Equity proxy holding refers to the act of the actual contributor signing an agreement with others regarding equity proxy holding,stipulating that the counterparty to the contract shall exercise shareholder rights and perform shareholder obligations on behalf of the actual contributor,and the aforementioned counterparty to the contract is the nominal shareholder.

China's"Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China(III)"(hereinafter referred to as the"Judicial Interpretation of the Company Law(III)")has made relevant provisions on the act of proxy holding of equity.Article 24,paragraph 1,determines that the actual contributor of a limited liability company enters into a contract with the nominal contributor,stipulating that the actual contributor shall contribute and enjoy the investment rights and interests,and the nominal contributor shall be the nominal shareholder,If there is a dispute between the actual contributor and the nominal shareholder over the validity of the contract,the people's court shall determine that the contract is valid in the absence of the circumstances specified in Article 52 of the Contract Law;Article 24(2)determines that if there is a dispute between the actual contributor and the nominal shareholder over the ownership of the investment rights and interests,and the actual contributor claims rights against the nominal shareholder on the ground that it has actually performed its investment obligations,the people's court shall support it.Therefore,China's law recognizes the legitimacy of equity proxy holding from two aspects:the effectiveness of the proxy holding agreement and the ownership of the proxy held equity.However,in the process of equity proxy holding,the actual investor still bears certain legal risks.

1、Legal Risks of Actual Contributors in Equity Holding

1.Risk of invalidity of equity holding agreement

Although China's laws determine the validity of equity holding agreements,equity holding actions are not all valid.According to the Judicial Interpretation of the Company Law(III),if equity holding actions are to be valid,there must be no five situations in which the contract is invalid as stipulated in Article 52 of the Contract Law.In practice,there are several situations that can easily lead to the invalidity of equity holding:(1)Public servants violate Article 59,Paragraph 16,and other relevant provisions of the Civil Service Law by engaging in business in the form of equity holding;(2)A shareholder of a commercial bank violates the provisions of Article 12,Paragraph 1,of the Interim Measures for the Administration of Commercial Bank Equity by entrusting or accepting another person's authorization to hold the equity of a commercial bank;(3)In order to evade foreign investment access policies,foreign investors invest in industries that are prohibited or restricted by laws and policies as actual contributors,or sign share holding agreements with domestic entities in order to obtain tax benefits.

2.Risk of difficulty in identifying the actual contributor

The actual contributor is not a shareholder of the company.According to the Judicial Interpretation of the Company Law(III),if an actual contributor wants to be converted to a prominent shareholder,it must obtain the consent of more than half of the other shareholders of the company.However,in practice,due to the existence of an anonymous contributor,it is more difficult to achieve the consent conditions of more than half of the other shareholders.In addition,even if the actual contributor and the named shareholder have signed a share holding agreement,the agreement is only an internal agreement between the two parties,and only has effect on both parties.The actual investor can only obtain the investment income agreed with him through the named shareholder,and cannot directly claim rights against the company in his own name on the basis of his actual investment.

3.Impairment of the actual contributor's rights and interests due to the actions of prominent shareholders

In the case of proxy holding of equity,the equity held on behalf of the nominee shareholder is nominally the property of the nominee shareholder,so there is a risk that the actual investor's rights and interests will be damaged due to the behavior of the nominee shareholder.In practice,the following situations often occur:(1)Explicit shareholders transfer or pledge their equity without the consent of the actual contributor;(2)Due to the debt of the named shareholder,the equity held on behalf of the named shareholder is frozen and sealed up as the property of the named shareholder;(3)Divorce and death of a prominent shareholder lead to the division and inheritance of the equity held on behalf of the shareholder.Currently,there is no clear legal provision as to whether the actual contributor can use the actual contribution as a pretext to confront a third party.The above situations will affect or restrict the rights and interests of the actual contributor,

2、Risk prevention of actual investors in equity holding

Firstly,when signing an equity holding agreement,the main qualifications of both parties to the contract should be reviewed to avoid the risk of invalidity of the equity holding agreement.Secondly,lawyers suggest that the equity holding agreement between the named shareholder and the actual contributor should be disclosed to the company and other shareholders of the company,which can to some extent prevent the abuse of the rights of the named shareholder.In addition,with respect to the transfer of equity from a prominent shareholder to an actual contributor,the actual contributor may attempt to obtain the written consent of a majority of the company's shareholders in advance,and request other shareholders of the company to waive the preemptive right to transfer shares.

Secondly,in the equity escrow agreement,the lawyer suggests that the named shareholder pledge the equity held on behalf of the actual contributor and register and publicize the equity pledge with the industry and commerce department according to law,which can separate the property of the named shareholder from the equity held on behalf of the named shareholder,and avoid the risk that the equity held on behalf of the named shareholder will be executed by the court as the property of the named shareholder due to the debt of the named shareholder.

In addition,in order to prevent the misconduct of prominent shareholders from harming the interests of actual contributors,actual contributors can agree on reasonable and strict liability clauses for breach of contract in the equity holding agreement to deter prominent shareholders and make them more cautious in performing shareholder obligations on behalf of them.

Finally,the actual contributor should keep documents such as the equity holding agreement signed by both parties,the capital contribution certificate,and the receipt certificate of the company's receipt of the actual contributor's funds in case of emergency.

(This article is translated by software translator for reference only.)