Perspective | Discussion on the Identification of Nominal Shareholders in Equity Transfer Guarantees and Practical Analysis

Published:

2024-12-31

1. Introduction With the development of the market economy, equity transfer guarantees, as a non-typical guarantee method, have increasingly attracted attention in financing activities and have gradually become popular and applied in judicial practice in recent years. However, due to its dual characteristics of equity transfer and guarantee, it faces many legal issues in theory and practice. This article aims to explore the concept, characteristics, and judicial practice recognition of equity transfer guarantees. 2. Overview of Equity Transfer Guarantees (1) Definition and Characteristics Equity transfer guarantees refer to the debtor or a third party transferring their company equity to the creditor as a security measure for debt performance. Unlike traditional pledges, equity transfer guarantees do not change the ownership of the equity but achieve the purpose of guarantee through the transfer of equity. This method can provide strong protection for creditors while avoiding interference with the normal operation of the enterprise. (2) Legal Status The Supreme People's Court issued the "Notice on Printing and Distributing the &lt;Minutes of the National Court Civil and Commercial Trial Work Conference&gt;" (hereinafter referred to as the "Nine Civil Minutes") in 2019 and 2020, and the "Interpretation on the Application of the &lt;Civil Code of the People's Republic of China&gt; Related to Guarantee Systems" (hereinafter referred to as the "Guarantee System Interpretation"), clarifying the issues related to transfer guarantees and resolving the problem of lack of legal basis for transfer guarantees. Article 71 of the Nine Civil Minutes stipulates that the transfer guarantee contract is valid, and if the contract stipulates that the debtor has not repaid the debt upon maturity, the property belongs to the creditor, that part of the stipulation is invalid, but it does not affect the validity of other parts of the contract. Articles 68 and 69 of the Guarantee System Interpretation follow the provisions of the Nine Civil Minutes regarding the effectiveness of transfer guarantees and further clarify the legal status and responsibilities of nominal shareholders in transfer guarantees, stating that nominal shareholders do not bear joint liability for the actual shareholders' failure to fulfill or fully fulfill their capital contribution obligations or for withdrawing capital. (3) Basic Characteristics First, there is a creditor-debtor relationship between the parties. This debt can be a certain debt or an uncertain future debt. As a non-typical guarantee, it falls under the category of contracts, so whether a main contract exists is key to determining whether an agreement is an equity transfer agreement or an equity transfer guarantee. Second, there is an appearance of equity change between the parties, but there is no true intention to transfer equity. The transferor and transferee have reached an agreement that meets the conditions and procedures for equity transfer under company law, and it has been publicly announced and registered in the name of the transferee, achieving the appearance of rights transfer. Third, although the equity has been registered in the name of the creditor, the transfer is for the purpose of securing the debt. In other words, the purpose of equity transfer guarantees is to provide security for the main debt, and the creditor, as the equity transferee, usually does not pay consideration for this. Additionally, before the debt repayment period, the transferee cannot exercise shareholder rights or dispose of the transferred equity. 3. Recognition of Equity Transfer Guarantees in Judicial Practice (1) Existence of Basic Creditor-Debtor Relationship When determining whether an equity transfer guarantee exists, the court usually first examines whether there is a basic creditor-debtor relationship, such as a loan agreement. If it cannot be proven that the equity transfer was made to secure the loan, it cannot be recognized as an established equity transfer guarantee. Case 1: [Judgment Summary] Whether a private lending contract has been established, is effective, and has been fully performed should be judged from both the signing and performance aspects. The lender should provide evidence such as the loan contract, bank transaction records, and reconciliation records, and the relevant evidence should corroborate each other. If the parties use the signing of an equity transfer agreement to secure private lending claims, this non-typical guarantee method is a transfer guarantee. Provided that it does not violate the mandatory provisions of laws and administrative regulations, the relevant equity transfer agreement is valid. After signing the equity transfer guarantee agreement and completing the equity registration change as agreed, if the borrower fails to repay on time, the parties agree to evaluate the equity and assets of the target company, offset the corresponding amount of debt, confirm the validity of the previous equity change, and actually transfer control of the target company, it should be recognized that the parties have reached an agreement on the real transfer of equity and have actually performed it. One year after this starting point, the borrower enters the reorganization