Shareholders may wish to amend the share structure of their subsidiary in China for several reasons by share transfer.
Shareholder share rights 股权 (Guquán) can be transferred to shareholders in whole or in part.
Under the Company Law, transferring share rights to a third party shall be approved by the majority of shareholders. Below, we take you through the basics of share transfer as provisioned by the Company Law.
The shareholder shall submit a written notice of the proposed transfer to seek consent. If there is no response within 30 days of receipt of the written notice – then the transfer is deemed approved.
If the majority of the other shareholders disagree, then those who disagree shall purchase the share rights. Refusal to purchase the share rights is deemed as consent to the transfer. Under the same conditions, the other shareholders have the right of first refusal.
If two or more shareholders exercise the right of first refusal, they shall determine the respective purchase percentages by negotiation. If the negotiation is unsuccessful, the right of first refusal is exercised in proportion to their respective capital contributions at the time of transfer.
Where the relevant shareholder and the company do not reach an agreement on the purchase of share rights, within 60 days of the date from the adoption of the relevant resolution, then the shareholder may initiate legal action in the people’s court. This action shall be done within 90 days from the date of the adopted resolution.
Articles of Association
Apart from the above, the articles of association of the company may regulate the transfer of share rights. And prevail over the above provisions.
Though it is important to note that not all articles of association provisions are recognized in judicial practice. And there is no standard answer to this issue. Commonly, the judicial practice renders that restrictions on equity transfer within the articles of association must be “reasonable”. And provisions shall not excessively restrict or even prohibit the transfer of equity to external persons. Such provisions may be deemed invalid.
The People’s Court can transfer the share rights of a shareholder according to a mandatory enforcement procedure provided by law. Under such condition, the court shall notify the company and the other shareholders may exercise the right of first refusal.
If shareholders do not exercise the right of first refusal within 20 days of receipt of court notice, it is deemed as a waiver of the right of first refusal.
Capital Contribution Certificate
When the transfer of share rights proceeds, the company shall cancel the capital contribution certificate of the original shareholder. And issue a capital contribution certificate to the new shareholder.
Additionally, the following shall be altered:
- records of shareholders;
- capital contributions in the articles of association; and
- register of members shall be modified.
Although, the board of shareholders do not need to vote to modify the articles of association.
Under the following circumstances, any shareholder who votes against the relevant resolution of the shareholders’ meeting may require the company to purchase their/its stock rights at a reasonable price.
- No profit is distributed to the shareholders for five consecutive years. But profits were made during the period and conformed to profit distribution requirements of the Law;
- In the event of any combination, division, or transfer of the principal assets of the company; or
- The business term specified in the articles of association expires or any of the other grounds for dissolution prescribed in the articles of association is satisfied. And the meeting of the board of shareholders continues the company by modifying the articles of association by adopting a resolution.