Guidelines #3 of the Supreme Court on the Company Act of the People’s Republic of China

(Adopted by the Supreme Court Judicial Committee during the 1504th Session on December 6, 2010, amended by the Supreme Court Judicial Committee during the 1607th Session pursuant to the Decision of the Supreme Court on Revising the Guidelines of Company Act of the People’s Republic of China on February 17, 2014, and second amended during the 1823th Session pursuant to the Decision of the Supreme Court on Revising Guidelines of 29 Commercial Cases, including the Reply of the Supreme Court on Whether State Owned Land Leasehold Rights May Be Included in Bankruptcy Assets on December 23, 2020.

​The purpose of these guidelines is to integrate caselaw into correct application of the Company Act of the People’s Republic of China, in disputes such as company formation, capital contribution, shareholder status.

Section 1 A company promoter refers to anyone who executes a company article of formation, subscribes capital or shares to the company, and performs formation, which includes shareholder who participate in the formation of the limited liability company.

Section 2 The court shall grant a contract counterparty’s claim to hold a promoter liable for a contract executed in the promoter’s own name during company formation, or to hold the company liable for such a contract after the company has been formed.

Section 3 The court shall grant a contract counterparty’s claim made subsequent to formation, to hold a company liable for a contract signed by a promoter in the company’s reserved name.

The court shall grant the company’s claim to be exculpated from liability on a showing that the promoter executed the contract in the company’s reserved name for personal gain, unless such counterparty acted in good faith.

Section 4 The court shall grant a creditor’s claim to hold all or some of the promoters jointly and severally liable for repayment of the expenses and debts incurred in forming the company, if a company fails to be formed for any reason.

The court shall order other promoters to share the liability pursuant to the agreed-upon ratio of liability where some promoters who have assumed liability in the preceding sections request other promoters to recover their respective shares. The court shall determine the shares based on the ratios of capital contributions if there is no agreed-upon ratio of liability. The liability shall be joint and several if neither basis exists.

The court shall determine the extent liability based on to the degree of fault if one promoter makes claims for damages against another promoter for causing the failure of company formation.

Section 5 The court shall grant a party‘s claim to hold the company liable for damages arising from a promoter’s conduct pursuing company formation. The court shall grant a party’s claim to hold all promoters jointly and severally liable for damages if the company is not formed.

A company or a promoter who is not at fault and who has assumed liability for damages may recover from the promoter who was at fault.

Section 6 The court shall hold that a new raise of share capital by a corporation’s promoters is effective, in the event a subscriber fails to seasonably pay in the contribution, but the corporation promoters must first make notice and demand for payment within a reasonable deadline. The court shall grant a company’s claim for damages against a subscriber liable if delay in payment causes losses to the company.

Section 7 The court shall apply Civil Code §311 in disputes over capital contributions where a subscriber contributes assets that are not freely transferable.

Equity acquired with proceeds derived from crimes including without limitation embezzlement, bribery, or misappropriation that are criminally prosecuted are subject to auction or forced sale.

Section 8 The court shall order the subscriber to make conveyance of leasehold rights, or to terminate the encumbrance of the right, within a reasonable deadline, if a company, a shareholder, or a company creditor petition the court to hold that the subscriber has failed to perform capital contribution obligations where the contribution was made by conveyance of land leasehold rights or encumbered land leasehold rights. The court shall hold the subscriber failed to fully perform capital contribution obligations if the subscriber fails to transfer or terminate by the deadline.

Section 9 The court shall designate a qualified appraiser to appraise the value of the contributed assets if a company, a shareholder, or a company creditor petitions the court to rule that the subscriber has failed to perform capital contribution obligations by making a non-cash contribution without obtaining a lawful appraisal of its value. The court shall hold that the subscriber has failed to fully perform capital contribution obligations if the appraised value is significantly lower than the amount set out in the company’s articles of formation.

Section 10 The court shall order the subscriber to complete the ownership registration procedures within a reasonable deadline if a company, a shareholder, or a company creditor requests the court to recognize that the subscriber has failed to perform capital contribution obligations by delivering assets as a capital contribution but failing to complete the registration of ownership transfer, including real estate, land leasehold rights, or registerable intellectual property. The court shall hold a subscriber has discharged capital contribution obligations if the subscriber finished the procedures by the deadline. The court shall grant the subscriber the applicable shareholders’ rights running from the time of the delivery of the assets to the company.

Where the subscriber has completed title registration but has not delivered the assets to the company, the court shall grant a claim by the company or other shareholders to order the subscriber to deliver the assets, and shareholder status does not commence until such delivery.

