Case of Dispute over the Qualification Recognition of a Company's Anonymous Shareholder

A hidden shareholder refers to a person who, in order to evade the law or for other reasons, establishes a company or invests in a company using someone else's name, but is recorded as an investor in the company's articles of association, shareholder register, and business registration as someone else's contributor.

[Basic Case Facts]

In March 2004, the plaintiff Wu Xun and the defendants Wu Yixin, Wu Yaping, Zhang Jianhua, Lu Yiwei, and Xu Jiachun agreed to jointly establish Sanxie Company; on March 7, 2004, and on August 10 and 18, 2004, the plaintiff contributed a total of 170,000 RMB in three installments; on August 10, 2004, the six investors signed to confirm their respective subscribed capital contributions; on August 23, 2004, Wu Yixin convened the other five shareholders for the first shareholders' meeting, which confirmed each shareholder's investment amount, established the company's articles of association, clarified the responsibilities of each shareholder, and agreed to register the company in the names of Wu Yixin, Wu Yaping, and Zhang Jianhua; on October 10, 2004, Sanxie Company was approved to obtain a business license, and the company's articles of association and business registration recorded the shareholders as Wu Yixin, Wu Yaping, and Zhang Jianhua, with Wu Yixin as the legal representative; from August 23, 2004, to May 21, 2006, Sanxie Company held a total of 9 shareholders' meetings, and the plaintiff also participated in the meetings and took part in company discussions. The plaintiff claimed that he had invested in the company but was not registered as a shareholder and did not enjoy shareholder rights, thus he brought the case to court, requesting the court to order the four defendants to jointly return the plaintiff's investment of 170,000 RMB.

The four defendants jointly argued that the plaintiff has shareholder qualifications and disagreed with the return of his investment of 170,000 RMB.

[Key Points of Judgment]

The first-instance court, after hearing the case, believed that although the registered shareholders of Sanxie Company were three people, in essence, it was established with the investment of six shareholders, including the plaintiff. The investment shares of the six investors were specific and clear. Although the company's articles of association and business registration did not record the plaintiff's shareholder identity, the plaintiff participated in shareholders' meetings multiple times as a shareholder and exercised shareholder rights before and after the company's establishment. Therefore, the plaintiff is recognized as a hidden shareholder of Sanxie Company. According to the principle of capital maintenance, shareholders cannot withdraw their contributions after the company is registered, and the plaintiff also did not provide evidence to prove that other shareholders and the company infringed upon his shareholder rights. Therefore, the plaintiff's request for the four defendants to jointly return his investment of 170,000 RMB is not established. Thus, in accordance with Article 128 and Article 64 of the Civil Procedure Law of the People's Republic of China and Article 36 of the Company Law of the People's Republic of China, the court ruled to dismiss the lawsuit of the plaintiff Wu Xun.

After the verdict, the plaintiff Wu Xun was dissatisfied and appealed to the second-instance court. He argued that he paid an investment of 170,000 RMB before Sanxie Company was approved to obtain a business license, but the company's articles of association and registration documents only listed three shareholders, and neither informed the appellant nor had any agreement that the appellant's shares were tied to anyone as a hidden shareholder. The appellant always believed he was a shareholder and participated in shareholders' meetings. During a disagreement at one shareholders' meeting, Wu Yixin coaxed the appellant out of the meeting room and clearly told him: "You are not a shareholder." Later, the appellant went to the industrial and commercial administration bureau to inquire and learned that he was indeed not a shareholder. Therefore, the 170,000 RMB investment was not his contribution, nor was it deposited into the company's account. Someone among the three registered shareholders used the appellant's investment without his consent, invested it in the company as their contribution, and obtained shares, which constitutes an infringement on the appellant; the original judgment's application of Article 36 of the Company Law, which states that shareholders cannot withdraw their contributions, is clearly a legal error.

