[Q&A] Share Transfers and Bona Fide Acquisition Rules
2025. 10. 11
Question: Can the system of bona fide acquisition be applied to the transfer of shares?
Answer: In summary, it can be applied. According to the provisions of Article 25, Paragraph 1 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' (III)", where a nominal shareholder disposes of shares registered in his/her name by means of transfer, pledge setting, or other methods, and the actual contributor requests the share disposal act to be invalid on the grounds that he/she holds substantive rights to the said shares, the People's Court may handle the matter with reference to the provisions of Article 311 of the "Civil Code".
Considering the provisions of Article 311 of the "Civil Code" collectively, the application of bona fide acquisition to a share transfer requires the following conditions to be satisfied. The transferee was in good faith when the real estate or movable property was transferred to him; that is to say, if the share transferee knew of the existence of a share holding arrangement between the nominal shareholder and the actual contributor and nevertheless failed to obtain the actual contributor's consent, the transferee would not constitute a bona fide acquisition. It was transferred at a reasonable price; that is to say, the price of the share transfer is in line with the market rate and is not manifestly excessive or low. Where the transferred real estate or movable property is required by legal provisions to be registered, registration has already been completed; where it is not required to be registered, it has already been delivered to the transferee. This means that at the stage where the shares have not yet been transferred, the anonymous shareholder (the actual contributor) may assert rights against the share transferee, and the original share transfer contract cannot continue to be performed. Simultaneously, the share transferee may claim damages against the nominal shareholder (the transferor). However, after the share transfer has been completed, the anonymous shareholder cannot recover the said shares and may only pursue the liability of the nominal shareholder based on the stipulations of the shareholding agreement.
During the share transfer process, the transferee should conduct sufficient due diligence to avoid, as far as possible, the occurrence of situations such as an unauthorised transfer by the nominal shareholder. Furthermore, with regard to the actual contributor, please be advised to reasonably design the shareholding scheme under the guidance of professionals and to set out clear agreements concerning the rights and obligations of the nominal shareholder, so as to reduce potential future risks.