Provisions on Several Issues Concerning the Application of the (3)

Revised on February 20 2014. Latest revision can be found at: http://www.chinalawandpractice.com/Article/3321465/Provisions-on-Several-Issues-Concerning-the-Application-of-the-PRC-Company-Law-3-Revised.html

(Promulgated by the Supreme People's Court on January 27 2011 and effective as of February 16 2011.)

Fa Shi [2011] No.3

The following provisions have been formulated in respect of issues concerning the application of the law by people's courts in the trial of disputes involving the establishment of companies, capital contributions, confirmation of equity interests, etc., in light of trial practice, in order to correctly apply the PRC Company Law.

Article 1: Persons that, for the purposes of establishing a company, execute the company's articles of association, subscribe for the capital contributions to, or shares in, the company and perform the duties involved in the establishment of the company shall be deemed the promoters of the company; such promoters include the shareholders of a limited liability company at the time of its establishment.

Article 2: Where a promoter, for the purpose of establishing a company, executes a contract with a third party in its own name and the counterparty to the contract requests that the promoter assume the liability under such contract, the people's court shall uphold such request.

Where, after its establishment, the company acknowledges the contract specified in the preceding paragraph, or has actually enjoyed the rights or performed the obligations under such contract, and the counterparty to the contract requests that the company assume the liability under such contract, the people's court shall uphold such request.

Article 3: If a promoter executes a contract with a third party in the name of a company that is being established and, after the establishment of the company, the counterparty to the contract requests that the company assume the liability under such contract, the people's court shall uphold such request.

If, after its establishment, the company has evidence showing that the promoter used the company's name while it was being established to execute the contract with the counterparty in the promoter's own interest, and the company claims on such grounds that it is not liable under such contract, the people's court shall uphold such claim, unless the counterparty entered into such contract in good faith.

Article 4: If the establishment of a company is not successful for any reason and a creditor requests that all or some of the promoters bear joint and several liability for repayment of the expenses and debts incurred in the course of the effort to establish the company, the people's court shall uphold such request.

If some of the promoters, after bearing the liability in accordance with the preceding paragraph, request that the other promoters share such liability, the people's court shall render a judgment ordering the other promoters to share the liability in proportion to the liability bearing percentages agreed upon. If no liability-bearing percentages were agreed upon, they shall bear liability in proportion to their agreed upon capital contributions. If no capital contribution percentages were agreed upon, they shall bear the liability equally.

If the establishment of the company was unsuccessful due to the fault of some of the promoters, and the other promoters request that they bear the expenses and debts incurred in the course of the effort to establish the company, the people's court shall determine the scope of liability of the parties at fault based on the circumstances of the fault.

Article 5: If a promoter, in performing its duties associated with the establishment of a company, causes a third party to incur damage, and, after the establishment of the company, the injured party requests that the company bear the liability for tort compensation, the people's court shall uphold such request. If the establishment of the company was unsuccessful and the injured party requests that all of the promoters bear joint and several liability for compensation, the people's court shall uphold such request.

After it or they have borne the liability for compensation, the company or the promoters that were not at fault may seek recourse against the promoters that were at fault.

Article 6: If a subscriber of a company limited by shares fails to pay on schedule the subscription moneys for the shares for which it has subscribed, still fails to do so within a reasonable period of time after a reminder from the promoters of the company, and the promoters of the company then put such shares up for offer, the people's court shall determine such offering to be valid. If the delayed payment of subscription moneys by a subscriber causes the company to incur a loss and the company requests that such subscriber bear liability for compensation, the people's court shall uphold such request.

Article 7: If an investor makes its capital contribution in the form of property over which it does not have a right of disposal and a dispute arises between the concerned parties over the validity of the capital contribution, the people's court may render its determination with reference to Article 106 of the Property Law.

If an equity interest is secured by way of a capital contribution made in the form of money derived from an illegal or criminal act, such as embezzlement, bribery, misappropriation and diversion, such equity shall be disposed of by way of an auction or sale when the illegal or criminal act is pursued and punished.

Article 8: If an investor makes its capital contribution in the form of an allocated leasehold or leasehold over which an encumbrance has been created and the company, other shareholders or a creditor of the company request(s) that a determination to the effect that the investor has failed to perform its capital contribution obligation be rendered, the people's court shall order the concerned party to carry out the procedures for the change in the land or remove the encumbrance within the designated reasonable period of time. If the investor fails to do so, the people's court shall determine that it has not fully performed its capital contribution obligation in accordance with the law.

