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A case from shanghai first intermediate peoples court ed as typical case on servingsafeguarding the construction of pilot free trade zones by peoples courts
[2022-03-01]

Recently, the Supreme People's Court issued the typical cases on serving and safeguarding the construction of pilot free trade zones by people's courts. A case of dispute over confirmation of shareholder qualifications (Carson v. Niuxinda Company) tried by Shanghai First Intermediate People's Court, i.e. China's first case where an overseas natural person requested shareholder qualification confirmation after the implementation of the Foreign Investment Law, was selected. The case was presided over by Zheng Tianyi, former Director of the Research Office of Shanghai First Intermediate People's Court (now Director of the Research Office of Shanghai High People's Court), with Cheng Yang and Ao Yingjie as members of the collegial panel.

Carson, a citizen of the United States, agreed with Zhang A and Cheng A (each with partial name withheld), Chinese citizens, to form a trading company in China. As the then Chinese law disallowed a foreign natural person to establish a joint venture with a domestic natural person, the three persons signed a Share Agreement, agreeing to form Niuxinda Company in the names of Zhang A and Cheng A. Carson later sued, claiming a confirmation that part of equities in Niuxinda Company in the name of Zhang A was owned by him and that Niuxinda Company should cooperate in making such modifications as to register the part of equities under the name of Carson.

After the trial, Pudong New Area People's Court of Shanghai held that Carson was a dormant shareholder of Niuxinda Company and Zhang owned 26% of the Company's equity on behalf of Carson. According to Chinese laws, despite a citizen of the United States, Carson's behavior of establishing a company jointly with Zhang and Cheng was still valid and Niuxinda's business scope did not fall within the negative list. There was no legal barrier to change Carson's registration as Niuxinda Company's shareholder. Hence, Carson's claim was supported. Niuxinda Company filed an appeal against the judgment.

Shanghai First Intermediate People's Court held upon trial that according to the contents of the Share Agreement, all parties concerned acknowledged that Carson owned 51% of Niuxinda Company's equity. According to the Capital Contribution Certificate, authenticity of which was confirmed after appraisal, Carson was a shareholder of Niuxinda Company and had made his capital contribution. In addition, it could be confirmed from the form and content that Zhang communicated with Carson via email and Carson was actually involved in the Company's operation. Therefore, the judgment of first instance was correct and upheld.

The Foreign Investment Law of the People's Republic of China subjects foreign investment to the pre-access national treatment plus negative list system, and in the meantime has removed restrictions on the joint formation of foreign-funded enterprises by domestic natural persons and foreign investors. The above changes have a significant impact on the judicial review standards for the foreign de facto shareholders requiring to turn into registered shareholders from dormant shareholders. According to the Foreign Investment Law of the People's Republic of China, the examination standards for a foreign dormant shareholder turning into a registered shareholder should meet the three conditions (1) that the actual investor has actually invested; (2) that a majority of shareholders other than nominal shareholders give their consent; (3) that if the people's court and the parties are to change the actual investor to a shareholder during litigation, the change should be subject to the approval by the authority overseeing foreign-invested enterprises, in the case of a restricted field on the negative list for foreign investment, or exempt from such approval in the case of an accessible field not on the negative list. In this case, the courts of first and second instance adjusted the corresponding review standards in a timely manner in accordance with the provisions of the Foreign Investment Law on market access for foreign investment, and protected the rights and interests of the foreign investors in accordance with the law, which is conducive to creating a law-based business environment in pilot free trade zones.  

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The English version of this article, which is translated from the Chinese version by CTPC, is for reference only and shall be subject to the corresponding contents on the Chinese webpage.
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