Restrictions and exclusions on the succession of shareholder qualifications in the articles of association of a limited liability company
Author: Zou Qianwen
"In the process of business operation, planning in advance on matters related to equity inheritance can often help the company make a smooth transition when a natural person shareholder dies suddenly, and avoid disputes arising from equity inheritance that affect the company's stable operation. Article 90 of the Company Law stipulates that: "After the death of a natural person shareholder, his legal heirs may inherit the shareholder qualifications, unless otherwise provided in the articles of association." This provision provides a general principle of equity succession, i.e., the legal heirs of natural person shareholders can inherit shareholder qualifications, while also allowing other arrangements to be made in the articles of association. Therefore, the importance of the company's articles of association in equity inheritance is self-evident. "
According to Article 90 of the Company Law and Article 16 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (IV), it can be seen that when a natural person shareholder dies, the heirs can in principle obtain shareholder qualifications and enjoy shareholder rights, without the consent of other shareholders or the company, so the other shareholders can only passively accept the addition of new shareholders. In the case of equity inheritance of a limited liability company, if the equity can be inherited as a matter of course as a right in rem or ordinary property rights, then when the natural person shareholder dies, his legal heir will directly enjoy the equity by inheritance and enter the company to become a shareholder, at this time, although the nature of the limited liability company's capital is not affected, it is difficult to predict whether the heir can maintain good cooperation with other shareholders of the company after becoming a shareholder of the company, that is, the personal compatibility of the limited liability company may be affected. Therefore, in order to protect the personal compatibility of a limited liability company, it is necessary to impose certain restrictions on the succession of shareholder qualifications. If only the protection of human compatibility is considered, and the consent of the company or other shareholders is required to obtain the consent of the successor to inherit the shareholder qualification, then it is difficult to guarantee the inheritance right of the heir. Therefore, the succession of the company's articles of association restricting the qualifications of shareholders should be based on reasonableness, which is reflected in the coordination and balance between the interests of the company, the interests of other shareholders, the wishes of the deceased shareholders and the interests of their heirs.
1. The understanding of "otherwise provided in the articles of association".
The articles of association of the company are the necessary documents for the establishment of the company, as the constitutional program document in the company, reflecting the common will of all shareholders, binding on the company, its members and institutions, etc., and is an important embodiment of the company's autonomy. Article 90 of the Company Law has the following two meanings:
First, compared with the principle provisions of the Company Law on the ex officio succession of shareholder qualifications, the exceptional provisions of the company's articles of association have priority application on the premise that they do not violate mandatory legal norms. When adjudicating a case of a dispute over the succession of shareholders' qualifications, the judicial organ shall give priority to examining whether there are provisions in the articles of association, and if there are such provisions and such provisions are legal and valid, in principle, the provisions in the articles of association shall be used as the basis for adjudication; if there are no provisions, the legal rules on the succession of shareholders' qualifications shall be followed. Second, the articles of association may restrict or exclude the succession of shareholder qualifications. This is because, in view of the high degree of personal compatibility of a limited liability company, in order to avoid challenging the relationship of mutual trust between shareholders, the law allows the articles of association of the company to provide for a method that shareholders consider practicable to resolve the issue of succession of shareholder qualifications. However, this does not mean that the Articles of Association are "otherwise stipulated" to be arbitrary. In order to exclude the application of the company law, the content of the articles of association formulated under the authority of such "other provisions" should be affirmatively evaluated in law or in general social perception. In other words, not all provisions of the company's articles of association that are different from those of the Company Law are automatically recognized. Article 90 of the Company Law stipulates that "the articles of association of the company provide otherwise", while emphasizing the autonomy of the company and the compatibility of people, should take into account the protection of the inheritance rights of the heirs.
(1) The articles of association can only restrict the heirs' qualifications to inherit shareholders, and shall not deprive the heirs of the right to obtain property consideration commensurate with the value of the equity
In terms of its essential attributes, equity includes not only the property rights of shareholders but also the identity rights arising from property rights, that is, shareholder qualifications, which are embodied in the rights of shareholders to exercise voting rights on the company's affairs and other related rights to participate in the company's decision-making. As far as the property rights of equity are concerned, it is in accordance with the current laws and regulations of the mainland that it is inherited as an inheritance. The succession of shareholder qualifications is regulated by the Company Law. Since Article 90 of the Company Law mainly addresses the issue of the inheritance of shareholder status rights in equity, i.e., shareholder qualifications, "otherwise provided in the articles of association" is only applicable to restricting the heirs from inheriting shareholder qualifications, and the heirs shall not be deprived of the right to obtain property consideration commensurate with the value of the equity in violation of the basic principles of the Inheritance Law. If there are also provisions restricting or excluding property rights, this part of the company's articles of association shall be deemed invalid and not protected by law.
