1. Essentials of refereeing
The legal relationship between the actual rights holder and the nominal rights holder of a limited liability company should not be based solely on the public appearance of the industrial and commercial registration, shareholder list, etc., but should focus on the actual control of the operation and management and the substantive ownership of property rights; in the case where there may be an agreement on equity holdings, the focus of the review is whether the actual investor has fulfilled its obligations. Capital contribution obligations and whether shareholders actually enjoy shareholder rights; if there is lack of direct evidence of equity holding on behalf of the shareholders, and the evidence submitted by the actual shareholders can form a complete chain of evidence to prove that they are the actual investors and actually participate in the company's operation and management or have strong operational control over the nominal shareholders, the court should comprehensively consider the facts of the entire case and determine that the equity holding agency relationship is established.
2. Typical cases
In May 2020, Zhang and Li agreed to jointly establish A Limited Liability Company (with a registered capital of 1 million yuan). Due to Zhang's identity restrictions, the two parties verbally agreed that Zhang would actually invest 800,000 yuan and register the shareholding in Li's name. Li was only a nominal shareholder and did not participate in the operation and did not enjoy actual shareholder rights. The company's operation, management and income were all controlled by Zhang.
Company A's industrial and commercial registration and shareholder list record that Li is the major shareholder holding 80% of the shares. However, in actual operation, the company's operating decisions, financial approvals, and personnel appointments and removals are all led by Zhang. Li only cooperates in signing relevant documents and does not participate in the operation or receive dividends.
In August 2023, due to Li's own debt, 80% of the equity in Company A under his name was seized by the court for enforcement. Zhang then sued to confirm that he was the actual right holder of the equity, that the two parties had an equity holding relationship, and requested to stop the enforcement.
During the lawsuit, Zhang submitted evidence such as investment bank statements, financial approval records, employee testimonies, chat records, and dividend transfer vouchers, forming a complete evidence chain to prove that he actually contributed capital, actually managed the company, and enjoyed shareholder returns.
Li argued that the two parties were in a lending relationship and that Zhang was entrusted to participate in the operation, but he did not submit any evidence to support it, and could not explain the reasonable reasons why he did not participate in the operation and did not pay dividends.
After trial, the court believed that the evidence submitted by Zhang formed a complete chain of evidence, which could prove that he was the actual investor and had substantial control over the company. Li was only a nominal shareholder. Therefore, the court ruled that the two parties had an equity holding relationship, and Zhang was the actual right holder, and the enforcement of the equity was stopped.
3. Case Analysis (Lawyer’s Perspective) (1) Analysis of Case Facts
The core dispute in this case is the determination of the equity holding relationship. The key is to distinguish between "public appearance" and "substantial rights." Judging from the public appearance, Li is a shareholder holding 80% of the shares recorded in Company A's industrial and commercial registration and shareholder list, which conforms to the characteristics of a nominal rights holder; but from the perspective of substantive rights, Zhang has fulfilled all 800,000 yuan investment obligations, actually leads the company's business management and major decisions, enjoys all shareholder returns, has substantial control over the company, and is consistent with the characteristics of an actual rights holder.
The court did not simply rely on the public appearance of industrial and commercial registration as the basis for its determination, but combined the three core elements of "investment fact + operating control + enjoyment of rights" and comprehensively made the determination based on the evidence in the entire case. In this case, although Zhang did not have a written equity holding agreement (direct evidence), the submitted indirect evidence such as bank statements, financial records, chat records, and witness testimony corroborated each other, forming a complete chain of evidence, which was enough to prove the existence of the equity holding relationship. It ultimately supported Zhang’s litigation request, embodying the adjudication principle of “substance over form” and highly consistent with the core adjudication logic provided by the user.
(2) Legal risk analysis
1. Legal risks of the nominal shareholder: In this case, Li, as a nominal shareholder, had his entrusted equity seized and enforced due to his own debts. Although the court finally confirmed that the equity belonged to Zhang, Li still had to bear litigation costs and credit risks. If he disposed of the entrusted equity (such as transfer or pledge) without authorization, he would also be liable for compensation to the actual rights holder. In addition, if the company has a debt dispute, the nominal shareholder may be added as a person subject to execution by the creditor and bear relevant responsibilities such as the shareholder's untrue capital contribution. Even if he is not the actual investor, he may also face the risk of being unable to recover the full amount after assuming the liability.
2. Legal risks of the actual rights holder (hidden shareholder): Zhang chose to hold the equity on behalf of his own identity. Although the rights were finally confirmed, he faced the risk of the equity being seized and litigation for rights protection in the process. In practice, if the actual rights holder cannot submit a complete chain of evidence to prove the holding relationship, he may face the risk of losing the lawsuit and be unable to confirm his or her identity as a shareholder. His capital contribution may be deemed as a loan or other creditor's rights, and he will not be able to enjoy shareholder rights. At the same time, if the nominal shareholder disposes of equity without authorization and abuses shareholder rights, the rights and interests of the actual rights holder may be infringed, and the cost of rights protection is high.
