Article 75 of the Company Law of the People's Republic of China stipulates: "After the death of a natural person shareholder, his legal heirs may inherit the shareholder qualifications; However, except as otherwise provided in the articles of association". It's a very simple sentence, but the legal issues contained in it are not simple at all, and the author will dissect it for you.

1. The provisions of Article 75 of the Company Law are aimed at limited liability companies

There are two types of statutory company forms in China, namely limited liability companies and joint stock limited companies. Regardless of the form of the company, it has the characteristics of capitalization. Therefore, the equity acquired by the shareholders of a capital partnership company for the consideration of capital contribution must have the nature of private property rights, and should be allowed to be transferred and inherited. But for LLCs, there are more human characteristics. The equity acquired by the shareholders of a human partnership company is not only limited to capital contribution, but also requires a foundation of trust among shareholders. Therefore, the inheritance of equity by the heirs of the original shareholders will be limited by the trust problem in personal compatibility. It is generally believed that a joint stock limited company is a typical joint venture company, and there are no legal obstacles to equity inheritance. However, a limited liability company has the characteristics of a personal partnership, and in the absence of the trust of other shareholders, the legal conflict between inheritance rights and personal compatibility requires legal guidance. Section 75 of the Companies Act itself does not specify a limited liability company. However, in the drafting system of the Company Law, Article 75 is under "Chapter III: Transfer of Equity in a Limited Liability Company", which is self-explanatory.

2. Other conflicts of law in inheritance of equity

If an heir inherits the equity of a limited liability company, in addition to having a personal conflict with other shareholders of the company and not being recognized as a shareholder, there may also be conflicts with other legal provisions. For example, the Company Law stipulates that the maximum number of shareholders of a limited liability company is 50, but after the equity inheritance, there may be situations where the number of shareholders exceeds 50, and some heirs will inevitably not be able to become shareholders. Another example: the Civil Servants Law prohibits civil servants from engaging in business activities, so civil servants inherit the equity of the company as heirs but cannot become shareholders. Therefore, although the legal heirs in the company's equity inheritance enjoy shareholder qualifications, there are likely to be legal obstacles to obtaining shareholder status at the same time.

III. Distinguishing between "Shareholder Qualifications" and "Shareholder Status"

Membership is not an automatic acquisition of shareholder status. According to the provisions of the Company Law, the acquisition of shareholder status of a limited liability company is based on the registration of the register of shareholders. It should be noted that the registration of change of shareholders conducted by the administrative department for industry and commerce is an adversarial element rather than an effective requirement. Membership is only a conditional factor, not a factual factor. Whether it is a transfer or inheritance, the successor to the equity enjoys shareholder status but does not have shareholder status until the registration of the company's register of shareholders. Enjoying shareholder qualifications is actually the basis for "legal heirs" to enjoy the right to compensation for equity discounts.

4. The two most common ways to deal with equity inheritance

Equity is a kind of composite right, which is not only a personal right that has the identity of a shareholder and enjoys the inherent rights of a shareholder, including the right to know, the right to vote, etc., but also a property right with the attribute of property value. Therefore, the most common way to deal with inheritance of equity is as follows:

1. Directly inherit the equity to obtain the identity of a shareholder, and have both the personal rights and property rights of the equity.

2. Obtain property consideration by realizing the equity discount and only enjoy the property rights of the equity.

The first way to obtain shareholder status may present legal obstacles, as mentioned above. The second way to cash out at a discount is equivalent to giving up the personal rights in the inheritance of equity. Therefore, the solution to the issue of equity inheritance should be comprehensively considered from the aspects of legal restrictions, heirs' ability to operate, and maintaining the stability of the company.

5. The articles of association may make independent provisions on equity inheritance

The second half of Article 75 of the Company Law, which stipulates that "except as otherwise provided in the articles of association" is an arbitrary legal provision, that is, a company can change, select or exclude the application of the above-mentioned provision that "after the death of a natural person shareholder, his legal heirs may inherit the qualification of shareholders" by formulating the articles of association. For example, the articles of association of a company can independently stipulate: "After the death of a natural person shareholder: the legal heir shall obtain the consent of a majority of the other shareholders of the company before obtaining the status of a shareholder of the company." ”

6. Correctly understand mandatory and arbitrary provisions

Although Article 75 of the Company Law gives a company the right to decide the treatment of equity inheritance, it is an arbitrary provision. However, the right of inheritance is a legal right, and the right of inheritance is protected by law and is a mandatory legal provision, so if it is mistakenly believed that the articles of association can stipulate that the company's shares cannot be inherited, then it is obviously depriving the "legal heir" of the inheritance right, and it is likely to be invalid because it violates the mandatory provisions of the law.

Therefore, the so-called arbitrary provisions of Article 75 of the Company Law mean that the articles of association of the company can arbitrarily stipulate the treatment of the company's equity in the event of inheritance, rather than denying the right of inheritance.

VII. Handling of equity inheritance in judicial practice

In judicial practice, if the articles of association of a company provide for the inheritance of a company's shares, as long as it does not violate the mandatory provisions of the law, it will generally be handled in accordance with the provisions of the articles of association. If the articles of association do not provide for this, if the legal heirs insist on becoming shareholders, the consent of the other majority of the shareholders is required. If other shareholders do not agree to the legal heirs becoming shareholders, and do not agree to pay the discount for the transferred shares, they shall be deemed to have agreed to the legal heirs to become shareholders.

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