Introduction
The new "Company Law," which will be implemented on July 1, 2024, makes significant revisions to the current 2018 "Company Law." Among these, Article 34 modifies the phrase "cannot be opposed to third parties" from Article 32, Paragraph 3 of the 2018 "Company Law" to "cannot be opposed to good faith counterparties." In my practice representing shareholding disputes, I often encounter situations where the actual investor and the registered shareholder are inconsistent. In the context of shareholding on behalf of others, when the nominal investor disposes of the shares externally, Article 25 of the "Supreme People's Court's Interpretation on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III)" stipulates that the validity of such disposition should be subject to the good faith acquisition system. However, in practice, disputes often arise between the general creditors of the nominal investor and the actual investor regarding the ownership of the shares held on behalf of others. The law and judicial interpretations do not clearly state to whom the shares belong in such cases or whether the actual investor can request to exclude enforcement during the compulsory execution of the shares held on behalf of others. In this situation, there is significant controversy in judicial practice due to different understandings of the opposition effect of the registration matters under the current "Company Law" Article 32. I believe that the revision from "third parties" to "good faith counterparties" in the new "Company Law" will greatly help clarify such disputes.
I. Disputes Between the General Creditors of the Nominal Investor and the Actual Investor Under the Current Company Law
In the context of shareholding on behalf of others, when the general creditors of the nominal investor (nominal shareholder) request the compulsory execution of the shares held on behalf of others, how can the rights and interests of the actual investor be protected? Can the actual investor request to exclude compulsory execution? There is currently no consensus in judicial practice.
The "Guidelines for Handling Objections to Enforcement and Objection Litigation Cases (III)," issued by the Jiangsu High Court and effective from June 10, 2022, Article 17 states, "If the enforcement court implements compulsory execution on the shares registered in the name of the person subject to enforcement, and the third party claims to be the real shareholder or actual investor and proposes an objection to the execution, requesting to exclude the execution or to confirm their shareholder status at the same time, it will not be supported. If the third party files an objection lawsuit to the execution, and the evidence provided can fully prove that the applicant for enforcement knew or should have known that they were the hidden shareholder or actual investor, it should be supported; otherwise, it will not be supported." The "Guidelines for the Trial of Objection Litigation Cases," issued by the Jiangxi High Court and effective from June 21, 2019, Article 38 states, "If the people's court enforces the shares registered in the name of the person subject to enforcement, and the third party claims to be the actual investor and files an objection lawsuit to the execution, requesting to exclude the execution, it will not be supported."
The Heilongjiang High Court in the "Answers to Several Issues in the Trial of Objection Litigation Cases" believes that "in the enforcement case, if the applicant for enforcement finds the shares registered in the name of the person subject to enforcement and applies to the court for compulsory execution of the shares, and the third party claims that the person subject to enforcement is only the nominal holder of the shares, and they are the actual right holder of the shares, the compulsory execution should not be carried out." The Shandong High Court in the "Answers to Several Issues in the Trial of Company Dispute Cases," effective from July 17, 2018, Article 6 also stated, "If the creditor of the nominal shareholder applies for the execution of the general debt formed with the nominal shareholder due to the loan relationship, and the creditor has not engaged in any civil legal acts involving share transactions with the nominal shareholder, from the perspective of the principle of right appearance, the creditor at this time is not a good faith third party who needs to be protected based on the trust in the right appearance, so their debt claim cannot be protected with priority over the actual right holder."
Therefore, the Jiangxi High Court and Jiangsu High Court tend to believe that in the context of shareholding on behalf of others, when the general creditors of the nominal investor request the compulsory execution of the shares of the nominal shareholder, the hidden shareholder's request to exclude the execution on the grounds that they are the actual investor will not be supported. The Heilongjiang High Court and Shandong High Court tend to believe that the actual investor can exclude the compulsory execution of the general creditors of the nominal shareholder through the objection lawsuit to the execution.
In addition to the inconsistent views in the guiding opinions issued by some high courts on this issue, the opinions in the judgment documents of local high courts and the Supreme Court are also inconsistent. Civil judgment books such as (2019) Supreme Court Civil Rehearing No. 46 and (2021) Shanxi Civil Final No. 59 believe that the actual investor has no right to exclude compulsory execution. Civil judgment books such as (2018) Supreme Court Civil Application No. 5464, (2015) Shandong Commercial Final No. 307, (2019) Supreme Court Civil Application No. 2978, and (2016) Zhejiang 06 Civil Final No. 237 hold the opposite view.
