Shareholders’ right of first refusal, means where the shareholder of a limited liability company intends to sell his/her shares of the company to an outsider, the other shareholders have the prior right to buy such shares under the Equal Conditions. The Judicial Interpretations (IV) further stipulated the followings regarding the right of first refusal:

  1. Inherited Shares

Where the share structure is changed due to inheritance, the other shareholders shall not exercise the Right of First Refusal, unless otherwise stipulated in the Articles of Association (hereinafter referred to as “AoA”) or agreed by all shareholders.

  1. Notice

In accordance with the Company Law, the shareholder shall notify other shareholders about the share transfer and the “Equal Conditions” in writing; Judicial Interpretations (IV) further stated that the shareholder shall notify in writing or by any other reasonable means which can be surely received by other shareholders.

The other shareholders shall request to purchase the said shares within the term stipulated in the AoA, or otherwise within 30 days where the AoA has no such provision.

  1. Equal Conditions

The Judicial Interpretations specified the factors which shall be taken into consideration in terms of Equal Conditions, including the quantity, price, payment method and payment term of the shares to be transferred.

  1. Cancellation of Share Transfer

In accordance with the Company Law, it isn’t stipulated that whether the share transfer can be cancelled after other shareholders exercise their prior right to buy the shares or not. However, in the Judicial Interpretations (IV), it confirmed that unless otherwise stipulated in the AoA or agreed by all the shareholders, the shareholder may cancel the share transfer after the other shareholders request to purchase the shares, and shall compensate reasonable losses caused to the other shareholders.

  1. Bona Fide Third Party

We’ve explained what a Bona Fide Third Party means in our first Article about Effectiveness of Company Resolutions. However, we’d like to remind you that the Judicial Interpretations (IV) has shown a contrary attitude towards Bona Fide Third Party.

According to the provisions, where the shareholder infringes other shareholders’ right of first refusal, the other shareholders may file a lawsuit to exercise such right, within 30 days since he/she knows or should know the equal conditions, or within 1 year since the share transfer is registered.

Therefore the outside buyer of the shares, who’s the Bona Fide Third Party in this case, will not be able to buy the shares due to other shareholders’ claim of right of first refusal. However the shareholder who intends to transfer the shares shall bear the corresponding civil liabilities.

Don’t miss the last episode about Shareholders’ rights, on coming Wednesday!

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For any further information you might need about the Shareholders’ right of first refusal, write to: info@dandreapartners.com