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On 14 May 2020, the Shanghai No. 1 Intermediate Court (hereinafter Appellate Court) publicly announced the result of a dispute over the qualification of a foreign shareholder. The Appellate Court found that a foreign individual, is an anonymous shareholder of a domestic company and has the right to claim back his equity. This case is the first one in China where a foreign individual has requested the confirmation of his shareholder status since the implementation of the Foreign Investment Law on 1 January 2020.2020514202011
In 2009, Mike Cheng and Zhang Yan met each other and wanted to start their business jointly. However, according to the then "People's Republic of China Sino-foreign joint venture law" (hereinafter "JV law"), Mike Cheng, as a foreign individual, Zhang Yan, as a Chinese, could not set up a joint venture. To solve this problem, Mike Cheng asked his brother Tony Cheng, a Chinese citizen to join them.2009(Mike Cheng)ZhangYan (Tony Cheng)
On 3 November 2009Mike Cheng transferred to Zhang Yan 260,000RMB, which was Mikes capital contribution invested in the name of Zhang Yan. At the same time, Zhang Yan and Tony set up Junda Company.Later on, the three parties signed an " Equity share agreement" and specified: "As a foreigner, Mike is unable to set up a joint venture with Chinese individuals currently", hence "Junda company will be set up in the name of Zhang Yan and Tony initially. When the situation presents itself, Mike shall set up a joint venture with Junda company." As to the actual investment ratio, the agreement made it very clear: "Mike 51%, Zhang Yan 25%, Tony 24%." ( Note: The actual ownership of equity is: Mike 51%, Zhangyan 25%, Tony 24%; However, in the business license, it only states two shareholders: Zhangyan owns 51% equity, among which, 26% owned by Mike; Tony  owns 49%, among which, 25% owned by Mike )200911326,51%25%24%
Since the incorporation of Junda company, Zhang Yan has been communicating with Mike and Tony via e-mail, such as reporting Junda company's operations, financials and dividend plans.On 6 August 2018, Junda Company issued a <Certificate of Contribution> to Mike, which stated that Mike had paid a capital contribution of 510,000RMB to the company on 3 November 2009.201886200911351
In 2019, Mike wanted Zhang Yan to transfer his 26% stake to Tony. However, Zhang Yan refused, and claimed that he is the actual owner of 51%  of the company, he never held any stake on behalf of Mike. Helplessly, Cheng had to file a lawsuit against Junda Company and Zhang Yan, with the purpose of confirming that the equity held by Zhang Yan, 26% of the company's shares are owned by Mike.201926%51%26%
The court of first instance held that the two sides had a series of clear agreements which confirmed that Mike actually held 51% of the shares of Junda, of which 26% was held by Zhang Yan, and 25% by Tony. At the same time, Mike had submitted payment records and mail exchanges to prove that he had discharged his contribution obligation to Junda company, and in fact participated in the operation and management of the company, fulfilling his rights and obligations as a major shareholder. Although Junda company and Zhang Yan denied the aforementioned fact, they failed to provide sufficient evidence to prove their denial. Therefore, the court of first instance ordered Junda company to change the ownership of the 26% equity share of Junda company to Mike instead of Zhang Yan's. Junda refused to accept the judgement and appealed to the Appellate Court.51%26%25%26%Junda company appealed and claimed that: what the Equity Share Agreement exactly meant is: Junda company shall set up another joint venture with Mike in the future, thus the first instance court misunderstood the meaning of this agreement. Furthermore, the e-mail address provided by Mike didnt belong to Zhang Yan, the judgement made based on Mikes unilateral statement is biased.
The Appellate Court believed that the content of the <Equity Share Agreement> is very clear and the following conclusions could be drawn:
a) First, all three parties confirmed that Mike is a shareholder of Junda company;
b) Second, Mike owns 51% of Junda' shares.
In addition, according to the <Certificate of Contribution>, Mike is the shareholder of Junda company, and he had paid 510,000RMB as capital contributions on 3 November 2009.51%200911351
Regarding the e-mail address, the Appellate Court found that all the user names of these mailboxes contain "zhangyan", which is in consistent with Zhang Yan's name in the phonetic alphabet and all signatures of the sender are "Zhang Yan" (in Chinese), which are exactly the same characters of Zhang Yan's name. Meanwhile, all the content of the correspondence involved the day-to-day operations of Junda company, such as monthly accounting details, financial statements, factory site selection, foreign exchange settlement schedules, etc. It is difficult to grasp such a detailed internal situation, unless the user is responsible for Junda's daily operations. As a matter of fact, Junda's legal representative is Zhang Yan.Taken together with all the above mentioned facts present, the court of first instance correctly concluded that these mailboxes were actually used by Zhang Yan between 2009 and 2018.Thus, the Appellate Court rejected the appeal and upheld the original judgment.zhangyan20092018
Comments:The Foreign Investment Law, which came into effect on 1 of January 2020, removes restrictions on Chinese individuals in setting up sino-foreign joint ventures with their foreign partners. Foreign businessmen such as Mike and Chinese national Zhang Yan, are now legally able to set up a joint venture after the new law came into effect.
In view of Chinas current system of foreign investment which stresses national treatment plus negative list, the court of first instance also consulted with relevant administrative authorities during the proceedings, and the reply they received was "... besides, Junda's business scope is outside of the scope of special management measures for foreign investment access (negative list),...... there arent any legal obstacles in adding Mike as a shareholder of Junda or to initiate procedures to change Jundas company to a foreign-invested enterprise". Therefore, it doesnt need to go through any special approval procedures to add Mike as a shareholder of Junda company, as there are no legal or policy obstacles any more.202011


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I Want My Equity Back!

