Equity transfer: How to avoid possible damage to corporate assets

Once a shareholder duly fulfils his capital contribution obligation, he acquires equity in the company, which entitles him to rights as a shareholder of the company that has fictive independent personality. However, there may be occasions where the shareholder behaves in a manner detrimental to the company’s assets if he neglects the independence between his equity and the company’s assets, owing to the intangibility of equity and the fiction of independent personality of the company.

Let’s start with a case in which the author was involved. In a real estate enterprise that was a Chinese-foreign equity joint venture (JV), Party A, Party B and Party C held respectively 30%, 40% and 30% equity, until in 2015 when they signed an equity transfer agreement (ETA) with the JV (the “quartet agreement”), which specified that: (1) it was agreed among the parties A, B, C and D that certain stores of Party D in the X project shall be transferred to Party A for a total consideration of RMB25 million (US$3.8 million). Party D shall assist Party A in selling these stores and the sales proceeds shall be the property of Party A; and (2) the 30% equity of Party A in the JV shall be transferred to parties B and C without consideration when they sign the agreement. Parties A, B and C subsequently signed an ETA relating to the RMB18 million that Party A represented in the registered capital. It was approved by the competent commerce authority and registered with the industrial and commercial bureau.

However, parties B and C neither transferred the stores to Party A as agreed, nor paid any equity transfer price. Party A brought a suit against Party B, Party C and the JV requesting specific performance of the quartet agreement by the three parties and completion of title transfer registration by the JV for the relevant stores.

Zhao Sheng is a partner at Co-effort Law Firm in Suzhou