The Study Of The Cognizance Of Dormant Investor’s Qualification In Limited Company

As economic and society develop, patterns of investment diverse, so do investors. Under such circumstances, dormant investment phenomenon comes up. Dormant investors invest in Limited Liability Company. As a result, new problems such as dormant shareholder’s qualification recognition and rights and interests protection spring up. Present laws and regulations in China have not defined concept of dormant shareholder. There are no unified standards to recognize qualification of dormant shareholder, and rights and obligations vary in judicial practice. In consideration of universality of such phenomenon, it matters a lot to clarify recognition standards of shareholder, which shall also help trim investing relationship, protect dormant shareholders’ and interested parties’legal rights and interests and regulate market economy order.Dormant investment is not normal way of investing in a Limited liability company, so it brings confusion to shareholder qualification recognition. There are theories such as Formation, essentialism and mixture theory. Meanwhile, reasons for dormant shareholders’existence are also various. Some aims at avoiding mandatory provisions in law and others aim at avoiding law but not for mandatory regulations. In this case, dormant investment forms vary based on different reasons. Dormant investment brings legal risks to dormant shareholders. They cannot participate in decision-making process of the company’s business; they cannot enjoy preemptive rights according to the law; stock rights may be transferred, pledged or deprived of.In regard to standards for shareholders’qualification recognition of Limited Liability Company, there are procedural elements and substantial elements in both common law countries and continental law countries. However, in general, it lays more emphasis on procedural elements when it comes to shareholder qualification recognition, though substantial elements’ legal effect is not denied. In lawmaking process, it tends to focus more on procedural elements. Although present Company Law in China do not define concept for dormant shareholders, there are such dormant shareholders in practice. Regarding disputes arising from dormant shareholders, liability is undertaken by apparent shareholders, in accordance with public notice and public faith principle. Related to disputes between dormant shareholders and apparent shareholders, internal agreement may provide solution.At present, dormant investment can be divided into 3 categories:complete dormant investment, incomplete dormant investment and special dormant investment. To clarify different forms of shareholder qualification recognition approach and basis, specific analysis in accordance with manifestation forms is needed. When dormant investment brings shareholder qualification recognition, dormant investor should be recognized as shareholder if substantial elements are adequate to overturn procedural elements. Or else, procedural elements prevail. Dormant investor need to be cautious, and internal agreement with apparent investor must be signed in order to protect legal rights and interests of themselves.