Article 9: If an investor makes its capital contribution in the form of non-monetary property that was not appraised and priced in accordance with the law, and the company, other shareholders or a creditor of the company request(s) that a determination to the effect that the investor has failed to perform its capital contribution obligation be rendered, the people's court shall appoint a qualified appraisal firm to appraise and price the property. If the value of the property determined in the appraisal is markedly lower than the value determined in the articles of association of the company, the people's court shall determine that the investor has not fully performed its capital contribution obligation in accordance with the law.

Article 10: If an investor makes its capital contribution in the form of property such as premises or leaseholds, or in the form of intellectual property for which the carrying out of title registration is required and has delivered such property for use by the company but has not carried out the procedures for the change in title thereto, and the company, other shareholders or a creditor of the company request(s) that a determination to the effect that the investor has failed to perform its capital contribution obligation be rendered, the people's court shall order the concerned party to carry out the procedures for the change in title within the designated reasonable period of time. If it does so within the aforementioned period of time, the people's court shall determine that it has performed its capital contribution obligation; and if the investor claims that it was entitled to the relevant shareholder rights from the time it actually delivered the property for use by the company, the people's court shall uphold such claim.

If an investor makes its capital contribution in the form of the property specified in the preceding paragraph, has carried out the procedures for the change in title thereto but has not delivered the same for use by the company, and the company or other shareholders request(s) that it deliver the same to the company and that it not be eligible for the relevant shareholder rights before actual delivery, the people's court shall uphold such request.

Article 11: If an investor makes its capital contribution in the form of an equity interest in another company, the people's court shall determine that it has performed its capital contribution obligation if the following conditions are satisfied:

(1) the equity interest is lawfully owned by the investor and, in accordance with the law, may be transferred;

(2) there are no defects in the rights to the equity interest and it is free of encumbrances;

(3) the investor has carried out the statutory procedures for transfer of the equity interest; and

(4) the value of the equity interest has been appraised in accordance with the law.

If a capital contribution made in the form of an equity interest fails to satisfy one of the conditions set forth in Item (1), (2) or (3) of the preceding paragraph, and the company, other shareholders or a creditor of the company request(s) that a determination to the effect that the investor has failed to perform its capital contribution obligation be rendered, the people's court shall order the investor to take remedial measures to satisfy the foregoing conditions within the designated reasonable period of time. If it fails to do so, the people's court shall determine that the investor has not fully performed its capital contribution obligation in accordance with the law.

If a capital contribution made in the form of an equity interest does not satisfy the condition set forth in Item (4) of the first paragraph of this Article, and the company, other shareholders or a creditor of the company request(s) that a determination to the effect that the investor has failed to perform its capital contribution obligation be rendered, the people's court shall handle the matter in accordance with Article 9 hereof.

Article 12: If, after the establishment of a company, the company, shareholders or a creditor of the company, on the grounds that any of the circumstances set forth below apply to the act by the relevant shareholder and such act harms the rights and interests of the company, request(s) that a determination to the effect that the shareholder has illegally withdrawn its capital contribution be rendered, the people's court shall uphold such request:

(1) after the capital contribution is transferred into the company's account and verified, it transfers it out;

(2) it transfers its capital contribution out after fabricating a claim-debt relationship;

(3) it prepares fraudulent financial accounting statements to fraudulently increase profits that are then distributed;

(4) it transfers its capital contribution out by way of an affiliated transaction; or

(5) it otherwise withdraws its capital contribution without carrying out the statutory procedure.

Article 13: If a shareholder fails to perform its capital contribution obligation in full or in part and the company or other shareholders request(s) that it perform such obligation in full, the people's court shall uphold such request.

If a creditor of the company requests that a shareholder that has not performed its capital contribution obligation in full or in part bear, in respect of the portion of the company's debt that cannot be repaid, liability for supplementary compensation to the extent of the principal of and interest on the capital contribution that it has failed to make, the people's court shall uphold such request. If, after the shareholder that has not performed its capital contribution obligation in full or in part has borne the aforementioned liability, another creditor makes an identical claim, the people's court shall not uphold such claim.

If a shareholder, at the time of the establishment of the company, fails to perform its capital contribution obligation in full or in part and a plaintiff that institutes a legal action pursuant to the first paragraph or the second paragraph of this Article requests that the promoters of the company and the shareholder that is the defendant in the case bear joint and several liability, the people's court shall uphold such request. Once they have borne the liability, the promoters of the company may seek recourse against the shareholder that was the defendant in the case.

If a shareholder, at the time of a capital increase by the company, fails to perform its capital contribution obligation in full or in part and a plaintiff that institutes a legal action pursuant to the first paragraph or the second paragraph of this Article requests that the directors and senior management personnel that failed to perform the obligations specified in the first paragraph of Article 148 of the Company Law, resulting in the capital contributions not being paid in full, bear the attendant liability, the people's court shall uphold such request. Once they have borne the liability, the directors and senior management personnel may seek recourse against the shareholder that was the defendant in the case.