Tap LegalTips

to follow usRelated articles:Close Your Company Properly - Dont Just Run Away!
Why A Good Accountant Is So Important
Can a Company Fire an Employee Who Failed to Tell the Truth?
On 14 May 2020, the Shanghai No. 1 Intermediate Court (hereinafter Appellate Court) publicly announced the result of a dispute over the qualification of a foreign shareholder. The Appellate Court found that a foreign individual, is an anonymous shareholder of a domestic company and has the right to claim back his equity. This case is the first one in China where a foreign individual has requested the confirmation of his shareholder status since the implementation of the Foreign Investment Law on 1 January 2020.2020514202011
In 2009, Mike Cheng and Zhang Yan met each other and wanted to start their business jointly. However, according to the then "People's Republic of China Sino-foreign joint venture law" (hereinafter "JV law"), Mike Cheng, as a foreign individual, Zhang Yan, as a Chinese, could not set up a joint venture. To solve this problem, Mike Cheng asked his brother Tony Cheng, a Chinese citizen to join them.2009(Mike Cheng)ZhangYan (Tony Cheng)
On 3 November 2009Mike Cheng transferred to Zhang Yan 260,000RMB, which was Mikes capital contribution invested in the name of Zhang Yan. At the same time, Zhang Yan and Tony set up Junda Company.Later on, the three parties signed an " Equity share agreement" and specified: "As a foreigner, Mike is unable to set up a joint venture with Chinese individuals currently", hence "Junda company will be set up in the name of Zhang Yan and Tony initially. When the situation presents itself, Mike shall set up a joint venture with Junda company." As to the actual investment ratio, the agreement made it very clear: "Mike 51%, Zhang Yan 25%, Tony 24%." ( Note: The actual ownership of equity is: Mike 51%, Zhangyan 25%, Tony 24%; However, in the business license, it only states two shareholders: Zhangyan owns 51% equity, among which, 26% owned by Mike; Tony  owns 49%, among which, 25% owned by Mike )200911326,51%25%24%
Since the incorporation of Junda company, Zhang Yan has been communicating with Mike and Tony via e-mail, such as reporting Junda company's operations, financials and dividend plans.On 6 August 2018, Junda Company issued a <Certificate of Contribution> to Mike, which stated that Mike had paid a capital contribution of 510,000RMB to the company on 3 November 2009.201886200911351
In 2019, Mike wanted Zhang Yan to transfer his 26% stake to Tony. However, Zhang Yan refused, and claimed that he is the actual owner of 51%  of the company, he never held any stake on behalf of Mike. Helplessly, Cheng had to file a lawsuit against Junda Company and Zhang Yan, with the purpose of confirming that the equity held by Zhang Yan, 26% of the company's shares are owned by Mike.201926%51%26%
The court of first instance held that the two sides had a series of clear agreements which confirmed that Mike actually held 51% of the shares of Junda, of which 26% was held by Zhang Yan, and 25% by Tony. At the same time, Mike had submitted payment records and mail exchanges to prove that he had discharged his contribution obligation to Junda company, and in fact participated in the operation and management of the company, fulfilling his rights and obligations as a major shareholder. Although Junda company and Zhang Yan denied the aforementioned fact, they failed to provide sufficient evidence to prove their denial. Therefore, the court of first instance ordered Junda company to change the ownership of the 26% equity share of Junda company to Mike instead of Zhang Yan's. Junda refused to accept the judgement and appealed to the Appellate Court.51%26%25%26%Junda company appealed and claimed that: what the Equity Share Agreement exactly meant is: Junda company shall set up another joint venture with Mike in the future, thus the first instance court misunderstood the meaning of this agreement. Furthermore, the e-mail address provided by Mike didnt belong to Zhang Yan, the judgement made based on Mikes unilateral statement is biased.
The Appellate Court believed that the content of the <Equity Share Agreement> is very clear and the following conclusions could be drawn:
a) First, all three parties confirmed that Mike is a shareholder of Junda company;
b) Second, Mike owns 51% of Junda' shares.
In addition, according to the <Certificate of Contribution>, Mike is the shareholder of Junda company, and he had paid 510,000RMB as capital contributions on 3 November 2009.51%200911351
Regarding the e-mail address, the Appellate Court found that all the user names of these mailboxes contain "zhangyan", which is in consistent with Zhang Yan's name in the phonetic alphabet and all signatures of the sender are "Zhang Yan" (in Chinese), which are exactly the same characters of Zhang Yan's name. Meanwhile, all the content of the correspondence involved the day-to-day operations of Junda company, such as monthly accounting details, financial statements, factory site selection, foreign exchange settlement schedules, etc. It is difficult to grasp such a detailed internal situation, unless the user is responsible for Junda's daily operations. As a matter of fact, Junda's legal representative is Zhang Yan.Taken together with all the above mentioned facts present, the court of first instance correctly concluded that these mailboxes were actually used by Zhang Yan between 2009 and 2018.Thus, the Appellate Court rejected the appeal and upheld the original judgment.zhangyan20092018
Comments:The Foreign Investment Law, which came into effect on 1 of January 2020, removes restrictions on Chinese individuals in setting up sino-foreign joint ventures with their foreign partners. Foreign businessmen such as Mike and Chinese national Zhang Yan, are now legally able to set up a joint venture after the new law came into effect.
In view of Chinas current system of foreign investment which stresses national treatment plus negative list, the court of first instance also consulted with relevant administrative authorities during the proceedings, and the reply they received was "... besides, Junda's business scope is outside of the scope of special management measures for foreign investment access (negative list),...... there arent any legal obstacles in adding Mike as a shareholder of Junda or to initiate procedures to change Jundas company to a foreign-invested enterprise". Therefore, it doesnt need to go through any special approval procedures to add Mike as a shareholder of Junda company, as there are no legal or policy obstacles any more.202011


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