Through case research, I found that the key disagreement between the two views is the issue of the application boundary of the principle of commercial appearance, that is, whether the general creditors of the nominal investor are the good faith third parties in Article 32, Paragraph 3 of the 2018 "Company Law."
One view believes that the general creditors of the nominal shareholder who are not based on the disposition of shares belong to "third parties," and they have a trust interest in the company's registration information. Article 32 of the 2018 "Company Law" is very clear that the company should register the name or title and the amount of capital contribution of the shareholders with the company registration authority, and if the registration matters change, the change registration should be processed. If the registration or change registration is not processed, it cannot be opposed to third parties, and the shareholders who are registered according to the law have public notice effect externally. From the perspective of trust interest protection, once the statutory matters are registered, they generate credibility, and the registration matters are presumed to be true, accurate, and effective. Good faith third parties who act based on trust in the registration are protected by law, even if the registration matters are not true, accurate, and consistent with the trust of the third parties, good faith third parties can also claim rights according to the records of the registration book. As long as the trust of the third party is reasonable, the trust interest of the third party should be protected by law with priority. Cases such as (2018) Supreme Court Civil Rehearing No. 325, (2019) Supreme Court Civil Rehearing No. 99, and (2019) Supreme Court Civil Rehearing No. 46 are representative.
The other view believes that the "third parties" stipulated in Article 32, Paragraph 3 of the 2018 "Company Law" only refer to the counterparty who directly transacts with the registered shares and does not include the creditors of the nominal shareholder who are not based on the disposition of shares. The principle of commercial appearance is essentially a principle that measures the conflicting interests between the true right holder and the appearance trustor in specific occasions and should be applied cautiously. In the case of inconsistency between the appearance rights and the actual rights, according to the principle of commercial appearance, the civil legal acts of the good faith third party who acts with the nominal right holder based on trust in the appearance rights are protected by law with priority. However, if the creditor of the nominal shareholder applies for the execution of civil legal acts that are not based on share transactions, from the perspective of the principle of commercial appearance, the creditor at this time is not a good faith third party who needs to be protected based on the trust in the appearance rights, so their debt claim cannot be protected with priority over the actual right holder. Cases such as (2019) Supreme Court Civil Application No. 2978 and (2018) Supreme Court Civil Application No. 5464 are representative.
Accordingly, there is currently no consensus on whether the general creditors of the nominal investor are the good faith third parties in Article 32, Paragraph 3 of the 2018 "Company Law." The new "Company Law" Article 34 modifies the phrase "cannot be opposed to third parties" in Article 32, Paragraph 3 of the 2018 "Company Law" to "cannot be opposed to good faith counterparties," which seems to challenge the first view.
II. From "Third Parties" to "Good Faith Counterparties"
Article 32, Paragraph 3 of the 2018 "Company Law": The company shall register the name or title of the shareholder with the company registration authority; if the registration matters change, the change registration should be processed. If the registration or change registration is not processed, it cannot be opposed to third parties.
Article 34 of the new "Company Law": If the company's registration matters change, they should be registered according to the law. If the company's registration matters are not registered or not changed, they cannot be opposed to good faith counterparties.
Both Article 32, Paragraph 3 of the 2018 "Company Law" and Article 34, Paragraph 2 of the new "Company Law" stipulate the opposition effect of the registration matters. We notice that Article 34, Paragraph 2 of the new "Company Law" modifies "cannot be opposed to third parties" to "cannot be opposed to good faith counterparties." In fact, since the revision of the "Company Law" in 2021, the three draft opinions have adopted the expression of "good faith counterparties."
In addition, we notice that the new "Company Law" appears four times with "good faith counterparties," in addition to the aforementioned Article 34, Paragraph 2, there are also Article 11, Paragraph 2, Article 28, Paragraph 2, and Article 67, Paragraph 3.
Article 11, Paragraph 2: The restrictions on the powers of the legal representative by the company's articles of association or the shareholders' meeting shall not be opposed to good faith counterparties.
Article 28, Paragraph 2: If the resolution of the shareholders' meeting or the board of directors is declared invalid, revoked, or confirmed not to be established by the people's court, the civil legal relationship formed by the company with the good faith counterparty according to the resolution shall not be affected.