process, and the borrower's claim to revoke the debt settlement behavior based on bankruptcy law should not be supported. Whether the equity transfer guarantee has property rights effectiveness should be judged based on whether it has been publicly announced according to the property rights publicity principle. In equity pledges, the pledgee can prioritize compensation for the equity that has been registered as pledged. In equity transfer guarantees where the equity as collateral has been registered in the name of the guarantor, the guarantor is formally the holder of the shares that are the subject of the guarantee, and their right to priority compensation for the equity as collateral should be protected, and in principle, they enjoy property rights effectiveness against third parties. When the borrower enters the reorganization process, confirming that the equity transfer guarantee holder enjoys the right to priority compensation does not constitute the individual compensation behavior referred to in Article 16 of the Bankruptcy Law. After establishing an equity transfer guarantee and completing the change registration, if the transfer guarantee holder agrees to use that equity to pledge the debt owed to the debtor by a third party and completes the pledge registration, the third party's claim to that equity should take precedence over the transfer guarantee holder's compensation. [Case Document Number]: (2019) Supreme Court Civil Final 133 (2) No True Intention of Equity Transfer The parties lack a true intention to transfer equity. In the case of equity transfer guarantees, there is no genuine intention to transfer equity between the transferor and transferee, but rather the form of equity transfer is used to provide security for the creditor's claim. In fact, the transferring shareholder remains the actual rights holder of the equity and continues to exercise corresponding shareholder rights and fulfill shareholder obligations as the actual shareholder. Case 2: [Judgment Summary] When the debtor and creditor use equity transfer as a guarantee for the realization of claims, it belongs to a special type of guarantee in the development of the market economy, which can compensate for the shortcomings of typical guarantees and other non-typical guarantee methods, serving as a beneficial supplement to equity pledges. The contract signed by the creditor and debtor, which is named an equity transfer but is actually an equity transfer guarantee, reflects the true intention of both parties and does not violate the mandatory provisions of laws and administrative regulations; this guarantee method is legal and valid. If the debtor fails to repay the debt as agreed, they cannot request the return of equity on the grounds of invalid equity transfer. However, the liquidated damages clause in the loan agreement is invalid, and after the debtor repays the debt according to law, they have the right to request the creditor to return the equity. [Case Document Number]: (2013) Huai Commercial First 0295 (3) Typically Involves Equity Buyback/Return After Basic Debt Elimination The typical structure of equity transfer guarantees is to return the equity after the basic creditor-debtor relationship is terminated. Typically, the creditor will set terms stipulating that when there is a significant change in the operating conditions of the target company, the transfer of important assets, or other situations that may affect the realization of claims, the transferor has the obligation to buy back the equity. In equity transfers with buyback conditions, similar agreements may also be included, which makes the boundary between equity transfers with buyback conditions and equity transfer guarantees blurred in certain cases. Therefore, when dealing with actual cases involving equity transfer guarantees and equity buybacks, there may be situations where disputes over equity transfer guarantees are mistakenly regarded as equity buyback cases. Case 3: [Judgment Summary] The nature of the "equity transfer agreement" signed by the parties should be determined from whether the agreement has a subordinate nature and whether the parties have made arrangements regarding equity buyback and other matters, exploring the true intention of the parties in signing the agreement, and thus determining whether the agreement is an "equity transfer" agreement or an equity transfer guarantee for "another transaction." Regarding the effectiveness of equity transfer guarantees, it should be distinguished from the perspective of the equity interest holder, namely the company: the internal effectiveness should define the boundaries of rights according to the separation rules of equity rights enjoyment and exercise, balancing the interests of all parties; the external effectiveness should protect good faith third parties according to the appearance principle. [Case Document Number]: (2019) Jing 01 Civil Final 2736 (4) Agreement on Nominal Shareholder Rights There is no disagreement in judicial rulings that nominal shareholders do not enjoy shareholder rights, but there is a divergence on whether nominal shareholders can exercise shareholder identity rights or agree on shareholder identity rights when they actually exercise them. Viewpoint 1: Nominal shareholders do not enjoy shareholder identity rights and cannot agree on shareholder identity rights. Case 4: [Judgment Summary] The relevant content in