Case study 1
Case: Dongshi A Real Estate Development Co., Ltd. and Zhou 2 shareholder qualification confirmation dispute, civil judgment of the Supreme People's Court of second instance
Case:
The clause in the articles of association restricting the succession of shareholder qualifications is valid, and although heirs have no right to inherit shareholder qualifications, their property rights should be protected. In this case, Company A was a limited liability company registered in accordance with the law, in which Zhou X 1 (Zhou X 2's father) held 42% of the equity and served as the legal representative. On September 12, 2007, Article 20 of the Articles of Association of Company A stipulates that "after the death of a natural person shareholder, his legal heirs may inherit the shareholder qualifications". On February 11, 2009, April 29, 2009 and March 29, 2012, Company A deleted the clause in Article 20 of the Articles of Association dated September 12, 2007 that the shareholder qualification allows succession, and Article 7 stipulates that "a shareholder shall not transfer equity to a person other than a shareholder...... The share capital shall be subject to the dynamic shareholding management measures. On January 10, 2015......, Article 7 of the Articles of Association of Company A added a third paragraph on the basis of the provisions of the aforementioned articles of association, stipulating that "shareholders who retire, have long illness, long leave and death at normal age shall go through the equity transfer procedures in a timely manner, and when the shareholders withdraw their shares, if the company has accumulated surpluses, they shall enjoy a return of less than 20% per year according to their shareholdings during the shareholding period". On November 23, 2015, Zhou Mou1 made a will, clarifying that the 42% equity of Company A held by him was inherited by Zhou Mou2, and the shareholder rights corresponding to the equity were enjoyed and inherited by Zhou Mou2. After Zhou X 1 died of illness, Zhou X 2 claimed to Company A to inherit 42% of the equity and become a shareholder of the company. From the time Zhou XX1 was diagnosed with illness in 2011 to his death on December 4, 2015, he participated in the revision of the above-mentioned articles of association as the legal representative and signed for confirmation.
The Court's Opinion:
The SPC holds that the articles of association, as the rules of autonomy of the company, are the most basic and important guidelines for the organization and activities of the company, and are binding on all shareholders. A correct understanding of the articles of association should be based on the literal interpretation, and the analysis should be carried out by comprehensively considering factors such as the charter system, the background of its formulation and the implementation situation. According to the analysis of the articles of association, it can be seen that Company A has a high degree of human compatibility and closed characteristics. Even if the articles of association of the company do not specify that the shareholder qualification of the deceased shareholder cannot be inherited, it can be determined that the articles of association of the company have excluded the inheritance of shareholder qualifications in combination with the relevant expressions such as "the deceased shareholder shall handle the equity transfer in a timely manner" and "the shareholder shall not transfer the equity to anyone other than the shareholder", as well as the practical handling of resignation and share withdrawal by Company A. After excluding the inheritance of shareholder qualifications, how to deal with the underlying equity is a matter of corporate governance and does not affect the judgment of shareholder qualifications in this case. After the equity involved in the case excludes inheritance, whether it is repurchased by the company or transferred by other shareholders can be realized through the autonomy of the company. As the heir of Zhou 1, Zhou 2 has no right to inherit the shareholder qualifications, but his property rights can be protected. It can still obtain the return of the share capital and a certain percentage of the return calculated according to the amount of the shareholding each year, and the protection of its rights and interests is also reasonable.
It can be seen from the judgment of this case that "the articles of association of the company provide otherwise" does not mean that the articles of association must clearly stipulate that the qualifications of shareholders shall not be inherited. If we combine the relevant provisions of the company's articles of association, previous amendments and practical operations, it can be inferred that it has the intention of restricting the succession of shareholders. In this case, based on the position of respecting the company's autonomy of will and protecting the company's personal compatibility, the court will not be confined to the literal interpretation of the articles of association itself, but will also comprehensively consider factors such as the background and practice of the revision of the company's articles of association to determine whether the company's articles of association exclude the succession of shareholder qualifications. Under the premise that the articles of association of the company have excluded the succession of shareholder qualifications and are legally valid, the articles of association of the company have the effect of priority application, because the articles of association of the company are a resolution made by all shareholders together, and the shareholders shall be bound by them after transferring part of their private rights to the company, and the articles of association of the company have the right to exclude or restrict the qualification of shareholders for the purpose of maintaining the compatibility of the limited liability company and the trust relationship between the existing shareholders. Therefore, the disposition of shareholder qualifications in the will of a natural person shareholder can be determined to be only a disposition of the equity value, that is, the testamentary heir can only inherit the equity value, but cannot inherit the shareholder qualification.