The second-instance court, after hearing the case, believed that although Sanxie Company registered three shareholders with the industrial and commercial administration department, in essence, it was established with the investment of six shareholders, including Wu Xun. The investment shares of the six investors were specific and clear, and it was agreed to distribute profits according to the investment ratio. Although the company's articles of association and business registration did not record Wu Xun's shareholder identity, he participated in shareholders' meetings multiple times as a shareholder and exercised shareholder rights before and after the establishment of Sanxie Company. Therefore, Wu Xun should be recognized as a hidden shareholder of Sanxie Company. According to relevant provisions of the Company Law, shareholders cannot withdraw their contributions after the company is registered, so the appellant's grounds for appeal cannot be established and are not accepted. The original court's judgment is correct and should be upheld. In accordance with Item 1 of Article 153 of the Civil Procedure Law of the People's Republic of China, the court ruled to dismiss the appeal and uphold the original judgment.

[Case Analysis]

This case mainly involves two issues: the recognition of hidden shareholders' qualifications in judicial practice and the maintenance of the principle of company capital. In the process of establishing a company, investors may use someone else's name to establish a company or invest in a company to evade the law or for other reasons, which is generally referred to as a hidden shareholder in theory. Correspondingly, shareholders recorded in business registration materials are called named shareholders. Disputes between named shareholders and hidden shareholders regarding shareholder qualifications are not uncommon. Due to the lack of clear definitions in China's Company Law regarding the recognition of hidden shareholders, resolving issues related to hidden shareholders has become a difficult problem in judicial practice when handling company cases. This case is a dispute arising from a hidden shareholder violating the principle of company capital maintenance and requesting to withdraw their investment.

In judicial practice, whether to recognize the shareholder qualification of hidden shareholders often has two different opinions: one view holds that the shareholder status of hidden shareholders should be recognized in judicial practice, based on the legal argument that China's Company Law does not explicitly prohibit hidden shareholders; the legal rationale is that the establishment of the hidden shareholder system reflects the freedom of contract and autonomy of will, fully aligning with the intent of contractual freedom and private law autonomy. Since commercial legal acts are essentially civil acts characterized by expression, hidden shareholders are also parties to the contract, committing to entrust their property or assets to one or more shareholders for actual management and operation, with the deliverer receiving certain benefits. This special contract is not essentially different from a general contract; as long as both parties reach an agreement and there are no malicious circumstances, the legal effect of such a contract should not be denied; moreover, public power should not excessively interfere with private rights. Commercial law, by its nature, belongs to private law, while company registration acts are administrative legal acts reflecting state will, characterized by clear state coercive provisions, belonging to public law. Public law is based on private law, and the structure between public and private law should prioritize private law. The shareholder qualification of hidden shareholders should not be easily denied due to the irregular characteristics of their form. The other view holds that hidden shareholders are not shareholders in the legal sense and should not have their shareholder qualifications recognized. This is because hidden shareholders do not possess the statutory formal characteristics of shareholders; the formal characteristics of shareholders as stipulated by law should be recorded in business department registrations, company articles of association, and shareholder registers, while the substantive characteristics include signing the company articles of association, actual contributions, obtaining proof of contribution, and actually enjoying shareholder rights. Among the formal characteristics, the publicity of business registration is the strongest, and its effect should take precedence over other formal characteristics; moreover, the existence of hidden shareholders contradicts transaction order and security. Protecting transaction security has become an overall trend in the development of modern civil and commercial law. The hidden shareholder system violates the basic principle of publicity and credibility in property rights in civil law, deviating from the basic value orientation of modern civil law. Therefore, hidden shareholders should not be granted legal shareholder qualifications but should be considered as engaging in illegal acts of concealing or altering statutory registration matters, and should be subject to corresponding administrative penalties.

