Is the Contract Between the Actual Controller and the Nominal Shareholder Valid?

2020/1/8

In the name of others, the actual controller actually contributed capital to the enterprise by himself. The actual controller controls the operation of the enterprise through nominal shareholders. Generally, a contract called a nominee agreement is concluded between the actual controller and the nominal shareholder. The contract stipulates that one party invests to a FIE actually and the other party acts as the nominal shareholder of the FIE. Is such the contract valid? 

If this contract is in line with the laws, this contract should be valid.  However, has the contract not been effective or invalid without the approval of the foreign-invested enterprise approval authority? It is still valid. Chinese law allows the existence of such nominee agreements. If the real investor requests the nominal shareholder of the FIE to perform the corresponding obligations according to the agreement, the court should support such claim.

In the event that both parties haven't agreed to the distribution of benefit, the court should support the real investor's claim for the income from the FIE. Where the nominal shareholder of a FIE claims the real investor to pay the necessary remuneration, the court should consider to support it.

However, the equity relationship and the debt relationship are different in law. In practice, many nominal shareholders overtly agree but covertly oppose, resulting in damage to the interests of the actual controller. We recommend that foreign investors should consider consulting with a Chinese lawyer when investing in a holding agreement to grasp the risks of equity holding.