Limited Liability Company Dormant Shareholders' Legal Issues Research

Dormant shareholders of a limited liability company refer to the investors who setup a company or invest in the company in the name of others due to somespecific reasons or to avoid laws. The persons instead of them appearing incompany’s rule, name list of shareholders and register archives in local companyregistry are nominee shareholders. Dormant shareholders are the actualinvestors of the company, but the forms of investments are limited since theyhave to be anonymous. The land use right, patent,trademark and other forms ofproperty or right, which shall be transferred on a condition of registration, can notget the chance to be the tool of investment. Dormant shareholders takemonetary or other properties which can be transferred by non-registration waysas the investment.Company Law of the People’s Republic of China does not have the concept ofdormant shareholder and the relative one is actual controller. Dormantshareholder is one type of actual controller according to the legislative intent.The article25and26of Provisions of the Supreme People’s Court about SeveralIssues Concerning the Application of the Company Law of the People’s Republicof China released in2011set out the approach to solve the inconsistencies ofthe actual investors and registered shareholders. USA handles the relationshipbetween dormant shareholders and nominee shareholders as fiduciary. Fewprovisions relative to dormant shareholders can be found in civil law systemwhile the company law of Korea provides that the dormant shareholder andnominee shareholder are jointly and severally liable, but the dormantshareholder’ equity rights are not identified either.The legal effect of dormant shareholders’ investment agreement can not begeneralized. The agreement shall be invalid if signed for the avoidance of lawsand administrative regulations on money laundering, business in terms ofofficial power and etc, while the agreement shall be deemed valid if signed justfor the avoidance of restrictions in company law on the number of shareholders of the limited liability company or the use of preferential policies for laid-offworkers, and the legitimate rights and interests of dormant shareholdes shouldbe protected in such condition.In judicial practice, the problem is more prominent on the confirmation of theidentity of dormant shareholders. One view thinks that the identity should bedecided by the real investment relations. Another view thinks that record of thecompany registry should prevail the real investment. Reasonably speaking, theidentity should be based on the effectiveness of the contract between thedormant shareholders and nominee shareholders and should be subject to realinvestment. However, to protect bona fide third parties and publicity credibility ofindustrial and commercial registration, the registry shall prevail in the outsiderelationship.The dormant shareholders can affect the transfer of equity of nomineeshareholders. Without the consent of the dormant shareholders, the transfer fallsinto unauthorized disposal. Of course, for the protection of bona fide third parties,if the transfer meets the bona fide acquisition conditions, the third party canobtain the equity as identified bona fide assignee. Meanwhile, dormantshareholders can also transfer the equity to the third party.Finally, it should be noted that dormant shareholders should take liability whileenjoy the revenue of the company. It may be illegal to withdraw their capitalcontributions for the dormant shareholders after the establishment of thecompany and if the dormant shareholders fail to make the capital contribution inwhole or in part, they have to fully perform the capital contribution obligation tothe company. Of their capital shortage, the creditors of the company have theright to request the relative nominee shareholder to bear the liabilities ofcomplement The nominee shareholder shall have the right, after paying theindemnification as stipulated, to recover the same from the actual investor. Inaddition, other rights, obligations and liabilities of dormant shareholders andnominee shareholders can be resolved in the agreement.