Nominee shareholding and rules of dispute hearing

Nominee shareholding is an arrangement where a person makes capital contribution and holds shares on behalf of the actual owner (beneficial owner) due to any special purpose. It is not uncommon that nominee shareholding gives rise to complicated legal disputes.

Q: What are the vital elements of a nominee shareholding arrangement, and what forms does it take?

A: In 2011, the Supreme People’s Court issued the Provisions on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III) (the company law interpretation), providing the first explicit clarifications about nominee shareholding in limited liability companies.

Pursuant to article 24 of the company law interpretation, a valid nominee shareholding arrangement must meet the following requirements: (1) there is an entrusted shareholding agreement between the nominee shareholder and the beneficiary owner; (2) the beneficiary owner takes the obligation of capital contribution to the registered capital; and (3) the entrusted shareholding agreement does not involve any invalidating circumstances under article 52 of the Contract Law.

As we can infer from article 24, the fact that a beneficiary owner chooses not to have his name appearing on the register of members does not mean that existence of the beneficiary owner is not known to the company, or any other shareholders. Therefore, there are two options for a nominee shareholding arrangement. As option 1, the nominee shareholder may hold shares in his/her own name without making any disclosure about the nominee shareholding arrangement. As option 2, the nominee shareholder may state upon equity acquisition that he/she is holding shares on behalf of another person, whether disclosing the identity of the beneficiary owner or not.