Section 11 The court shall hold a subscriber’s discharged its obligation to contribute capital in the form of equity in another company if:

(a) The subscriber legally holds the contributed equity, which is transferable at law;

(b) The contributed equity is free from defects or encumbrances;

(c) The subscriber has performed the statutory procedures for the equity assignment; and

(d) A lawful appraisal of the value of the contributed equity has been performed.

The court shall order a subscriber whose equity contribution does not comply with Section 11(a)-(c) to make corrections within a reasonable deadline, upon claim made by the company, a shareholder, or a company creditor that the subscriber has failed to perform capital contribution obligations. If the subscriber fails to comply by the deadline, the court shall hold the subscriber is in default of the capital contribution obligation.

Where the contributed equity does not comply with § 11(d), the court shall apply § 9 in response to a petition by a company, a shareholder, or a company creditor to hold that a subscriber has failed to perform capital contribution obligations.

Section 12 The court shall grant a claim by a company, a shareholder, or a company creditor to hold that a shareholder has perpetrated sham capitalization after the company’s formation, on the ground that such conduct damages the company’s interests, where the shareholder has:

(a) Distributed inflated profits through financial statement manipulation;

(b) Round tripped out their capital contribution as fictitious indebtedness;

(c) Round tripped out capital contributions through related party transactions; or

(d) Round tripped out capital contributions in a manner not following the statutory procedures.

Section 13 The court shall grant a petition by a company or a shareholder to compel performance against a shareholder who has not performed, or has partially performed, capital contribution obligations.

The court shall grant a claim by a company creditor against a shareholder who has failed to perform, or has only partially performed, capital contribution obligations, to impose liability for contribution to the extent the company is insolvent, limited to the principal and interest on the unfulfilled capital contribution. The court shall not grant duplicative requests from other creditors if such liability has already been imposed on the shareholder.

The court shall grant a plaintiff’s petition to impose joint and several liability on the company promoter and the defendant shareholders under §§ 1 or 2, if a shareholder failed to perform, or fully perform, capital contribution obligations during the company’s formation. The company promoter who has assumed such liability may claim indemnification against the defendant shareholders.

Where a shareholder fails to discharge, or fully discharge, capital contribution obligations during a capital increase, the court shall grant a claim for damages by the plaintiff for the directors and officers pursuant to §§ 1 and 2 for failure to discharge Company Act § 147(a) capital contributions.  The directors and officers who have assumed such liability may recover damages from the defendant shareholder.

Section 14 The court shall grant a demand by the company or a shareholder against any shareholder who used round-tripping to make sham capitalization return the capital with interest to the company, and impose joint and several liability on other shareholders, directors, officers, or persons with actual control, who facilitated the sham capitalization.

The court shall grant a claim by a company creditor against a shareholder who made a sham capitalization to impose liability for contribution with interest for debt to the extent the company is insolvent up to the amount of the sham capital; joint liability is imposed on other shareholders, directors, officers, or actual controllers who facilitated the sham capitalization. The court shall not grant damages for the duplicative claims by other creditors if the shareholders who made sham capitalization have already been held liable for contribution.

Section 15 The court shall not grant a claim by the company, a shareholder, or a company creditor to compel a subscriber to fulfill capital contribution obligations where non-monetary assets have depreciated due to a supervening event, such as market volatility after the subscriber has legally made the capital contribution. However, this is only applicable unless the parties have negotiated otherwise.

Section 16 The court shall not grant a claim by a shareholder to invalidate restrictions on shareholder rights imposed by the company pursuant to its articles of formation or a resolution of the shareholders meeting, including but not limited to rights to dividends, preemptive rights, and residual claims.

Section 17 Where a shareholder has failed to perform capital contribution obligations or has made in sham capital contributions by round-tripping, and has failed to pay or return the capital contribution within a reasonable time after a demand, the court shall not grant a petition by a shareholder to invalidate a disqualification passed in a resolution of the shareholders meeting of the LLC.

The court shall order the company to carry out a capital reduction or require other shareholders or a third party to make the capital contribution as outlined above in rendering judgment. The court shall grant a claim by a company creditor to impose liability under §§ 13 or 14 before capital reduction or capital contribution by other shareholders or a third party is completed.

