How can Other Shareholder Handle the Situation if One Shareholder Transfers All or Part of His Qquity to a Third Party?

2020/1/8

The composition of shareholders in foreign-invested enterprises has a significant impact on the company's operations. Foreign-invested enterprises have higher characters based on shareholders. Mutual trust between shareholders can help enterprises overcome various difficulties in development and make the enterprise run smoothly and healthily. The change of shareholders will have a great impact on the enterprise. 

If one of the shareholders does not obtain the consent of the other shareholders, he partially or wholly transfers his shares to a third party other than the shareholders. When the transfer of the shares has an adverse effect, how can other shareholders safeguard their legal rights? The people's court will support a shareholder who claims the cancellation of the equity transfer contract if the equity transfer infringes on his preemptive right. If the shareholder fails to claim the preemptive right within one year after the date of signing the equity transfer contract, then the contract shouldn't be revoked.

The transferor or transferee have no right to claim for invalidation of the equity transfer contract if it infringes on other shareholders' preemptive right, and the court will not support such a claim.

The term 'transfer' mentioned here should only refer to 'sale', but not gift and/or inheritance. In other words, other shareholders cannot claim the preemptive right to the equity that is transferred by the way of gift or inheritance.

If the investors transfer equity to each other, they do not need consent of other shareholders, and other shareholders do not enjoy preemptive right.

The transfer of shares is an important issue for enterprises, and we recommend that foreign investors must hire a lawyer to consult relevant matters.