Analysis Of Legal Issues Related To Company's Dry Share

As the economy of China continues to grow rapidly, companies as the most important form of entities have already become the most important element of the economic system. As a by-product of the rapid development of companies, the so-call Dry Share becomes very common. We believe Dry Share shall mean share of which the holder enjoys the shareholder's rights but does not contribute capital as provided by law. There are reasons why Dry Share exists. The Company Law of China provides for five forms of capital contribution namely cash, material objects, industrial property rights, non-patented technology and land-use rights, making other forms of capital contribution unjustified. However, there will be shareholders who are willing to make certain party a shareholder of the company without requiring this party to contribute capital into the company like normal shareholders because of the special resources owned by this party. This objective can be achieved by loan, donation of shares provided by other shareholders or by the company after converting its undistributed profit into registered capital. The shares hold by this party are so-called Dry Shares. In essence, Dry Share enables this party with special resources to contribute indirectly into the company and become a shareholder of the company based on the agreement between this party and the other shareholders without jeopardizing the rights of the company's creditors, which shall be allowed and protected by law. However, the law and legal practice in this respect is not able to meet the demand of the economy. This article intends to conducts a research over the legal issues relevant to Dry Share and provide legal practice with guidelines and suggestions. This article consists of five chapters: Chapter 1 contains an introduction of Dry shares in existence, their interpretations and the scope of the research under this article. The research of this article has more focus on Dry Share of limited liability companies since its existence in companies limited by shares is limited by the principle of "same share same right", "same share same interests". Chapter 2 discusses the suitability of the contribution associated with Dry Share. The two most important characteristics of Dry Share are first, its shareholders enjoy the shareholder interests in whole or in part; and second, its shareholders paid in no capital contribution. The chapter contains the research on Dry Share associated with contributions such as loan, donation, labor, human capital and other special resources as well as the author's opinion on the Dry Share shareholder's liability where there is a contribution qualification issue. Chapter 3 focuses on the verification of the shareholder qualification of Dry Share shareholders. Such verification is key to the protection of the interests of the parties concerned and the resolution of the disputes among the Dry Share shareholders, the company, other shareholders and the creditors of the company. The uniqueness in the contribution of the Dry Share shareholders inevitably leads to the differences between the Dry Share shareholders and other shareholders in terms of registration in articles of association, shareholders'registration, shareholders'interests, which all further complicates the verification of the shareholder's qualification of Dry Share shareholder. This chapter discusses the various standards for verification of shareholders'qualification, their respective application and the impact brought by the creditors of the company when company's creditors are involved. Chapter 4 focuses on the restriction of the transfer of Dry Share. The parties concerned will certainly try to impose some restrictions on the transfer of Dry Share due to the uniqueness in the contribution of the Dry Share shareholders. Very often this kind of restriction is more strict that those under the Company Law. This Chapter conducts an analysis over the rationale and theory behind this kind of restriction as well as the fundamental principles and guidelines. The last Chapter intends to provide legal practice with practical guidelines and suggestions when Dry Shares are involved. At the moment, it seems that there is no need to use legislation to deal with Dry Share. However, there does exist a need to provide legal practice and enforcement with practical guidelines and principles so that the judgments and decisions on Dry Share related disputes are consistent in terms of the principles applied for the protection of the interests of the parties concerned and the promotion of economy without causing unnecessary interferences.