3. Risks to the company and third parties: Equity ownership entrustment leads to unclear ownership of the company's equity, which may affect the company's normal operating decisions. If there is a dispute between the actual rights holder and the nominal rights holder regarding the ownership of the equity and the exercise of shareholder rights, it will disrupt the company's operating order; for third parties such as company creditors and equity transferees, the publicity effect of industrial and commercial registration has credibility. If a third party conducts transactions with nominal shareholders based on the appearance of publicity, and the actual rights holder claims that the transaction is invalid, it may not be able to fight against the bona fide third party, resulting in damage to the third party's rights and interests, and may also trigger the company's joint liability risk.
(3) Analysis of key points in litigation
1. Distribution of the burden of proof: The party claiming the existence of an equity holding relationship (Zhang in this case) must bear the burden of proof. The core is to prove "the fact of capital contribution", "agreement in holding on behalf of the shareholder" and "actual enjoyment of shareholder rights/exercise of operating control". If there is no direct evidence such as a written holding agreement, indirect evidence must be used to form a complete chain of evidence to exclude the possibility of other legal relationships such as loans and entrusted operations.
2. Focus of evidence review: The core of the court’s review is “substantial attribution” rather than “public appearance”. Specifically, the first is evidence of investment, including bank transfer records, capital verification reports, investment certificates, etc. It must be clear that the nature of the payment is "capital contribution" and is actually paid by the claimant; the second is evidence of business management, including financial approval records, meeting minutes, employee testimonies, decision-making documents, etc., proving that the claimant actually participated. Operate with the company and have control over the company; third, evidence of rights, including dividend records, equity income transfer certificates, etc., proving that the claimant actually enjoys shareholder income; fourth, evidence of agreement on behalf of the holding, including chat records, call recordings, witness testimony, etc., supporting the existence of an oral or written agreement between the two parties to hold on behalf of the company.
3. Key points of defense: The defense of the nominal shareholder (Li in this case) must be supported by clear evidence. If it is claimed that the two parties are in a loan, entrusted operation or other relationship, relevant evidence such as IOUs, entrustment agreements, repayment records, etc. must be submitted, otherwise its defense will not be accepted. In practice, if the nominal shareholder claims that he is a legal shareholder based on "industrial and commercial registration", the court will not support it if he cannot prove his actual capital contribution and actual exercise of shareholder rights.
4. Lawyer’s advice
Based on the legal risks and litigation points of this case, the following lawyer suggestions are made for the actual rights holder, the nominal rights holder, and the company to avoid risks related to equity holdings and standardize equity management:
(1) Suggestions for actual rights holders (hidden shareholders)
1. Prioritize the signing of a written entrustment agreement: Try to avoid oral agreements and sign a standardized "Equity Holding Agreement" that clearly stipulates the rights and obligations of both parties, including the method of capital contribution, the period of capital contribution, the way to exercise shareholder rights (such as voting rights, vesting of dividend rights), the period of entrustment, prohibited behaviors of nominal shareholders (such as unauthorized transfer, pledge of equity), liability for breach of contract, conditions for rescission of the entrustment relationship and equity change registration process, etc., and retain written evidence to avoid subsequent disputes.
2. Keep a complete chain of evidence throughout the process: properly keep evidence related to investment (bank statements, capital verification reports, capital contribution confirmations, etc.), and clearly note the amount as "investment money"; retain relevant evidence of participation in the company's operation and management (financial approval records, meeting minutes, signature documents, employee ID cards) statements, etc.) to prove one's actual control over the company; retain relevant evidence of shareholder rights (dividend records, income transfer vouchers, etc.) to prove that one is the substantive right holder; if it is an oral entrustment, chat records, call recordings, witness testimony, etc. must be retained to support the agreement of the entrustment.
3. Regularly check the equity status: Regularly check the industrial and commercial registration information to understand the changes in the equity of the nominal shareholder, and prevent the nominal shareholder from disposing of the equity without authorization; if it is found that the nominal shareholder has debt disputes, equity seizure and other risks, take preservation measures in a timely manner, file a lawsuit to confirm the ownership of the equity, and avoid damage to its own rights and interests.
4. Try to avoid unnecessary agency holdings: If your own conditions permit, try to register as a shareholder in your own name to avoid various risks arising from agency holdings; if you really need to hold on behalf of the shareholders, give priority to a reliable nominal shareholder with good credit, no debt disputes, and check their credit status and liabilities in advance to reduce the risks of agency holdings.