Article 6, Section 3.2 of the involved "Agreement" regarding the "Board of Directors" and Section 3.3 regarding the "Management Organization" clearly states that Pan American Company sends personnel to serve as the executive director and general manager of Yinjian Company, indicating that Pan American Company participates in the business decision-making and management of Yinjian Company, obtaining benefits and safeguarding interests through joint cooperation, which is different from the rights enjoyed by the guarantor in a transfer guarantee relationship and does not constitute a transfer guarantee. [Case Document Number]: (2020) Supreme Court Civil Application 4636 Case 5: [Judgment Summary] During the period when the equity transferee, Yin Certain Partnership, held equity in Meng Certain Oriental Culture Company, the loan was repaid, indicating that the equity held by Yin Certain Partnership reflected its guarantee function. The court accepted the opinion that the equity held by Yin Certain Partnership on behalf of a certain company in Meng Certain Oriental Culture Company was actually a transfer guarantee for the debt formed by Bang Certain Company due to entrusted loans. Yin Certain Partnership factually appointed directors to Meng Certain Oriental Culture Company, becoming one of the three directors of Meng Oriental Partnership, participating in the voting on major decision-making matters of the company, and having the same "one vote veto" right as other directors. This arrangement effectively granted the directors appointed by Yin Certain Partnership the right to participate in the company's operations. In this case, merely recognizing Yin Certain Partnership as a nominal shareholder or nominal holder of shares clearly damages the trust interests of external third parties and does not align with the actual rights enjoyed by Yin Certain Partnership. The provision in Article 69 of the "Interpretation on the Application of the &lt;Civil Code of the People's Republic of China&gt; Related to Guarantee Systems" that "shareholders provide guarantees for debt performance by transferring their equity to the creditor's name, and the company or the company's creditors request the nominal shareholder to bear joint liability for the shareholder's failure to fulfill or fully fulfill their capital contribution obligations or for withdrawing capital, the people's court will not support" does not apply to this case. [Case Document Number]: (2022) Jing 02 Civil First 28 Viewpoint 2: Nominal shareholders can agree on certain shareholder identity rights. Case 6: [Judgment Summary] The involved equity transfer has a consideration of 0 yuan, and the exercise of shareholder rights is restricted, such as the transferee not participating in company operations or enjoying dividend rights unless otherwise agreed, and if the buyback conditions are triggered, the buyback price for the equity will be 0 yuan if Hengyue Company has already paid the agreed buyback price in the "Debt Buyback Agreement." The above agreements have characteristics different from a simple equity transfer, and their rights and obligations are more in line with the situation of equity transfer guarantees. The argument by Dingxin Company that the timing of the signing of the involved equity transfer agreement was earlier, thus causing disputes in the expression of relevant terms, but the true intention of both parties was to guarantee the debt buyback obligation of Zhujing Company through equity transfer, is more likely. Regarding the claim by Chengnan Company that Dingxin Company actually manages Zhuheng Company, Dingxin Company argued that as a nominal shareholder and substantial guarantor, it dispatched personnel to serve as directors of Zhuheng Company only to supervise and take timely measures when the company encountered significant adverse events, which is reasonable. The involved equity transfer behavior conforms to the situation of equity transfer guarantees. [Case Document Number]: (2023) Su 0205 Civil First 129 4. Conclusion The "Guarantee System Interpretation" clearly states that nominal shareholders in equity transfer guarantees do not need to bear the responsibility for capital contribution defects. However, it does not specifically stipulate whether nominal shareholders can agree on or exercise certain management rights (such as dispatching personnel to key positions like directors and finance for supervision), leading to divergent views in the courts on this issue. Most courts believe that if the equity transfer agreement or other documents stipulate management-type rights, then the transaction is not regarded as an equity transfer guarantee; however, some courts believe that it is reasonable for nominal shareholders to agree on certain shareholder identity rights to safeguard the realization of claims, and this situation still constitutes an equity transfer guarantee. Ensuring that contract terms are clear and reasonable, and clarifying the rights and obligations of all parties, is key to preventing legal disputes and protecting the rights and interests of all parties. Looking ahead, as relevant laws and regulations gradually improve, the legal relationship of equity transfer guarantees will become clearer and more standardized, thus providing stronger legal protection for market participants.<!--中华人民共和国民法典--><!--全国法院民商事审判工作会议纪要-->

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