and confronting a bona fide third party outside the company, invariably need to make clear their legal shareholder status. After the court affirms the shareholder status in disputes over shareholder qualification, the rights holder needs the company to issue a capital contribution certificate, update the registry of shareholders, and handle the change of industrial and commercial registration to finally realise the shareholder status. However, in judicial practice, even if a rights holder wins the case, multiple obstacles often affect the judgment’s enforcement.

The company and its original shareholders set up obstacles to exclude new shareholders. If the original and other shareholders exclude new shareholders, it will lead to other litigation disputes, such as those over registry of shareholders and requests to change the company’s registration. In those cases, even if the rights holder won the dispute over shareholder qualification, it is impossible to fully exercise the shareholder rights, and the rights holder may be confronted with other litigation.

Without a clear provision of payment, the court cannot enforce it. Under article 461 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law (amended in 2020), the effective legal documents through which a rights holder applies to the court for execution should have clear provisions of payment. Under article 17.2 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Execution of Equity by People’s Courts, an effective legal document confirms only that the equity belongs to the rights holder, and the rights holder may use the document to apply to the company and the company registration authority to handle the equity change formalities.

However, applications to the court for enforcement will not be accepted. As a dispute over shareholder qualification is an action for rights affirmation, the court will not accept the enforcement application in the absence of clear provisions of payment.

Third-party execution measures may hinder an enforcement application by a rights holder of rights affirmation. Although existing judicial opinions support dormant shareholders’ ability to request the exclusion of execution measures, and affirmation of their shareholder qualification in objecting to execution, litigating execution objection and shareholder qualification affirmation are two independent systems.

In the execution of an action for affirmation in Hantang Securities v Hongyuan Water Treatment (2018), heard by Guangdong High People’s Court, it was affirmed that the rights holder had enjoyed the equity in question, having obtained favourable judgment, and applied to the court to enforce the transfer of equity under the rights holder’s name, but Shenzhen Intermediate People’s Court, the execution court, rejected the application.

The execution court held that the execution basis of the rights holder’s application to transfer equity was the affirmation of its rights over the equity held by the person subject to execution, but did not contain any provisions of payment, and thus did not meet the conditions for the court to accept the application. Because the equity had been frozen in the execution procedure of another case, it would not be effective against the third party before the rights holder completed change of registration. Accordingly, the application was rejected.

Therefore, when initiating a qualification affirmation lawsuit, also consider enforcement issues. The integration of litigation and execution is more conducive to the rights holder to thoroughly resolve disputes and exercise shareholder rights quickly.

New provisions

In accordance with article 17 of the provisions, effective from 1 January 2022, in disputes over shareholder qualification, the rights holder may ask the company to issue a capital contribution certificate, update the registry of shareholders, and complete formalities with the company registration authority. If a litigation request was supported by a trial court judgment, but the company or shareholders set up obstacles, the execution court may enforce the request.

If any provision of payment is added to an action for affirmation, the litigation cost will increase. However, in many regions, the litigation cost for action for affirmation is charged with reference to the amount of the subject matter involved. In other words, the charge method under the provision of payment.

In disputes over shareholder qualification, to facilitate the execution procedure, rights holders may try to specify the provision of payment in the action for affirmation, and divide the request into the following parts: (1) to confirm XXX as a shareholder of company A and enjoy x% equity of company A; (2) to order company A to issue a capital contribution certificate to XXX, update XXX in the registry of shareholders, and co-operate to complete the industrial and commercial change registration for the x% equity of company A held by XXX; and (3) for company A to pay the litigation costs.

Wu Zhiqiang is a senior partner at Leaqual Law Firm. Zhang Ye, an associate at the firm, also contributed to the article

Leaqual Law Firm

12/F, Tower A, ZT International Center

10 Chaoyangmen South Avenue

Beijing 100020, China

Tel: +86 10 5365 2379