(2) Suggestions to nominal rights holders (named shareholders)
1. Clarify the risks of entrusted holdings and prudently sign an entrusted holding agreement: Before signing an entrusted holding agreement, fully understand the legal risks of entrusted equity holdings, clarify your rights and obligations, especially the liability provisions, and avoid unnecessary legal liabilities due to entrusted holdings (such as false capital contributions by shareholders, joint liability for debts, etc.); the agreement clearly stipulates that if you bear liability due to the actual right holder, you have the right to recover full compensation from the actual right holder, and agree on the method of recovery and liability for breach of contract.
2. Do not participate in the actual operation of the company and retain relevant evidence: If you are only a nominal shareholder and do not participate in the operation and management of the company, you must retain relevant evidence (such as a power of attorney, chat records, etc.) that the actual rights holder has entrusted you to sign on your behalf and cooperate with the industrial and commercial registration. Make it clear that you are only fulfilling the obligations of holding on behalf of the company and do not enjoy actual shareholder rights; avoid exercising shareholder rights (such as voting, dividends) without authorization to prevent being recognized as an actual shareholder and assuming corresponding responsibilities.
3. Inform the actual rights holder of relevant risks in a timely manner: If you have a debt dispute, equity is seized, etc., notify the actual rights holder in a timely manner, and cooperate with the actual rights holder to take rights protection measures to avoid damage to the actual rights holder's rights and interests due to your own actions, and then bear the liability for compensation.
(3) Suggestions for limited liability companies
1. Standardize equity registration management: Try to avoid equity holdings on behalf of others, and ensure that the shareholders recorded in the industrial and commercial registration and shareholder registers are consistent with the actual rights holders; if there is indeed equity holding on behalf of others, it is recommended to keep the agency holding agreement for record within the company, clarify the relationship between the actual investor and the nominal shareholder, and avoid the company's business risks caused by unclear ownership of equity.
2. Improve the operation and management process: clarify the relevant procedures for the exercise of shareholders' rights, and retain relevant records such as shareholder decision-making, financial approval, dividend distribution, etc. If the actual rights holder participates in the company's operations, his identity and authority must be clarified in relevant documents to avoid subsequent disputes over "who is the actual rights holder"; at the same time, the company's operating status and financial information should be disclosed to shareholders (including actual rights holders) in a timely manner to protect shareholders' right to know.
3. Prevent third-party transaction risks: When trading with third parties (such as creditors, equity transferees), clearly inform the other party of the company's equity status. If there is equity holding on behalf of the company, it is necessary to ask the actual rights holder to issue a written confirmation document to avoid invalidating the transaction due to equity ownership disputes and damaging the rights and interests of the company and third parties.
5. Links to legal provisions
1. "Civil Code of the People's Republic of China"
Article 143 A civil legal act is valid if it meets the following conditions: (1) The actor has the corresponding capacity for civil conduct; (2) The expression of intention is true; (3) It does not violate the mandatory provisions of laws and administrative regulations, and does not violate public order and good customs.
2. "Company Law of the People's Republic of China"
Article 32 A limited liability company shall prepare a shareholder register, recording the following matters: (1) The name and address of the shareholder; (2) The amount of the shareholder’s capital contribution; (3) The number of the capital contribution certificate. Shareholders recorded in the shareholder register may claim to exercise shareholder rights in accordance with the shareholder register. The company shall register the names of shareholders with the company registration authority; if the registration items are changed, the change registration shall be carried out. Without registration or change of registration, no action against a third party is allowed.
3. "Regulations of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (3)"
Article 21 If a party files a lawsuit in the people's court to request confirmation of its shareholder qualifications, the company shall be the defendant, and the person who has an interest in the equity disputed in the case shall participate in the lawsuit as a third party.
Article 22 If a dispute arises between parties over the ownership of equity, and one party requests the People's Court to confirm its ownership of equity, it shall prove one of the following facts: (1) It has contributed capital or subscribed capital to the company in accordance with the law, and does not violate the mandatory provisions of laws and regulations; (2) It has transferred or inherited the company's equity in other forms, and does not violate the mandatory provisions of laws and regulations.
Article 24 The actual investor and the nominal investor of a limited liability company enter into a contract, stipulating that the actual investor will contribute capital and enjoy investment rights, and the nominal investor shall be the nominal shareholder. If the actual investor and the nominal shareholder dispute the validity of the contract, if there is no invalidity provided by law, the people's court shall determine that the contract is valid. If there is a dispute between the actual investor and the nominal shareholder as stipulated in the preceding paragraph over the ownership of investment rights, and the actual investor claims rights against the nominal shareholder on the grounds that it has actually performed its capital contribution obligations, the people's court shall support it. If the nominal shareholder denies the rights of the actual investor on the grounds that it is recorded in the company's shareholder list and registered with the company registration authority, the people's court will not support it. If the actual investor requests the company to change shareholders, issue an investment certificate, record it in the shareholder list, record it in the company's articles of association, and go through registration with the company registration authority without the consent of more than half of the company's other shareholders, the people's court will not support it.