Section 18 The court shall grant a claim by an LLC against a shareholder who transfers equity but has not performed, or only partially performed, capital contribution obligations, to compel the shareholder to make the capital contribution. When the assignee knew or should have known that the shareholder transferred the equity without performing or fully performing capital contribution obligations, the court shall also impose joint and several liability on the assignee. The court shall grant a claim by a company creditor against such shareholder under § 13(b) and impose joint and several liability on the assignee.

The court shall grant a transferee held liable under the preceding paragraph to recover damages from any shareholder who has failed to perform or fully perform capital contribution obligations. However, this is only applicable unless the parties have negotiated otherwise.

Section 19 Where a shareholder has failed to perform, fully perform, or has carried out sham capitalization, the court shall not recognize a defendant shareholder’s statute of limitation defense against a company or other shareholders that claim specific performance of capital contributions or the return of capital.

For creditor claims filed by the statutory deadline, the court shall not recognize a defendant shareholder’s defense that capital contribution obligations or return of capitalization are time-barred made in response to company creditor’s claim to enforce against a shareholder who has failed to perform, fully perform, or carried out sham capitalization under §§ 13(a), 14(b).

Section 20 In disputes concerning capital contribution obligations, the defendant shareholder has the burden to prove that the capitalization was made after a plaintiff presents evidence raising reasonable doubt about the shareholder’s performance of those obligations.

Section 21 In a dispute to affirm shareholder qualifications, the party shall name the company as the defendant and any individual with an interest in the disputed equity as a third party.

Section 22 A party seeking a declaration of shareholder status in a dispute shall satisfy one of the following:

(a) Have lawfully contributed or subscribed to the company’s capital without breaching any mandatory rule of law;

(b) Have lawfully acquired equity interests through assignment or succession, without violating any mandatory rule of law.

Section 23 The court shall grant a claim by a party who has effectively paid in capital or acquired shares, requiring the company to issue a certificate of contribution, record the shareholder in the shareholder register, and register the shareholder at the company’s registering office under Company Act §§ 31 and 32, if the company fails to do so.

Section 24 The court shall recognize the validity of a contract between a beneficial owner and a nominee shareholder, under which both hold rights to an interest in the investment and the nominee as subscriber is the nominee shareholder, unless the contract is invalid as a matter of law.

In the above type of nominee shareholder dispute, the court shall recognize beneficial owner’s capital contribution as evidence of their rights. The court shall not accept the nominee shareholder’s shareholder ledger or registration at the company business registrar as evidence to disprove the beneficial owner’s rights.

With less than half of the other shareholders’ consent, the court shall not grant a beneficial owner’s petition to order the company to amend the shareholder ledger, issue a certificate of contribution, record the name in the article of company, and register in the company’s registering office.

Section 25 The court shall apply of the Civil Code § 311 when a beneficial owner asserts the beneficial rights over equity and requests the court to void actions taken by a nominee shareholder, including transfers, pledges or other disposition of the equity interests registered in their name.

The court shall grant a claim by a beneficial owner to hold a nominee shareholder liable for damages if the nominee shareholder, while disposing of equity, causes losses to the beneficial owner.

Section 26 The court shall not grant a nominee shareholder’s defense denying beneficial ownership when a company creditor seeks to hold the registered shareholder liable for contribution to the extent the company is insolvent up to the amount of the remaining capital contribution obligation.

The court shall grant a nominee shareholder’s claim to recover indemnity from the beneficial owner for liability assumed on their behalf.

Section 27 The court shall apply Civil Code § 311 when a transferee shareholder petitions the court to set aside actions of a former shareholder who continues to exercise rights in transferred shares, including transfers, pledges, or other dispositions, where no amended filing for the transfer has been made at the registrar office and they hold a property interest as a transferee shareholder in the equity .

When failure to promptly amend the registration filings causes losses, the court shall grant a claim by a transferee shareholder to recover damages from the former shareholder and holding directors, officers, or persons with actual control. The liability to directors, officers, and persons with actual control shall be reasonably reduced if the transferee shareholder is at fault for failing to seek seasonable amendment.

Section 28 A person who uses identity theft to make capital contributions and to register as a shareholder at the company registrar is liable therefor. The court shall not grant a claim by a company, a shareholder, or a company creditor to hold the person whose identity has been stolen liable for fulfilling capital obligations or for the company’s illiquid debts.

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These rules were translated to American English using the  User Centered Translation approach from the following government publications:

“最高人民法院关于适用《中华人民共和国公司法》若干问题的规定（三）”
https://flk.npc.gov.cn/detail?id=ff808181799def980179ac07a9ca117c&fileId=&type=&title=最高人民法院关于适用《中华人民共和国公司法》若干问题的规定（三）