Research On The Dormant Investors’ Qualification And Interest Problem

Enacted in2011, the Supreme People’s Court’s Provisions on Several Application Issues of the People’s Republic of China’s Contract Law Ⅲ marks China’s official recognition of dormant investment in the form of legislation. The provision referred to the issues of conditions by which dormant investors’can become shareholders, the effect of rights distribution agreements between the nominal and dormant investors, and the transfer of shares in dormant investments. Due to the rapid developing economy and investment needs in recent years, cases concerning of dormant investment are increasing each year. As a hybrid of public law and private law, the Company Law of the People’s Republic of China has been attempting to seek equilibrium between fueling the economic growth and maintaining transaction security as well as economic order. This attempt is the most typical in the changing of Chinese laws’attitude in dormant investment—How to protect the legitimate interests of dormant investors without smashing the limited liability companies’ people-character and posing threats to the interests of other shareholders has an important problem that the Corporate Law Explanation Ⅲ tried to solve. However, the solutions that Corporate Law Explanation III provided cannot solve all the problems. Dormant investors’main purpose of investing in the company’is to obtain interests. In this regard, adequate legal protection of their legitimate rights and interests should be provided, especially to the dormant investors who cannot become the shareholders of a LLC. Once recognized as shareholders, dormant investors will get undifferentiated protection as the other shareholders of an LLC. However, existing laws and regulations are insufficient in protecting the rights of dormant investors who do not have a chance in being recognized as shareholders. Viewed from another perspective, since Corporate Law Explanations Ⅲ has legalized the existence of dormant investors, denying them appropriate protection of their legitimate rights makes it hard for Corporate law to work the desired effect in encourage in practice. This paper attempts to find an effective way of exercising dormant investor’s rights, and to find a reasonable way of protection for them by identifying two different stages in the identifications in dormant investment and by defining the scope for the rights of dormant investors the legitimate interests of the Analysis. This paper is divided into four parts. The first part is the preamble, explaining origin of the identification problems and rights protection problems in dormant investments, and elaborated the research value of the issue.The second part is an overview of the dormant investment phenomenon. This part explored the background and causes of dormant investment phenomenon, and aims at enhancing the understanding the internal motive of dormant investments or their objectives. It also seeks to serve as the premises for the later discussion of the content and the protection dormant investors. Next, from the theoretical point of view and our current law perspective, the author explored the meaning of the concept of dormant investor, giving a summary of the fundamental characteristics of dormant investors, while comparing it with similar concepts. The analysis is necessary for identifying dormant investments and to differentiate dormant investments from other legal relationships in actual cases.The third part marks the commencement of key analysis in the article. In this section the author analyzed related Chinese domestic legislation, academic theories, as well as actual cases for their standards in identifying the dormant investment relations, and reached the conclusion that the identification of dormant investments should be divided into two stages:dormant investment relations identification and the dormant investors’ qualification to become shareholders. The author backed the opinion with actual cases, and gave the benefits for dividing the identification into two stages. This part’s analysis is crucial to the next part’s discussion of the protection of dormant investment interests.In the fourth part, the author defined the interests of the dormant investors, and figured out the relationship between the two using the theory of corporate law. Thorough definition to the content and the structure of the dormant investor’s rights are given. This part particularly discussed issues unsolved by Corporate Law Explanation Ⅲ:the effect of right distribution agreement between the nominal and dormant investors. Finally this part proved the appropriateness and the effectiveness of protecting the dormant investor’s right using the rules of agency, rather than the rules of trust. In addition, the author re-structured the model of dormant investor protection using the indirect-agent theory.