An introduction to the Measures on Registration of Equity Pledge

Scope of the Measures

Echoing Article 226 of the Property Law, the Measures apply to registration of a pledge of shares of a limited liability company or company limited by shares, excluding shares of a company limited by shares which has already been registered with the securities registration and settlement authorities.

Under PRC laws, pledged equity registered with the security registration and settlement authorities shall be the share of listed companies. The pledges over share of listed companies are excluded from the Measures.

Equities which can be pledged

Article 5 of the Measures states: “Equity for which application is made for pledge registration shall be the one that is permitted to be assigned and pledged under PRC law.” With no further explanation on what share can be pledged, the same Article only stresses that “No application for equity pledge registration shall be made with respect to a share frozen by a people's court until it is unfrozen”.

In the meantime, the Measures provide that “No pledge of the equity of a foreign investment enterprise shall be registered unless it is approved by the authority originally examining and approving the establishment of the enterprise”. This provision reiterates the established principle from the Certain Provisions on the Change of Equity Interests of Foreign Investment Enterprises, implemented in 1997, aiming at preventing foreign investors from secretly withdrawing their capital contributions by the way of equity pledge.

Registration formalities

Applications for an equity pledge registration shall be jointly submitted by the pledgor and the pledgee with administrative authorities for industry and commerce. The applicants shall be legally liable for the authenticity of the application documents, legality and validity of the equity pledge agreement and completion for the capacity for right of the pledged equity.

The Measures stipulate that “in the event that an application is beyond the scope of the equity pledge registration or beyond the jurisdiction of a particular registration authority, or an application is inconsistent with the Measures, such registration authority shall advise the applicants on the site when the application for registration is presented, and return the application documents”. This provision implies that the purpose of the registration is to create pledge right against any third party and to improve the public recognition of the pledges through more effective public announcements. Whether the documents submitted are legally valid or not is beyond the scope of the registry's duty of inspection. This purpose is again reflected in Article 4 of the Measures governing the matters to be registered for an equity pledge. Instead of recording matters regardless of importance, only three items will be traced: the name of the pledgor and the pledgee, the name of the company in which the pledged equity pledge is located and the amount of the pledged equity.

In accordance with Article 7 of the Measures, applicants shall submit the following documents:

• An application form for the registration of equity pledge signed or affixed with seal by the applicants;

• A photocopy of the shareholder register of a limited liability company setting forth the name of the pledgor and the amount of its capital contribution or a photocopy of the equity certificate of a company limited by shares held by the pledgor (each to be affixed with the seal of the company);

• An equity pledge agreement;

• A photocopy of business licence or natural person identity certificate of the pledgor and the pledgee (to be signed in person if it is a natural person, or affixed with seal if it is a legal person);

• A certificate for representatives respectively or authorising an agent jointly if the applicants designate representatives respectively, or authorise an agent jointly, to complete the application; and

• Other documents required by the State Administration for Industry and Commerce.

The Measures also contain provisions governing the registration procedures for change registration, voluntary deregistration and mandatory registration, covering all the phases of equity pledge.

Conclusion

Unlike other property owned by a company which can be pledged or mortgaged under PRC laws, equity interest is supposed to be in a better position to reflect the value of the company. Plus, as a general rule of PRC law, the pledgee has the right to collect any dividends or liquidation distributions paid on the pledged shares. The introduction of the Measures provides a practical basis for pledge registration with simple formalities.