Research On The System Of Forfeiture Of Shares In China

The system of forfeiture of shares refers to the rules made in respect of the shareholders’ violation of their obligation of capital contribution that results in their removal of qualification of shareholders,which has the functions of preventing the shareholders from failing to pay their due capital contribution and hindering the capital raising of the company and urging the shareholders to fully perform their obligation of capital contribution as agreed.The Company Law has not stipulated the system of forfeiture of shares.The provisions on the disqualification of shareholders established in Article 17 of the Judicial Interpretations III of the Company Law regarding the shareholders who fail to perform their obligation of capital contribution or withdraw all their capital contribution is an embodiment of the system of forfeiture of shares in the company law norms.The revised draft of the Company Law published in December 2021 made legislative developments on the system of forfeiture of shares in Articles 46 and 109,using the concept of "forfeiture of shares" for the first time to establish the system of forfeiture of shares at the level of the Company Law,giving the company the right to deprive shareholders of unpaid shares through the statutory procedure,which has responded to some of the limitations of the aforementioned judicial interpretation.However,there are still many problems remained.Based on the norms and judicial status,this paper reviews the legislative development of the system of forfeiture of shares in China from the aspects of regulation objects,implementation guarantees,subsequent disposal of shares and legal liabilities.It also sorts out the extraterritorial modes,the theoretical basis of the system and the construction principles that should be followed in the localization of the system,and finally puts forward suggestions for the construction of the system of forfeiture of shares suitable for China.The main part of the paper is divided into the following four chapters:The first chapter summarizes the norms and judicial status quo of the share forfeiture system in China.It points out that Article 17 of the Judicial Interpretation III of the Company Law is the disqualification rule based on the shareholder’s capital contribution obligation.According to the purposes and functions of the system,it should belong to the share forfeiture rule in comparative law rather than the shareholders removal rule in narrow sense.The qualitative deviation of this article has led the theoretical and practical circles to discuss and apply it as the shareholders removal rule.Problems in the design of the rule,such as narrow scope of application,confusing logic in the setting of statutory procedures,vague expression of statutory procedures and unclear stipulation on legal consequences,lead to the current situation of rigid application of provisions and different judgment standards in judicial practice,which in fact determines the limited effect of this rule.The second chapter focuses on the legislative development of the revised draft of the Company Law on the system of forfeiture of shares,and examines the existing problems in the provisions about forfeiture of shares in the judicial interpretation and the revised draft of the Company Law.There are some of the main problems.Firstly,the scope of application of the system is narrow,whether it is limited to failure of capital contribution obligation and withdrawal of all capital contribution or only limited to failure of capital contribution obligation,there are institutional loopholes which can easily be circumvented.Secondly,there is a temporary lack of system assurance,which means the requirements for the company to perform its obligation of checking the capital contribution of the shareholders are vague,and there is legal space for the company to decide whether to deprive the shareholders who fail to fulfill their capital contribution obligations of their shares.Thirdly,the subsequent disposition of the corresponding shares is unknown,and no arrangements have been made for the restriction on the disposal of the shares after depriving shareholders of shares.Fourthly,the provisions on legal liability are unclear as there are no explicit provisions on the legal liability of the shareholder and other related parties once the shareholder’s share is deprived of.The aforementioned problems may lead to the failure of the regulatory purpose of the system of forfeiture of shares and the existence of obstacles to the performance of the system.The third chapter sorts out the extraterritorial modes and localization foundation of the system of forfeiture of shares providing extraterritorial experience and theoretical support for the improvement of the system of forfeiture of shares in China.Representative extraterritorial modes include the system of declaration of forfeiture of shares(Kaduzierung)in Germany,the system of forfeiture of shares when a company is established in Japan,the system of forfeiture of shares in the United Kingdom and the relief measures for shareholders who fail to pay for shares in Delaware.Under the corresponding relationship of capital contribution and shareholder rights,the similar arrangements set up by different countries are closely related to the capital systems adopted by them.Such institutional arrangements differ mainly in whether the deprivation of shares of a shareholder who fails to fulfill its obligation of capital contribution will directly result in such shareholder’s disqualification and whether the shareholder bears subsequent liabilities.Grasp the commonalities of the system of forfeiture of shares from the individuality of the extraterritorial experience,that is,the function positioning of granting the company the autonomous right to deprive the shareholders of their shares in order to urge the shareholders to fulfill their capital contribution obligation under the organic law and the institutional mechanism which the company have the termination right under the contractual relationship.In the process of localization construction,attention should also be paid to adapting to current capital system in China,balancing the interests of the parties involved in the forfeiture of shares and preventing the company from abusing forfeiture rights to violate the principle of equal shareholders.The fourth chapter is based on the review of the legislative development of the system of forfeiture of shares in China in the second chapter,with reference to the foreign experience and construction foundation mentioned in the third chapter,and puts forward to improve the system of forfeiture of shares in China from the perspective of applicable situations,institutional safeguards and legal liabilities.These suggestions specifically include expanding the application of forfeiture of shares including the withdrawal of capital contributions;clarifying the company’s share payment verification obligations and distinguish the specific performance requirements for the limited liability company and the joint stock limited company;imposing a restriction standard on the company’s decision to deprive the shareholders of their shares,that is,there should be a legitimate reason that is more beneficial to the company’s interests to make the decision not to deprive shares from the shareholder who has not fulfilled the obligation of capital contribution;refining the disposition rules for the shares,with shares transfer over capital reduction and cancellation;and making arrangements for the shareholders of forfeited shares,the former shareholders as well as the directors and executives of the company to bear relevant responsibilities under the system of forfeiture of shares.