On The Validity Of The Equity Transfer Contracts With Capital Contribution Flaws

The capital is the foundation for a corporation’s operation. The capital of acorporation, especially at the beginning of the business, derives from the investors. Ifan investor does not fulfill his or her obligation of contributions according to thearticles of incorporation, the adequacy of capital will be seriously affected.Consequently, the interests of shareholders and creditors will be then prejudiced.Capital contribution flaw or flaw contribution refers to a kind of equities whichhave flaws per se due to the ‘breach factors’(including breach of the obligations ofcontribution and breach of the due procedures when transferring the equities) informal and substantial requirements. In this dissertation, breach of the obligations ofcontribution, which is the focus of the analysis, is considered as the capitalcontribution flaw in the narrow sense.Generally speaking, however, capital contribution flaws, which are notuncommon in the practices of corporations, are not strictly regulated by the CompanyLaw in force. For local courts around the country, there is also no standard forjudgment in identifying the capital contribution flaw in the process of equity transfer.Thus it makes several relative cases under the subjective consideration of the judgeand widely attracts attentions from the society. Similarly, for scholars, there are alsono consensuses reached.Hence, it is inevitably meaningful to discuss the question of the capital contribution flaw and to analyze the issue on the identification of the stakeholder withcapital contribution flaw, the validity of the equity transfer contract with capitalcontribution flaw and the accountability of this flaw. On this basis, the suggestions onhow to establish the rules of capital contribution flaw accountability in China havebeen given. Chapters of this dissertation are as follows:Chapter one gives a brief introduction on the concept and nature of capitalcontribution flaw in order to understand the backgrounds of the equities with capitalcontribution flaws.Chapter two sheds light on the notion ‘equities with capital contribution flaws’and the cause of it. This kind of equities results from the incomplete or delayedfulfillment of their obligations of contribution including false investment, secretlywithdrawing investment and untrue investment and violation of the due process whentransferring the equities. Based on the analysis above, this chapter also deals with thequestions of the stakeholder qualifications and rights to transfer the equities.The third chapter examines several points given by scholars on the validity ofthe equity transfer contracts with capital contribution flaws and practices of severalcourts within China. This dissertation argues that an equity transfer contract withcapital contribution flaw is valid; it also argues that this sort of contracts coincideswith the commercial rules of fluidity and safety within China.The former part of the fourth chapter regards the remedy of equities with capitalcontribution flaws, especially highlights the obligations of complement forstakeholders whose contribution are identified as capital contribution flaws. The latterpart mainly handles the problem of accountability after equity transfer. This paperasserts that the responsibility should be taken by both of the stakeholders who sell theequities and the ones who buy them. In addition, this argument has been put intoseveral situations and, by this way, the responsibility of liquidation could be clarified.The last chapter concludes with the identification of the defects in legislation,judicial and the executive systems of the stakeholders’ contribution obligations.Moreover, to solve the problems in judicial practice, this chapter also gives a fewsuggestions on the improvement of the rules of stakeholders’ contribution obligations (e.g. increase of the compensation of the stakeholders).