Article 14: If a shareholder illegally withdraws its capital contribution and the company or other shareholders request(s) that it return the principal of, and the interest on, its capital contribution to the company and that the other shareholders, directors, senior management personnel or de facto controller that assisted in the illegal withdrawal of the capital contribution bear joint and several liability therefor, the people's court shall uphold such request.

If a creditor of the company requests that the shareholder that has illegally withdrawn its capital contribution bear, in respect of the portion of the company's debt that cannot be repaid, liability for supplementary compensation to the extent of the principal of and interest on the illegally withdrawn capital contribution and that the other shareholders, directors, senior management personnel or de facto controller that assisted in the illegal withdrawal of the capital contribution bear joint and several liability therefor, the people's court shall uphold such request. If, after the shareholder that has illegally withdrawn its capital contribution has borne the aforementioned liability, another creditor makes an identical claim, the people's court shall not uphold such claim.

Article 15: If a third party advances funds to assist a promoter in establishing a company and the parties have expressly provided that, after the verification of the company's capital or after the establishment of the company, the capital contribution of the promoter is to be withdrawn to repay the third party, and, after the promoter withdraws the capital contribution and repays the third party pursuant to the aforementioned provision, it fails to make up the capital contribution in full and a relevant rights holder requests that the third party jointly and severally bear the attendant liability arising in connection with the promoter's withdrawal of its capital contribution, the people's court shall uphold such request.

Article 16: If, after an investor makes its capital contribution in the form of non-monetary property that satisfies the statutory conditions, such property decreases in value due to changes in the market or another objective factor and the company, other shareholders or a creditor of the company request(s) that the investor bear liability for making up the difference in its capital contribution, the people's court shall not uphold such request, unless the parties had provided otherwise.

Article 17: Where a shareholder fails to perform its capital contribution obligation in full or in part or illegally withdraws its capital contribution and the company, pursuant to its articles of association or a resolution of the shareholders' meeting, places reasonable restrictions on its shareholder rights such as the right to claim a profit distribution, the preemptive right to subscribe for new shares or the right to a distribution of remaining property, if the shareholder requests that a determination to the effect that such restriction is invalid be rendered, the people's court shall not uphold such request.

Article 18: Where a shareholder of a limited liability company fails to perform its capital contribution obligation or illegally withdraws all of its capital contribution, fails to make or return such capital contribution within a reasonable period of time after being reminded to do so by the company, and the company terminates its qualifications as a shareholder by way of a resolution of the shareholders' meeting, if the shareholder requests confirmation that such termination is invalid, the people's court shall not uphold such request.

Under the circumstance described in the preceding paragraph, the people's court shall, when rendering its judgment, explain that the company is required to, in a timely manner, carry out the statutory capital reduction procedure or have the other shareholders or a third party make the relevant capital contribution. If a creditor of the company, before the statutory capital reduction procedure has been carried out or the other shareholders or a third party have/has made the relevant capital contribution, requests pursuant to Article 13 or Article 14 hereof that the relevant parties bear the attendant liability, the people's court shall uphold such request.

Article 19: If a shareholder of a limited liability company that has not performed its capital contribution obligation in full or in part transfers its equity interest and the transferee knew or ought to have known thereof, and the company requests that the shareholder perform its capital contribution obligation and that the transferee bear joint and several liability therefor, the people's court shall uphold such request. If a creditor of the company institutes an action against the shareholder pursuant to the second paragraph of Article 13 hereof and additionally requests that the aforementioned transferee bear joint and several liability therefor, the people's court shall uphold such request.

If the transferee, after bearing liability in accordance with the preceding paragraph, seeks recourse against the shareholder that failed to perform its capital contribution obligation in full or in part, the people's court shall uphold such recourse, unless the parties had provided otherwise.

Article 20: Where a shareholder of a company fails to perform its capital contribution obligation in full or in part or illegally withdraws its capital contribution and the company or other shareholders request(s) that it fully perform its capital contribution obligation toward the company or return its capital contribution, if the shareholder that is the defendant in the case mounts its defence on the grounds of the limitation of actions, the people's court shall not uphold such grounds.

Where the limitation of actions for a claim of a creditor of the company has not expired and the creditor requests, pursuant to the second paragraph of Article 13 or the second paragraph of Article 14 hereof, that the shareholder that failed to perform its capital contribution in full or in part or illegally withdrew its capital contribution bear liability for compensation, if the shareholder that is the defendant in the case mounts its defence on the grounds that the limitation of actions for its capital contribution obligation or obligation to return the capital contribution has expired, the people's court shall not uphold such grounds.

