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The exercise of equity rights and the machinery of corporate governance both turn on shareholder status. Under the current Regulations on Civil Causes of Action, confirmation of shareholder status ranks first among the 28 sub-categories of company-related disputes.

The question of who qualifies as a shareholder routinely surfaces in cases concerning capital contribution, access to information, corporate resolutions, breach of directorial duties, capital increases and dissolution. In the more complex arena of corporate control battles, the tension between beneficial owners and nominee shareholders is commonplace and invariably central to the contest.

The judicial interpretation of the new Company Law currently under preparation by the Supreme People¡¯s Court is set to refine the principles governing this question. This article draws upon practical experience in resolving disputes over beneficial ownership to map out the relevant terrain.

Nominee shareholdings

A common practice is for the beneficial owner and the nominee shareholder to execute a written custody agreement to confirm that the former supplies the capital and retains the investment benefits, with the latter acting purely as the registered holder.

Yet commercial realities differ widely, and it is not uncommon for such arrangements to proceed without a direct written contract. Instead, they may be reflected obliquely through instruments such as holding certificates, unconventional agreement clauses, and tailored shareholding frameworks.

Where no written custody agreement exists, disputes tend to centre on evidence of actual capital contribution and participation in corporate governance. According to the Shanghai No. 2 Intermediate People¡¯s Court¡¯s Guidance on Recurring Issues in Nominee Shareholding and Shareholder Status Confirmation Cases, a custodial arrangement may be recognised if the beneficial owner has actually paid the capital contribution and has exercised shareholder rights including voting, claiming profit distributions, and engaging in management.

Among these, actual capital contribution carries particular weight. The same principle is endorsed in precedent case Xin 2302 Min Chu 1569 (2021), a shareholder status confirmation litigation initiated by Lan against Zhong and a mining company in Xinjiang.

The Exposure Draft of the Interpretation of the Supreme People¡¯s Court on Several Issues Concerning the Application of the Company Law offers a more systematic articulation of the test for establishing the authenticity of a nominee share-holding arrangement. It stipulates that the following factors should be subjected to careful scrutiny: (1) the existence of a genuine written custody agreement; (2) actual payment of capital contributions, the provenance of funds and the party¡¯s funding capacity; and (3) the presence of any special relationship between the parties.

Formalisation criteria

Under article 24 of the Provisions of the Supreme People¡¯s Court on Several Issues concerning the Application of the Company Law (III), the formalisation of a beneficial owner as a shareholder requires ¡°the consent of more than half of the company¡¯s other shareholders¡±. Article 28 of the Minutes of the National Courts Civil and Commercial Trial Work Conference builds on this foundation, supplementing it with the further condition that ¡°more than half of the other shareholders are aware of the actual capital contribution and have raised no objection to that person¡¯s exercise of shareholder rights¡±.

Building on the above-mentioned provisions, article 31 of the draft interpretation sets out two scenarios in which a beneficial owner may be formally recorded as a shareholder. The first is where ¡°the company, by shareholders¡¯ resolution, has recognised the beneficial owner¡¯s shareholder status¡±.

The second is where ¡°more than half of the other shareholders consent to the beneficial owner exercising shareholder rights, or more than half of the other shareholders know or should have known of the nominee arrangement and have raised no objection to the exercise of such rights¡±. With respect to the second scenario, the Supreme People¡¯s Court is also considering an alternative formulation that would raise the threshold from ¡°more than half¡± to ¡°unanimous¡± consent.

The first scenario anchors formalisation in a shareholders¡¯ resolution, marking a shift from the earlier ¡°shareholder consent¡± threshold. A corporate resolution constitutes an expression of the company¡¯s will and is bound by the Company Law, the articles of association and procedural rules governing shareholders¡¯ meetings.

This raises several practical questions that await further clarification. How should a shareholders¡¯ meeting be convened where shareholder status itself is in dispute? What voting and recusal rules apply? How should any resulting disputes over the validity of the resolution be handled? This approach also underscores that corporate governance mechanisms must function effectively throughout the process.

The choice between the two competing formulations in the second scenario ¨C ¡°more than half¡± versus ¡°unanimous¡± consent of the other shareholders ¨C betrays a certain tension in judicial policy. Recent mainstream judicial practice has generally inclined towards recognising the validity of nominee shareholding agreements provided they do not contravene mandatory provisions of law or administrative regulations, nor offend public order and good morals.

This serves to safeguard the legitimate interests of beneficial owners and secure fairness in individual cases. At the same time, however, the courts neither advocate nor encourage nominee arrangements. Clarity of ownership and alignment between registered and actual titles should remain the general principle.

Simply put, the first scenario entails express recognition by the company and its shareholders of the beneficial owner¡¯s shareholder status, whereas the second entails recognition ¨C whether explicit or implied ¨C by the other shareholders through their conduct. It remains to be seen whether the judicial interpretation of the new Company Law will preserve both avenues, and what specific criteria will be adopted.

Forecast

Nominee shareholding arrangements are situated squarely within the zone of tension between the principle of party autonomy and the need to safeguard corporate governance, the reliability of public registers and the protection of third-party reliance, a friction that renders such structures particularly susceptible to dispute. The anticipated judicial interpretation of the new Company Law will inevitably engage with this issue.

The draft version indicates that the rules for identifying nominee relationships are to be rendered more systematic, and that the threshold for formalising a beneficial owner¡¯s shareholder status may be elevated. Enterprises would do well to attend to these developments, the better to navigate the competing claims of efficiency and stability in their commercial arrangements.

Yi Xiangming is a partner and Yang Yue is a paralegal at Zhong Lun Law Firm