More importantly, the restriction on equity inheritance in the company's articles of association can only extend to the personal rights in the equity, i.e., the qualification of shareholders, but not to the property interests in the equity. The property gains obtained by the heirs can usually be realized by the repurchase of shares by the company or the transfer of equity by other shareholders.
(2) The restrictions on the succession of heirs after the death of shareholders in the articles of association of the company shall not automatically take effect
In practice, many articles of association do not provide otherwise for equity succession. Until the death of a natural person shareholder, the other shareholders are unable to form trust in their heirs, and intend to restrict the succession by amending the articles of association. To this end, other shareholders urgently convened a shareholders' meeting and made a resolution to amend the company's articles of association, temporarily adding provisions restricting the qualifications of inherited shareholders. When the articles of association of a company that restrict the succession of shareholders are formed after the death of the shareholders, the shareholders who died at the time of the amendment to the articles of association have no opportunity to express their opinions, and the fairness and effectiveness of the articles of association formed at this time should be treated with caution. In the absence of sufficient reasons from the company or other shareholders, it is not appropriate to determine the content of the articles of association formed by such a surprise amendment.
Case study 2
Case: Shanghai A Cable TV Co., Ltd. v. Tao 2, a shareholder rights dispute appeal case
Case:
Defendant Company A was jointly funded and established by 44 shareholders including Tao X 1. On January 17, 2005, the decedent Tao X 1 passed away due to illness, and the legal heir Tao X 2 sent a letter to Company A for this purpose, requesting Company A to change the equity of Tao X 1 to his name. On August 29 of the same year, Company A held a general meeting of shareholders to form a resolution to amend the articles of association (draft). It is clearly stipulated that after the death of a shareholder, the heirs can obtain their rights and interests in shares and property in accordance with the law, but they do not automatically obtain the right to be a shareholder.
The Court's Opinion:
The Shanghai No. 2 Intermediate People's Court held that the "Amendment to the Articles of Association of Shanghai A Cable TV Co., Ltd. (Draft)" formed by Company A at the shareholders' meeting held on August 29, 2005 was amended only after the occurrence of a dispute over the inheritance of Tao X 1's equity, and could not be applied to the inheritance of the equity, and the articles of association of the company applicable at the time of the succession did not restrict the issue of succession of shareholder qualifications. After the death of Tao X 1, his heirs have obtained equity including shareholder qualifications. Therefore, the draft amendment to the articles of association formed by Company A on August 29, 2005 did not affect the inheritance of the equity by Tao X 2, nor could it restrict the exercise of Tao X 2's rights. Moreover, at the time of the voting at the shareholders' meeting, the 43.36% of the shares held by Tao X 1 at issue before his death were not exercised on behalf of anyone, and the original articles of association stated that "a resolution to amend the articles of association of the company must be passed by shareholders representing more than two-thirds of the voting rights", so the amended articles of association are not binding and do not fall under the circumstance of "except as otherwise provided in the articles of association" as provided in Article 76 of the current Company Law.
To sum up, the time for the articles of association to restrict or exclude the succession of shareholders' qualifications should be limited in principle to the articles of association of the company concluded before the death of the natural person shareholder, and not to the articles of association formed after the death of the natural person shareholder. Specifically, before the death of a natural person shareholder, the articles of association of the company do not exclude the restriction on the succession of shareholder qualifications, but after the death of the shareholder, the company convenes a shareholders' meeting to amend the articles of association and exclude or restrict the succession of shareholder qualifications. In this case, according to the provisions of the articles of association before the death of the shareholder, the heirs can inherit and inherit the shareholder qualifications upon the death of the natural person shareholder, and the subsequent amendment of the articles of association will not affect the successor's right to inherit the shareholder qualifications that the heirs have obtained. Therefore, in principle, the company can only determine whether and how the heirs can inherit the shareholder qualifications based on the articles of association of the natural person shareholders before their death and which are already binding on all shareholders, and cannot prevent the heirs from entering the company by amending the articles of association afterwards, otherwise the inheritance rights of the heirs will not be guaranteed. In addition, even if the shareholders' meeting of the company amends the exceptional provisions of the articles of association after the death of the natural person shareholder, the legal heirs should be notified to participate in and vote, because the articles of association of the company before the death of the natural person shareholder are the result of the joint resolution of all shareholders, and after the death of the natural person shareholder, if a shareholders' meeting is convened without notifying the heirs and the succession of shareholders' qualifications is excluded or restricted, the resolution of the shareholders' meeting or the amended articles of association of the company cannot reflect the will of all shareholders, and such amendment is an infringement of the inheritance rights of the legal heirs。
2. Suggestions for the design of the company's articles of association
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Judging from the current practice of companies in mainland China, disputes related to equity inheritance are on the rise. In order to avoid disputes, the issue of equity inheritance should be fully considered when formulating the company's articles of association, and the inheritance method should be agreed in advance to protect the company's interests to the greatest extent. The exceptions that can be made in the articles of association of the company include, but are not limited to, stipulating the subject of succession of shareholder qualifications, the time of succession, the method of succession, and the procedures that the heirs need to perform to obtain shareholder qualifications, and even excluding the successor's right to inherit shareholder qualifications, etc., which are all internal affairs of the company, and these exclusionary or restrictive provisions shall be effective on the premise that the articles of association of the company are legal and valid and do not violate the mandatory provisions of laws and regulations.