Article 21: If a dispute arises between parties over whether a capital contribution obligation has been performed, and the plaintiff provides evidence that gives rise to reasonable doubt as to whether the shareholder has performed its capital contribution obligation, the shareholder that is the defendant in the case shall bear the burden of proof in respect of its having performed its capital contribution obligation.

Article 22: When a party institutes a legal action in a people's court seeking confirmation of its status as a shareholder, it shall name the company as the defendant, and persons that have a material interest in the disputed equity in the case shall participate in the action as third parties.

Article 23: When a dispute over ownership of an equity interest arises between parties, and a party requests that the people's court confirm that it owns such equity interest, it shall substantiate one of the following facts:

(1) has made a capital contribution or subscribed for a capital contribution to the company in accordance with the law and the same does not violate mandatory provisions of laws or regulations; or

(2) it has acquired or otherwise succeeded to the equity interest in the company and the same does not violate mandatory provisions of laws or regulations.

Article 24: If, after a party has, in accordance with the law, performed its capital contribution obligation or succeeded to and obtained an equity interest, the company fails to issue an investment certificate, and/or record its name in the register of shareholders and carry out registration with the company registry, in accordance with Articles 32 and 33 of the Company Law, and the party requests that the company perform the foregoing obligations, the people's court shall uphold such request.

Article 25: If an actual investor and a nominal investor in a limited liability company enter into a contract providing for the capital contribution to be made and the investment rights and interests to be enjoyed by the actual investor and for the nominal investor to be the nominal shareholder, and a dispute over the validity of the contract arises between the actual investor and the nominal investor, the people's court shall determine such contract to be valid unless any of the circumstances set forth in Article 52 of the Contract Law applies.

If a dispute arises between the actual investor and the nominal shareholder specified in the preceding paragraph over vesting of the investment rights and interests, and the actual investor asserts rights against the nominal shareholder on the grounds that it was it that actually performed the capital contribution obligation, the people's court shall uphold such assertion. If the nominal shareholder denies the actual investor's rights on the grounds of the record in the company's register of shareholders and the registration with the company registry, the people's court shall not uphold such denial.

If the actual investor, without the consent of at least one half of the other shareholders of the company, requests that the company change shareholders, issue it an investment certificate, record it in the register of shareholders, record it in the articles of association of the company and carry out registration with the company registry, the people's court shall not uphold such request.

Article 26: If a nominal shareholder transfers, pledges or otherwise disposes of the equity registered under its name and the actual investor requests that a determination to the effect that such disposal is invalid be rendered on the grounds that it is it that has the actual rights in the equity, the people's court may handle the matter with reference to Article 106 of the Property Law.

If the disposal of the equity interest by the nominal shareholder causes the actual investor to incur a loss and the actual investor requests that the nominal shareholder bear liability for compensation, the people's court shall uphold such request.

Article 27: If a creditor of a company requests that a shareholder registered with the company registry bear, on the grounds that it has not performed its capital contribution obligation, in respect of the portion of the company's debt that cannot be repaid, liability for supplementary compensation to the extent of the principal of and interest on the capital contribution that it has failed to make, and the shareholder mounts its defence on the grounds that it is merely a nominal shareholder and not the actual investor, the people's court shall not uphold such grounds.

If the nominal shareholder, after bearing the liability for compensation pursuant to the preceding paragraph, seeks recourse against the actual investor, the people's court shall uphold such recourse.

Article 28: If, after an equity transfer, registration of the change is not carried out with the company registry, and the original shareholder transfers, pledges or otherwise disposes of the equity still registered under its name, and the acquiring shareholder requests that a determination to the effect that such disposal is invalid be rendered on the grounds that it is it that has the actual rights in the equity, the people's court may handle the matter with reference to Article 106 of the Property Law.

If the disposal of the equity by the original shareholder causes the acquiring shareholder to incur a loss and the acquiring shareholder requests that the original shareholder bear liability for compensation and that the directors, senior management personnel or de facto controller that are at fault for failing to carry out registration of the change in a timely manner bear the attendant liability, the people's court shall uphold such request. If the acquiring shareholder was also at fault for the failure to carry out registration of the change in a timely manner, the liability of the aforementioned directors, senior management personnel or de facto controller may be appropriately reduced.

Article 29: If a party fraudulently uses another's name to make a capital contribution and registers such third party as a shareholder with the company registry, such party shall bear the attendant liability. If the company, other shareholders or a creditor of the company request(s), on the grounds of failure to perform the capital contribution obligation, that the party whose name was fraudulently used and registered as a shareholder bear the liability for making up the difference in the capital contribution or compensation for the portion of the company's debt that cannot be repaid, the people's court shall not uphold such request.