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As China¡¯s economy advances, companies have become the most common form of business entity. Given historical traditions and prevailing social norms, it is not unusual for one spouse to hold shares in a company while managing its operations. While much has been written about the division of shares acquired during marriage after a divorce, far less attention has been given to how premarital shareholdings should be treated.

Many assume that assets owned before marriage remain exclusively personal property, exempt from division in divorce. However, equity ownership is not a singular right but a composite of property and personal entitlements.

The property rights alone include dividends distributions, rights to new share offerings, and claims on residual assets. If these benefits accrue during the marriage, they may be classified as marital property and subject to division. Whether such rights constitute marital property, however, must be determined on a case-by-case basis.

Premarital shareholdings. Under article 1063 of China¡¯s Civil Code, property acquired before marriage remains the personal asset of the owning spouse. Article 31 of the Judicial Interpretations on the Marriage and Family Section of the Civil Code (I) further clarifies that premarital assets do not automatically convert into marital property over time ¨C unless both spouses agree otherwise.

Therefore, whether shares acquired before marriage constitute marital property depends primarily on whether there is any agreement between the spouses. If such an arrangement exists, it takes precedence. In the absence of any agreement, the shares remain the sole property of the original shareholder.

Appreciation and returns from premarital shares during marriage. Article 1062 of the Civil Code establishes that income derived from production, business operations or investments during marriage constitutes marital property. Article 26 of the Judicial Interpretations on the Marriage and Family Section of the Civil Code (I) stipulates that, except for fructus (yields and proceeds) and natural appreciation, returns generated from a spouse¡¯s premarital assets during marriage should be recognised as marital property.

In other words, whether the appreciation or income from premarital shares acquired during the marriage qualify as marital property depends on whether it constitutes ¡°fructus¡± or ¡°natural appreciation¡±.

In the post-divorce property dispute case of Tan v Lei (2020), the Supreme People¡¯s Court held that, as the company in question had neither developed the land nor engaged in any substantive business operations, the fluctuation in Lei¡¯s share value derived solely from market movements in the underlying property¡¯s value, not from business activities or reinvestment of profits.

Although Lei transferred the shares during the marriage, any premium realised at the time of transfer was deemed natural appreciation and should not be treated as marital property for division.

In the post-divorce property dispute case of Luo v Shen (2023), the court found that Luo, as an original shareholder of Lizhi Company, actively participated in the company¡¯s management and operations. The appreciation in the value of Luo¡¯s 90% shareholding was attributed to business activities and thus the increase in value during the marriage was deemed marital property.

It is illustrated that the key principle in determining whether the appreciation or income from premarital shares constitutes marital property is whether post-marital management or effort was involved. If the increase in value or income is linked to the business activities or management undertaken by either spouse during the marriage, it is considered marital property. If not, it remains personal property.

Notably, the division of dividend income in divorce proceedings is contingent on the income still existing at the time of divorce. In the above-mentioned case of Luo v Shen (2023), the court held that marital asset division applies only to existing property, not previously disposed assets, unless evidence proves malicious concealment or transfer.

Bank records showed the bonuses and dividends totalling RMB560,000 (USD78,000) received by Luo no longer existed at divorce, having been spent on household expenses and child support. As Shen failed to demonstrate any intentional dissipation of these funds by Luo, the court rejected Shen¡¯s claim for division.

Expansion of premarital shareholdings during marriage. When a spouse holds shares acquired before marriage, these shares may not only appreciate or generate income during the marriage, but also be subject to capital increases. Whether the additional shares acquired through such increases constitute marital property depends on the source of the investment.

If the capital increase is funded by marital assets, and there is no clear written agreement between the spouses to the contrary, the newly acquired shares should be regarded as marital property.

In the post-divorce property dispute case of Ma v Fu (2020), the court ruled: ¡°Regarding whether the 0.5% stake in Qingji Company, acquired by Ma and Fu through a capital increase during their marriage, constitutes marital property, the facts established in the Jingmen Intermediate People¡¯s Court¡¯s civil judgment ¡­ confirm that this 0.5% shareholding was acquired with joint funds during the marriage and should therefore be recognised as marital property.¡±

In the case that a company increases its capital using undistributed profits or capital reserves, it must first be determined whether these profits or reserves represent the natural appreciation of shares during the marriage.

If the undistributed profits or capital reserves are linked to the business management activities of one spouse during the marriage, they should be considered marital property. Otherwise, they should be regarded as the individual property of the shareholder.

In summary, shareholdings and related property rights acquired by one spouse before marriage should not be automatically classified as personal assets. Instead, a comprehensive assessment should be made, taking into account whether either spouse contributed capital, time or effort to the management or operation of the business during the marriage.

Xu Xiaoyan is a senior counsel and Liu Wei is an associate at Anli Partners.