JC Master Research | Typical Cases in the Corporate Equity Change Phase — Equity Transfer Disputes

In the divorce proceedings between Zhang and Sun, Sun filed a lawsuit with the court seeking a declaration that the transfer of equity in a certain power company—conducted by Zhang without Sun’s consent and at a price significantly below market value—was invalid, on the grounds that the transfer was undertaken with the malicious intent to unlawfully transfer assets.

Zhang and Zhang Moumou, together with the company, contend that the reasonableness of the equity transfer price is subject to shareholders’ assessments of market conditions and various other factors. The equity transfer at issue was necessitated by the urgent need for capital injection into a certain electrical company in which Zhang had invested; under pressure from relevant administrative authorities and in order to avoid more severe legal liabilities, Zhang transferred the equity in question to raise funds. The transaction was conducted through a public auction, with open bidding, whereby the equity was assigned to the highest bidder—thus enabling Zhang to secure the maximum possible benefit for himself and his spouse in a manner consistent with due process. Moreover, the equity transfer was approved by the shareholders of the power company, and there was no malicious collusion between Zhang Moumou and Zhang. The transfer complies with applicable laws. Equity transactions are commercial activities; provided that the terms of the equity transfer agreement conform to the provisions of the Company Law, it shall have legal effect, and the consent of Sun is not required. Even if the equity in question constitutes marital property jointly owned by Zhang and Sun, the right to decide on the transfer of such equity may be exercised solely by Zhang; Sun is entitled only to any property‑related proceeds actually derived from and realized through the equity.

First-instance judgment : The court dismissed Sun’s claim. Sun filed an appeal on the ground that the original judgment misapplied the law.
 

Second-instance judgment 1. Revoke the first-instance judgment; 2. The equity transfer agreement at issue, entered into between Zhang Mou and Zhang Mouxu, is invalid; 3. Within ten days from the date this judgment takes effect, Zhang Mou, Zhang Mouxu, and a certain power company shall register the equity that Zhang Mouxu acquired pursuant to the equity transfer agreement in Zhang Mou’s name. Dissatisfied with the second-instance judgment, Zhang Mouxu and Zhang Mou have filed an application for retrial with the Supreme People’s Court.

Retrial Ruling : The applications for retrial filed by Zhang Moumou and Zhang Mou are dismissed.
 

The court’s final judgment holds that the transfer of equity interests, as a commercial act, is governed by the Company Law, and individual shareholders are recognized under the Company Law as lawful disposers. The transfer of equity registered in a shareholder’s name to an external party constitutes a valid disposition and does not require the consent of the shareholder’s spouse. , the validity of an equity transfer contract may not be invalidated solely on the ground that the transfer was made without the spouse’s consent. However, equity possesses property value and constitutes a component of the marital community property interests, During the subsistence of the marital relationship, each spouse has a statutory duty not to engage in any conduct—such as transferring or disposing of equity interests—that would seriously prejudice the interests of the marital joint property. If one spouse engages in an unreasonable, low‑price transfer of equity interests that objectively reduces the marital community property available for division, and the transferee, as the counterparty to the transaction, knows or ought to have known of this situation, the other spouse, as the injured creditor, may seek to rescind the transaction through the creditor‑protection mechanism. Furthermore, if there is evidence demonstrating that the transferee and the transferor colluded in bad faith to infringe upon the lawful rights and interests of the transferor’s spouse, that spouse shall be entitled, in accordance with the law, to declare the equity‑transfer contract void. Based on the facts ascertained in the original judgment, the price at which the equity was transferred in this case was substantially lower than the value of the equity held by Zhang, as reflected in the balance sheet. The equity transfer occurred during the divorce proceedings between Zhang and Sun, and Zhang transferred the equity to his own father, Zhang Moumou, whose level of knowledge regarding the marital status of Zhang and Sun differed from that of an ordinary party. Although Zhang Mou and Zhang Moumou contend that the target company, a certain power company, engaged in false capital contributions, thereby rendering the actual value of the equity substantially lower than the amount recorded on the balance sheet, nevertheless… The audit report it submitted was prepared at the unilateral request of a certain power company by an accounting office, and evidence such as the “Minutes of the Shareholders’ Meeting” has been found, upon forensic examination, to contain numerous irregularities, including backdated entries. . The original judgment in Based on a comprehensive review of all the evidence in the case, it is determined that… The equity transfer contract at issue is invalid, and no manifest impropriety has been established; accordingly, there are no grounds for retrial on the basis of either a lack of evidentiary support for the underlying facts or an error in the application of the law. The grounds advanced by Zhang Mou and Zhang Mouxu for applying for a retrial are insufficient to trigger the initiation of retrial proceedings in this case.