Article 67, Paragraph 3: The restrictions on the powers of the board of directors by the company's articles of association shall not be opposed to good faith counterparties.
Among them, Article 11, Paragraph 2, which stipulates the consequences of the behavior of the legal representative, absorbs the provisions of Articles 64 and 65 of the "Civil Code," "If the registered matters of a legal person change during its existence, it shall apply for change registration with the registration authority according to the law," and "If the actual situation of the legal person is inconsistent with the registered matters, it shall not be opposed to good faith counterparties."
I believe that the introduction of the concept of "good faith counterparties" in the new "Company Law" intends to be consistent with the "Civil Code." There is no expression of "good faith counterparties" in the 2018 "Company Law," and the expression of "counterparties" is more common in the "Civil Code." Tracing back further, it is in the "General Principles of Civil Law." The Supreme Court's "Understanding and Application of the Minutes of the National Court Civil Trial Work Conference" in explaining the relationship and application between the "General Principles of Civil Law" and the "Company Law" mentioned that "Article 32, Paragraph 3 of the 'Company Law' stipulates that 'if the registration or change registration is not processed, it cannot be opposed to third parties,' while Article 65 of the 'General Principles of Civil Law' corrects 'cannot be opposed to third parties' to 'cannot be opposed to good faith counterparties.' After checking the relevant legislative reasons, the provisions of Article 32, Paragraph 3 of the 'Company Law' should be replaced by the provisions of Article 65 of the 'General Principles of Civil Law.'" Therefore, from the legislative process, Article 65 of the "General Principles of Civil Law" intended to correct the phrase "cannot be opposed to third parties" in Article 32, Paragraph 3 of the 2018 "Company Law" to "cannot be opposed to good faith counterparties," and the "Civil Code" continued the expression of the "General Principles of Civil Law," and the revised new "Company Law" is to be consistent with the "Civil Code."
Since the concept of "good faith counterparties" in the new "Company Law" is intended to be consistent with the "Civil Code," I believe that the understanding of this concept should start from the "good faith counterparties" in civil law. Regarding the definition of "counterparties," in civil and commercial substantive law, "counterparties" generally refer to one party in a contract relationship and are specific. In the "Civil Code," the general provisions of the sixth chapter, section two, "Meaning Expression," use the terms "actor" and "counterparty" to refer to the parties of the meaning expression, that is, for the two parties of the same transaction behavior, the "Civil Code" calls one party "actor" and the other party "counterparty," that is to say, "counterparty" is relative to the other party of the same transaction behavior - "actor." The judgment of whether the "counterparty" is "good faith" mainly depends on the "Civil Code" and the relevant judicial interpretations of the Supreme Court. Article 7 of the "Supreme Court's Interpretation on the Application of the 'Civil Code of the People's Republic of China' on Relevant Guarantee Systems" provides two dimensions of examination, one is that the counterparty "does not know and should not know" the matters beyond the authority, and the other is that the counterparty "has fulfilled the reasonable review obligation." Therefore, in general, "good faith counterparty" refers to the transaction counterparty who is unaware or should not be aware of the restrictions on the right of representation and has fulfilled the reasonable review obligation. There are also different academic views on the concept of "third parties," and scholars of our country's legislative organs believe that the "third parties" in civil law refer to specific persons who have a certain legal relationship with one party outside the contract parties.
Therefore, from the legislative process and the understanding of the text, I believe that the concept of "good faith counterparties" narrows the scope of the "cannot be opposed" personnel compared to the concept of "third parties." Based on this subtle change, I believe that the "counterparty" in Article 34, Paragraph 2 of the new "Company Law" should be more inclined to be understood as the other party corresponding to the actor in the same commercial transaction relationship, that is, the contract party. Accordingly, in the case of shareholding on behalf of others, it should be inclined to be interpreted as the third party who engages in share transactions with the registered right holder based on trust in the appearance of rights.