(1) Restricting the qualifications of multiple heirs to inherit shareholders
According to Article 1127 of the Civil Code, the right of inheritance is equal between "spouses, children and parents" in the first order of inheritance and between "siblings, grandparents and maternal grandparents" in the second order. Therefore, in the event of shareholder succession, the number of people who can exercise the right of inheritance is often multiple, and these entities will enjoy shareholder qualification according to the succession at the same time. However, after each heir is qualified as a shareholder, there is a risk that the number of members of the limited liability company will exceed 50. Therefore, it can be directly stipulated in the articles of association that only one of the heirs can inherit the shareholder qualification, so as to maintain the personal compatibility of the limited liability company to a certain extent, and also avoid the change of the company's form. Therefore, in the event of the death of a natural person shareholder, the designated heir qualifies as a shareholder. As to whether the other equity (investment) income of other heirs who have not inherited the shareholder qualification needs to be protected, it should be answered in the affirmative at the time of statutory succession. When the decedent has a will, it should be handled in accordance with the will, which is a matter of inheritance law and has nothing to do with the articles of association.
(2) Restricting heirs who do not meet the shareholder standards from inheriting shareholder qualifications
Based on the human compatibility characteristics of a limited liability company, the basis of cooperation between shareholders comes from comprehensive factors such as trust, ability, and resources among shareholders. In order to prevent the inheritance of shareholder qualifications by heirs who are incompetent shareholders and affect the mutual trust between shareholders and the stable operation of the company, the conditions that must be met for the qualifications of successor shareholders may be directly and clearly stipulated in the articles of association. For example, it is agreed that a person who has no or limited capacity for civil conduct and does not have the basic ability to make decisions and manage the management of the company shall not inherit the shareholder qualifications.
(3) Restricting the successors of shareholders who have not contributed capital to inherit the qualifications of shareholders
At the moment of the company's capital subscription system, the fact that the decedent does not actually contribute capital does not affect the inheritance of equity by the heir. Article 1161 of the Civil Code stipulates that the heir shall pay off the taxes and debts payable by the decedent in accordance with the law to the extent of the actual value of the inheritance. The part exceeding the actual value of the estate shall not be subject to voluntary repayment by the heirs. Therefore, if the heir is unwilling to give up the inheritance equity, the debts of the deceased should be paid off. However, if the heir inherits the equity and the inheritance is not sufficient to fully fulfill the decedent's obligation to contribute capital to the company, the heir may claim liability within the actual value of the inheritance, which will bring risks to the company. In view of this, when designing the articles of association, it can be directly stipulated that the premise of the successor to inherit the shareholder qualification is that the capital contribution obligation is fulfilled on behalf of the original shareholder. If the heir refuses to perform, it shall be deemed to have waived the qualification of the successor shareholder.
(4) Exclude the successor from inheriting the shareholder qualifications
It is clearly stipulated that when a shareholder dies, the heirs shall not inherit the shareholder qualifications, but can only inherit the property rights and interests of the equity, and at the same time clearly stipulate the treatment of the equity when the shareholder dies, such as capital reduction, company repurchase, shareholder acquisition, etc. Considering that with the accumulation of the company's assets, the company's equity value will gradually increase, and it may also decrease the company's equity value due to market fluctuations. It is slightly inappropriate for the articles of association to stipulate in advance the equity transfer or purchase price to be inherited, but it can stipulate the calculation standard of the equity transfer or purchase price, so as to prevent disputes arising from the inability to reach an agreement on the price issue when transferring or acquiring the inherited equity. For example, with reference to the company's net assets at the time of succession, the corresponding equity value is converted according to the equity appraisal value issued by a third-party appraisal agency, or the PE multiple of the company's net profit. These agreements are the expression of shareholders' autonomy of will under the framework of the Company Law, and reflect the design of the mechanism for shareholders to improve the company's human compatibility.
This article is for informational purposes only and does not represent the author's legal advice or interpretation of the law
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