1. Although the transfer of equity registered in a shareholder’s name is a commercial transaction governed by the Company Law and does not require the spouse’s consent, if the shareholder and their spouse are undergoing divorce proceedings, it is advisable to refrain from engaging in equity transfers intended to prejudice the spouse’s rights; otherwise, should the spouse file a lawsuit, the court may deem such a transfer invalid.

2. To mitigate the risk that the property value of their equity interests may be subject to division upon divorce, company shareholders are well advised to enter into a written agreement with their spouses, clearly delineating the allocation of assets acquired during the marriage as well as premarital property.
 

Company Law of the People’s Republic of China (Revised in 2023)

Article 84 (formerly Article 71) Shareholders of a limited liability company may transfer all or part of their equity interests to one another.

When a shareholder transfers equity to a person outside the circle of shareholders, they shall notify the other shareholders in writing of the quantity, price, payment method, and term of the equity transfer; the other shareholders shall have a right of first refusal under identical terms. If a shareholder fails to respond within thirty days from the date of receipt of the written notice, such failure shall be deemed a waiver of the right of first refusal. If two or more shareholders exercise their right of first refusal, they shall negotiate to determine their respective purchase proportions; if no agreement is reached, each shall exercise the right of first refusal in proportion to their respective capital contributions at the time of the transfer.
 

If the company’s articles of association provide otherwise regarding the transfer of equity interests, such provisions shall prevail.
 

The Civil Code of the People’s Republic of China

Article 154 A civil legal act entered into by the actor and the other party in malicious collusion, thereby harming the legitimate rights and interests of a third party, is void.
 

Article 311 If a person without the right of disposition transfers real property or personal property to a transferee, the owner shall have the right to reclaim it; unless otherwise provided by law, where the following conditions are met, the transferee shall acquire ownership of such real property or personal property:

(1) The transferee was a bona fide purchaser at the time of acquiring the real or personal property;
 

(2) Transfer at a reasonable price;
 

(3) With respect to real or personal property subject to registration under the law, such registration has been completed; where registration is not required, the property has been delivered to the transferee.
 

Where the transferee acquires ownership of real or personal property in accordance with the preceding paragraph, the original owner shall have the right to claim damages from the person who lacked the authority to dispose of such property.

Where a party acquires another real right in good faith, the provisions of the preceding two paragraphs shall apply by analogy.

Article 1062 The following property acquired by the spouses during the subsistence of the marriage shall be deemed joint property of the spouses and shall be owned jointly by them:

(1) Wages, bonuses, and labor compensation;
 

(2) Income derived from production, business operations, and investments;
 

(3) Income derived from intellectual property;
 

(4) Property inherited or received as a gift, except as provided in Article 1063, Paragraph 3 of this Law;
 

(5) Other property that should be jointly owned.

Spouses have equal rights to manage their joint property.

Article 1063 The following property shall be the personal property of one spouse:

(1) The premarital property of one party;
 

(2) Compensation or damages received by one party as a result of personal injury;
 

(3) Property designated in a will or gift contract as belonging solely to one party;
 

(4) Personal items exclusively used by one party;
 

(5) Other property that should be attributed to one party.

Article 1065 The spouses may agree that property acquired during the marriage, as well as premarital property, shall be owned individually by each spouse, jointly by both, or partly by each and partly jointly. Such agreements must be in writing. In the absence of an agreement, or where the agreement is unclear, the provisions of Articles 1062 and 1063 of this Law shall apply.

Any agreement between spouses regarding property acquired during the marriage as well as premarital property shall be legally binding on both parties.

If a married couple has agreed that property acquired during the marriage shall be owned separately by each spouse, and a third party is aware of such agreement, any debt incurred by one spouse shall be satisfied out of that spouse’s personal property.