Exploring compliant methods of bypassing preemptive right

The term “shareholder right of first refusal” – or preemptive right – means that when a shareholder of a limited liability company wishes to transfer any of his equity to a third party, the other shareholders have, all things being equal, the preemptive right to purchase such equity. The main legal basis for this is article 71 of the Company Law (amended in 2013).

The main purpose of the preemptive right is to assure the “personalized nature” of limited liability companies and safeguard trust between the shareholders. It has a positive effect on the corporate system. However, limited liability companies are characterized both by their “personalized nature” and “profit seeking”, and if the former were to be overemphasized at the expense of the latter, the realization of market trading efficiency and liberty would be compromised, as would the protection and realization of the lawful rights and interests of transferring shareholders and acquirers. In practice, serious difficulties can arise because the legal provisions are sometimes too general and the procedure is complicated. An entire equity transaction may occasionally become null and void due to flaws in the preemptive right procedure.

The Company Law divides shareholder rights into inherent and non-inherent rights. The criterion for the division is whether a right can be restricted or deprived by the company’s articles of association, or a resolution of the shareholders’ meeting. Room for adjustment and configuration of inherent rights by corporate contracts is limited, with the large majority of such rights either immune to restriction or requiring the unanimous consent of all of the shareholders before any restrictions can be placed.

The great majority of the relatively important or core rights comprising shareholders’ rights fall into the category of inherent rights, including the preemptive right. Accordingly, in practice, bypassing the preemptive right requires consideration from a different vein in the company system.

Xi Qing is a senior partner at AllBright Law Offices in Nanjing