Research On Legal Issues Regarding Equity Transfer Of Limited Liability Companies

In recent years, along with the rapid development of a socialist market economy, there have been many serious legal issues arising from the application of the Corporation Act. These issues include, the equity transfer dispute, which appears most frequently, holds the most complicated legal relation and is especially obvious in limited liability companies (LLCs hereafter).This paper is an analysis and discussion of some frequent legal issues arising from the application of the Corporation Act regarding equity transfer of LLCs. Apart from the introduction and conclusion, the paper is divided into four parts.The first part explains issues related to preemptive rights and compulsory purchase obligations in LLC equity transfer. It begins with an analysis of the shareholders'preemptive rights and discussion of the definition of same condition as it relates to shareholders'preemptive rights. Then, it points out the inadequacies of formulating the preemptive right which is compulsorily executed by the current Corporation Act and proposes that only the shareholders who have not given up preemptive right are obliged to decide if they will excise the preemptive right within a reasonable time after the settlement of same condition. Settlement examples include the price of transfer equity through auction, sale and some other ways which is followed by some legislative proposals to ensure the execution period of the preemptive right. Secondly, it explains the dissenting shareholders'compulsory purchase obligations and analyses the purchase conditions of dissenting shareholders and ways to deal with situations when several dissenting shareholders ask to purchase equity.The second part explains the identification of the validity of contract of LLC equity transfer. To begin with, it analyses the criterion of determining if the contract of LLC equity transfer is valid and proposes that a valid contract should meet the following four conditions: 1. The parties of equity transfer contract should be in line with the relevant legislation; 2. The subject matters of equity transfer contract should be in line with the relevant legislation; 3. The parties in signing the contract should express their true intention; 4. The ways of transferring equity should be in line with the relevant legislation. Secondly, it analyses the validity of equity transfer contract under the following three special circumstances: 1. If an equity transfer contract fails to win the consent of more than half of other shareholders, the author believes it should be categorized as uncertain effectiveness contract and be invested with the right to decide the validity of equity transfer act. Meanwhile, in accordance with the articles in Section 47 (2) of Contract Law, the equity transferee can urge other shareholders to ratify the contract within one month after the transferee is aware of the dissenting fact. And it shall be regarded as a refusal of ratification that other shareholders do not make any expression; 2. If an equity transfer contract breaches the company policy, the author believes with invalid company restrictions, it should be considered valid while it meets other equity transfer conditions regarding Corporation Act; with valid company restrictions, it should be considered valid if it tries to transfer equity to non-shareholders; 3. If an equity transfer contract is signed by anonymous investors, the author believes, while investors are members of company's shareholders and the contract does not breach other relevant legislation, it comes into effect at the time of establishment; while investors are not members of shareholders, it should be categorized as an unauthorized disposition contract according to article 51 of Contact Law and its validity is to be determined, unless it is ratified by more than half of the company's shareholders.The third part explains issues related to blemished equity of LLC equity transfer. To begin with, it defines the blemished equity. Secondly, it identifies the blemish of capital contribution, which is divided into two categories: No contribution at all and improper contribution. Thirdly, it discusses the criterion of determining the qualification as the shareholders of the blemish of capital contribution. Fourthly, it discusses the validity of blemished equity transfer contract. The author believes, technically blemished equity transfer contract remains valid regardless of blemished capital contribution factor and transferees may not deny the validity of the contract due to the blemish of the transfer of the subject matter; The transferee may cancel the equity transfer contract in the name of contract fraud if the shareholder conceal the blemish fact during equity transfer, but the transferee may not act against a third party in exercising the right of revocation. Finally, it discusses the accountability of the shareholder and the transferee after the successful transfer of the blemished equity. The author believes that the shareholder should continue to undertake the civil liability of capital contribution of blemished equity while the transferee, together with the shareholder, should shoulder the joint liability of repayment.The fourth part talks about the obstacles in LLC equity transfer and their solutions. In this part the author proposes corresponding solutions regarding several kinds of equity transfer barriers frequently occurring during company practice and the author hopes they can provide some thoughts and help during the process of dealing with relevant practical problems. The solutions include a solution for incapability to inform other shareholders of equity transfer, a solution for company's refusal to issue a capital contribution certificate and a solution for company's refusal to undergo changes in industrial and commercial registration.