In daily life we oftentimes entrust other people such as our friends or relatives to hold things for us, but we suggest to think twice when it’s company shares we entrust other people to hold. We hereby will briefly introduce share-holding entrustment and its risks.

Shareholding entrustment refers to the agreement between the actual contributor and another person, stipulating that this other person shall assume the rights and liabilities of shareholder in his/her name for the actual contributor. The actual contributor shall be called “dormant shareholder” and the other person can be named as “registered shareholder”.

Shareholding entrustment mainly entails the following risks:

1) The shareholding status of the dormant shareholder is unrecognized as the AIC record shows the registered shareholder. Moreover, it’s not easy to change the dormant shareholder to registered shareholder, as the relevant judicial interpretation requires over half of the other shareholders to issue approval for the change.

2) The registered shareholder intentionally damages the interests of the dormant shareholder such as disposal of shares or abuse of voting rights.

3) Due to the registered shareholder’s reasons, the shares may be frozen or executed by the court.

We propose following measures to counter the legal risks:

1) Set significant liquidated damages in an entrustment agreement and have it notarized, as the violation by the registered shareholder is hard to terminate. Afterwards, the liquidated damages shall function to deter the registered shareholder.

2) Notify other significant shareholders and interested parties of the existence of the shareholding entrustment to avoid a situation in which the dormant shareholder has no knowledge of violation by the registered shareholder.

3) The dormant shareholder shall pay close attention on evidence preservation such as the entrustment agreement, contribution certificate, shareholder’s resolution, etc.

4) Clearly define the methods of execution of shareholding rights such as voting rights, dividend rights, etc. the above rights can only be performed by the registered shareholder with the written approval of the dormant shareholder to guarantee the latter is the actual controller of the company.

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