Research On Rights Of Dormant Partners In Limited Liability Company And The Legal Protection

Dormant partners of limited liabilities companies(LLCs)refer to investors practically implementing the stockholders' obligations of investment or stock subscription but record in LLCs' articles of associations,stock transfer books or industrial and commercial registration materials in the name or designation of others.With the development of China's market economy,the number of investors joining LLCs in the form of dormant partners due to various reasons is increasing,and disputes thus incurred with other investment subjects in the market are increasing,and even become a common social phenomenon.For a long time,China's laws did not stipulate anything about dormant partners.It was not until the issuance of the Provisions of the Supreme People's Court on Certain Issues Concerning the Application of the “Company Law of the People's Republic of China”(III)(hereinafter referred to as the “Provisions(III)”)that there are instructional regulations for disputes related to dormant partners.However,the Provisions(III)fails to give a detailed description of the scope of rights of dormant partners and its stipulations about how to protect rights and interests of dormant partners are blurry.As the rights of dormant partners are binding and uncertain,their rights are mainly subject to the dormant investment contract signed with significant shareholders,and the rights of dormant partners differ in different situations.Some are general rights guaranteed by all dormant partners signing agreement with significant shareholders,and some are special rights agreed by different types of dormant shareholders with significant shareholders according to their own needs.In practical cases,situations in which rights and interests of dormant stockholders in terms of the right to know,participation in corporate major decisions and stock right transfer are infringed have occurred.Dormant partners often have to undertake risks brought by dormant investment contracts.For example,due to lack of evidences caused by loss of such contracts,the court might deny their qualification as stockholders;or if contracts of the kind cannot withstand the third party,they are left to the disposal of creditors of significant stockholders about their stock rights.Concerning the above infringement of rights,the author thinks the following legal countermeasures can be adopted: 1)improve the stock-holding manner of dormant partners in state-owned enterprises to implement the right to known of dormant partners;2)prepose stockholders' rights in declaratory judgment to safeguard participation of dormant partners in company's major decisions;3)prevent and maintain the stock right transfer safety of dormant stockholders through contract notarization and responsibility investigation;and 4)reduce risks brought by dormant investment contracts by the judge's measurement of legal interests in individual cases.The ultimate countermeasure to solve infringement of rights of dormant partners in LLCs is to build a stock ownership trust system.The charm of stock ownership trust lies in the flexibility of its stock-holding mechanism,through which dormant partners can become pure right subjects in the real sense.Stock ownership trust can be operated according to their own requirement.They can enjoy returns on equity without exercising rights on their own.In terms of the internal relationship of stock ownership trust,dormant partners and significant stockholders are both directly restricted by stock ownership trust contracts.The latter shows its name or designation to the outside and is entitled to the right of disposition to manage and control stock ownership trust.The former hides its name or designation to the outside,and enjoys investment rights and interests of stock ownership trust.In terms of the external relationship,significant stockholders have direct legal relationship with LLCs and the third party,and are entitled to exercising stockholders' right according to trust property in LLCs and paying off debts incurred by trust to the third party.This coincides with the dormant investment relationship and can provide sound protection for rights and interests of dormant partners.In terms of stock ownership trust,there are two kinds.One is the equity investment trust;the other is the equity investment trust.These two kinds of dormant partners can undergo voting trust transformation according to two stock right trust forms.Through stock right trust transformation,implementation of stock right trust contracts,establishment of stock right trust and publicity system,the stock right trust system can be reasonably built to efficiently prevent rights of dormant partners from being infringed and protect legal rights and interests of dormant partners.