Both viewpoints have their merits. Due to the inadequacies of the current corporate legal system in our country, the Company Law does not clearly specify the methods and specific standards for acquiring shareholder qualifications. It is unclear whether the registration of shareholder identity by the company promoters during the establishment of the company is a power-granting act or a certificate-holding act, leading to inconsistent and non-unified opinions in judicial practice regarding such disputes. The author believes that the recognition of the qualifications of hidden shareholders cannot be generalized; it cannot be simply denied or fully affirmed, but should be treated differently based on the specific circumstances of each case. In judicial practice, disputes related to hidden shareholders can generally be divided into two categories: one involves internal company relations, mainly including disputes over profit distribution, the exercise of shareholder rights by hidden shareholders, internal liability disputes, and capital contribution disputes; the other involves external company relations, mainly including issues regarding the external recognition of shareholders, disputes over the transfer of equity by hidden or named shareholders, etc. When handling these two different types of disputes involving hidden shareholders, we should adhere to the basic principle of "dual standards, internal and external distinctions" in dealing with company law issues, approaching from both internal and external perspectives. Specifically, first, when handling disputes arising from internal company relations, the principle of freedom of contract and autonomy of will should be followed. The contracts reached between hidden shareholders and named shareholders regarding the distribution of rights and obligations are not fundamentally different from general civil contracts. As long as both parties have a mutual agreement and do not violate mandatory legal provisions, they should be binding on both parties. Internally, this contract only changes the distribution of rights and obligations among shareholders and does not involve the interests of third parties outside the company. Therefore, as long as this contract represents the true intention of both parties and is made in good faith, its legal effect should be recognized, thereby confirming the qualifications of hidden shareholders; second, when handling external legal relations of the company, the principles of publicity and appearance should be followed to maintain transaction order and security, and to protect the interests of good faith third parties. The principles of publicity and appearance ensure the credit of commercial entities and the normal commercial order while pursuing efficiency. When involving third parties, it is necessary to quickly, accurately, and authoritatively determine who is the legally recognized shareholder between hidden investors and named investors, as the registration form is primarily external, making it easier for third parties to judge and identify. In disputes with third parties outside the company, the recognition of shareholder qualifications is more meaningful than actual characteristics and is easier to identify. The substantial characteristics of shareholders in law mainly serve internal purposes, used to determine the rights and obligations among shareholders. In resolving disputes between shareholders, the significance of substantial characteristics outweighs that of formal characteristics, while signing the company articles reflects the true intention of the actor as a shareholder, and its effect should take precedence over other substantial characteristics. Therefore, in transactions with the company, the certificate for recognizing shareholder qualifications should be the business registration, and named investors should be recognized as company shareholders. Since named investors have shareholder qualifications and own equity, they have the freedom to transact with third parties. Whether they actually own equity depends on the agreements made with hidden investors, which is an internal company issue. In handling such disputes, the recognition of hidden shareholders' qualifications should be based on form. Any matters already registered with the business authority, unless there is conclusive evidence proving them to be false statements, should be presumed to be true and have legal credibility. Hidden shareholders cannot counteract good faith third parties who transact based on the belief that the registration is true, thus maintaining transaction safety and efficiency.

Both the first and second instance courts in this case confirmed the hidden shareholder qualifications of the plaintiff Wu Xun, based on the aforementioned theory, adhering to the principle of "dual standards, internal and external distinctions". The essence of the dispute in this case belongs to the capital contribution disputes among internal shareholders, which are internal company disputes and do not involve good faith third parties. The capital contribution agreement signed by the six contributors and the various resolutions of the shareholders' meeting are the result of consensus among all contributors or shareholders. After the plaintiff Wu Xun contributed the agreed investment amount, he clearly stated the reasons for being hidden at the shareholders' meeting and, in practice, participated in the shareholders' meetings multiple times in the capacity of a shareholder, exercising shareholder rights. The plaintiff has not provided any evidence to prove that he has lost or had his shareholder qualifications infringed. Since this dispute has always only involved internal company matters and does not involve any third parties outside the company, his shareholder qualifications should be confirmed. On the premise of confirming his company shareholder qualifications, according to Article 36 of the Company Law of the People's Republic of China: shareholders may not withdraw their contributions after the company is registered. This is a direct reflection of the principle of capital determination, maintenance, and invariability, which is a mandatory provision of company law. After the hidden shareholder's qualifications are confirmed, he is no different from named shareholders and must also comply with all provisions of company law and the articles of association. Therefore, after the company is established, the plaintiff, as a contributor and having shareholder qualifications, has no right to request the withdrawal of his contribution.