Research On The Dormant Investment's Legal Issues Of Limited Liability Company

In recent years, there are a large number of dormant investments in economic life. The number of the civil cases arising from the dormant investment is increasing. And those cases have created many legal issues which should be regulated and resolved immediately. However, with regard to those issues especially the conformation of shareholder qualification, the current legislation is not clear. No consensus is achieved in academic discussions. And there are no unified rules adapted in judicial practice. Hence, rational and unified adjudication rules should be established so as to not only resolve those cases, but also regulate the dormant investment and guide people to set up and manage the company under laws.The paper includes three parts:the introduction, the main text and the conclusion. The main text is divided into five chapters.Chapter one:Overview of the dormant investment.First, it elaborates the definition. The dormant investment has the branch of broad sense and narrow sense. In this paper, it refers to a situation where, out of some considerations, the investor, called the dormant investor, reaches an agreement with another, called the nominal shareholder, that the dormant investor actually makes the capital contribution to the company and has the investment interests while the nominal shareholder's name is recorded in the articles of association, the register of shareholders, and the registration with the company registry. Secondly, it analyzes the causes. The basic goal of dormant investment is to get business interests. However, the main reasons why the dormant investment is popular lie in the levels of law, system and society. Third, it summarizes two different main types:complete dormant investment and incomplete dormant investment; dormant investment for circumventing the law and dormant investment without this purpose.Chapter two:Analysis of the civil cases arising from the dormant investment.Those cases can be classified into three main categories:cases about dormant investment contracts, cases about share disposal contracts and cases about confirmation of shareholder qualification. And they have showed two characteristics. First, in general, money is the form of investment. The nature of the money becomes the focus of dispute in some cases. Second, the dormant investor chooses to invest in other's name for circumventing the law or concealing his assets or for commercial considerations. The cases refer to several legal fields, such as civil law, contract law and company law. They also refer to many kinds of legal relationships. Moreover, there is issue about value orientation and balance of interests involving in those cases. The validity of contracts and the confirmation of shareholder qualification are the two main legal issues.Chapter three:Analysis of contracts'validity and solutions.The first part is about the dormant investment contract. With regard to the validity, there are two views. One is to invalidate all the dormant investment contracts. Another is to distinguish the situations and only those contracts which violate the compulsory provisions of laws and administrative legislations should be invalidated. The second one is widely adopted by the judicial practice and the third judicial interpretation of the Company Law, which is promulgated by the Supreme People's Court to address some issues in relation to the dormant investment. The author doesn't agree with this solution totally. Those contracts for circumventing the law should be invalidated. And the solution should be adopted to deal with those contracts without the purpose of circumventing the law. However, the agreement on the ownership of share should not be held valid directly because the result will refers to others'interests.The second part is about the share disposal contract. From the dominant point of view, when the share is disposed by the nominal shareholder, the interests of the bona fide third party, who has reliability in the registered information, should be protected and the disposal contract should be held effective if the third party can be proved to have acted in good faith. The solution provided in the judicial interpretation upholds this view. In the field of academic and judicial practice, there is no unified opinion on the validity of the disposal contract reached between the dormant shareholder and the third party. Someone thinks that the dormant investor is the actual investor so that he has the right to dispose of the share. According to the dormant investment contract, the third party can reasonably believe that the dormant investor is the actual shareholder. So the disposal contract should be held valid. From the view of other person, the capital contribution of the dormant investor is not recorded. And only the bona fide third party's interests on the basis of reliance on the registration should be protected. So the disposal contract shall be void. The third judicial interpretation does not make any solution to the issue of contract's validity under the circumstance that the dormant shareholder disposes of the share. In the author's opinion, the third party should not be recognized as the bona fide third party, and the issue of validity of the share disposal contract can be deal with right after the issue of conformation of shareholder qualification is resolved.Chapter four:Analysis of conformation of shareholder qualification and solutions.In the dormant investment, the party who has the substance elements is not the one who has the form elements. Should the former one be recognized as the shareholder or the latter? The current legislations are not specific on this question. In the field of academic, there are three views, the form theory, the substance theory and the distinguished theory. These views also exist in the field of judicial practice. As a result, with regard to the cases with similar facts, the adjudication rules are quite different. The Supreme People's Court has drafted a consultative paper of judicial interpretation concerning this issue. And the High People's Courts of some provinces or municipalities directly under the Central Government, such as Beijing, Shanghai and Jiangsu, have formulated some guidelines respectively. However, the solutions made in the above documents are not the same. The third judicial interpretation of the Company Law is the first document that has legal effect in relation to the issue of confirmation of shareholder qualification in the dormant investment. It adopts the distinguished theory, which has double standards and distinguishes between internal and external relations. When dealing with the disputes between the dormant investor and the nominal shareholder, the court shall adopt the substance theory. If the dormant shareholder can prove that he has made the capital contribution, the dormant investment does not violated the compulsory provisions of laws and administrative regulations and a majority of the other shareholders of the company allow the dormant investor to become the shareholder, the court shall confirm the dormant investor's shareholder qualification. When it refers to the third party's interests, the court should deal with the validity of the share disposal contract with reference to the Bona Fide Acquisition System in Real Property Law. It means that the bona fide third party can make a conclusion from the form elements that the nominal shareholder is the one with shareholder qualification. In fact, it is a standard of the form theory. The third judicial interpretation of the Company Law still has some problems, although it has made a unified adjudication rule on the issue of confirmation of shareholder qualification for the judicial practice. First, according to the judicial interpretation, the dormant investor can be recognized as the shareholder due to the substance elements. That may weaken the effect of the registration and increase the costs of the company and the third party. Also it may encourage the dormant investment, which is an irregular economic activity. Second, the article about consent of a majority of the other shareholders is not detailed. What is the form of the consent? And when should it be made? It will result in some confusion in the judicial practice. Third, this rule cannot protect the interests of the nominal shareholder's creditor. In addition, it may result in some negative consequence. For example, some shareholder may raise a defence to his creditor's claim by fabricating a story and evidences that the dormant investment exists and he is the nominal shareholder.Chapter five:Amendments of the adjudication rules.The dormant investment refers to several parties'interests. And the main conflict of interests lies between the dormant investor and the bona fide third party. So, before making the adjudication rules, the issue of value orientation and balance of interests should be taken into account first. We must protect the bona fide third party's interests and consider the protection of the dormant investor's interests. We also should protect the safety of transaction and consider the protection of the safety of investment. More suitable rules should be made to achieving the relatively balance of interests. There are some shortcomings with the adjudication rules provided by the third judicial interpretation. In comparison, if the standard from the form theory is adopted totally, it will be more rational and more applicable. So the author suggests that the adjudication rules should be amended and improved. When dealing with all the cases in relation to the dormant investment, only the nominal shareholder should be recognized as the shareholder of the company because of the form elements. Other issues which concern the legal relationship between the dormant investor and the nominal shareholder, including their rights and obligations, should be deal with according to the dormant investment contract.