III. The Hierarchy of Rights Protection for the General Creditors of the Nominal Investor and the Actual Investor Under the New "Company Law"
There are many controversies in judicial practice on how to understand and apply Article 32, Paragraph 3 of the current 2018 "Company Law," but the new "Company Law" is about to be implemented, and Article 34 is more inclined to subtly change the issue from "cannot be opposed to third parties" to "cannot be opposed to good faith counterparties" compared to the 2018 "Company Law." I believe that the general creditors of the nominal investor in the shareholding on behalf of others relationship, who are not the creditors engaged in share transactions with the nominal investor, do not belong to the "good faith counterparties" stipulated in Article 34, Paragraph 2 of the new "Company Law," and their rights protection hierarchy is not necessarily higher than that of the actual investor. The main reasons are as follows:
First, the good faith counterparty specifically refers to the counterparty who engages in share transactions with the nominal investor, which obviously narrows the scope of the personnel who cannot be opposed. According to the views of the Supreme Court on the "Understanding and Application of the Minutes of the National Court Civil Trial Work Conference," the counterparty only applies to the contract relationship, "according to the principle of contract relativity, in a contract relationship (A-B), both parties are 'counterparties' to each other. The distinction between good faith counterparties and malicious counterparties is: when one party (A) has a reason that affects the validity of the contract (no right of disposition, exceeding the power of representation, exceeding the power of agency, exceeding the scope of business), the other party (B) is 'unaware' of this reason and engages in transactions, which belongs to 'good faith counterparties'; on the contrary, if the other party (B) is 'aware' of this reason, it belongs to 'malicious counterparties'." In the shareholding on behalf of others relationship between the nominal investor and the actual investor, the shares held on behalf of others cannot be opposed to good faith counterparties, and since the counterparty applies to both parties in the contract relationship, the general creditors of the nominal investor are obviously not the contract counterparties who engage in share transactions with the nominal investor, so they do not belong to the good faith counterparties stipulated in Article 34, Paragraph 2 of the new "Company Law."
Second, starting from the original intention of the principle of commercial appearance, in the transaction relationship between the nominal investor and its general creditors, since the transaction is not based on shares as the subject of the transaction, from the perspective of the general person, the creditor will not have a trust relationship with the shares outside the transaction. Since the basis for the protection of trust interest is lost, it is far away from the original intention of the principle of commercial appearance, so in the case of shareholding on behalf of others, the general creditors of the nominal investor should not be interpreted as "good faith counterparties."
Third, it is necessary to emphasize and protect the actual ownership of the property. In the case of shareholding on behalf of others, the legal rights and interests of the actual investor should be protected, and protecting the legal rights and interests of the actual investor will not damage the interests of the general creditors of the nominal investor. If the scope of application of the principle of commercial appearance is expanded indefinitely, it may increase more formal litigation, so in this situation, it is more necessary to judge the actual ownership of the property.
Fourth, if the "good faith counterparty" is expanded to include the general creditors of the nominal investor, it will cause more substantial unfairness. In the case where the nominal investor does not actually contribute capital, the shares of the nominal investor are compulsorily executed, which is actually an increase in the responsibility property of the nominal investor, the general creditors of the nominal investor obtain improper benefits, the actual investor suffers losses, and it is very likely to cause the abuse of the principle of commercial appearance.
In the commercial environment, we should admit that shareholding on behalf of others objectively has a certain positive role in economic development. Although commercial interests and legal risks coexist, commercial interests and legal risks should be adapted to each other within a certain range. The legal risks undertaken by the actual investor in shareholding on behalf of others should not be expanded to cover the general debt and credit of the nominal shareholder.
IV. Conclusion
The introduction of the "Minutes of the National Court Civil and Commercial Trial Work Conference" in 2019 stated in the preface: "From the perspective of current legal rules, the principle of appearance is an exception set to protect transaction security and is generally applicable to transaction behaviors that reasonably trust the appearance of rights or the appearance of meaning expression. The relationship between the actual right holder and the nominal right holder should focus on the actual ownership of the property, rather than simply depending on the public appearance. In summary, in judicial practice, it is necessary to accurately grasp the scope of application of the principle of appearance and avoid generalization and abuse," which has actually given some enlightenment to legal practitioners, and cannot be solely based on the principle of appearance. The new "Company Law" Article 34, Paragraph 2, from "third parties" to "good faith counterparties," contains the deep meaning of the legislator and should also be implemented in judicial practice. I believe that there is a trend of narrowing the scope of application of the principle of appearance. Of course, each case has its own specific facts and details, so it is necessary to analyze each case specifically and cannot be generalized.
Since the "Company Law" has not been officially implemented yet, this article is only an exploration of views.
