COMPANY SHARES represent a significant amount of wealth in the economy. Shares can be held in both unlisted (private) companies and in listed (public) companies (for a discussion about companies, see China Business Law Journal, volume 3, issue 9: Company or enterprise).
This column discusses the nature of shares as property and when ownership of shares passes from one party to another party pursuant to an equity transfer agreement.
The position in common law jurisdictions, such as the Hong Kong Special Administrative Region, is first discussed. The position in mainland China is then examined. In the case of transfer of ownership, the discussion makes specific reference to the ongoing debate among legal scholars and others in mainland China as to the point at which ownership of shares in Chinese companies passes from a vendor to a purchaser.
Shares as property
In common law jurisdictions, shares are treated as personal property and can be transferred and dealt with as such. The Companies Ordinance in Hong Kong confirms this as follows:
134. Nature and transferability of shares
(1) A share or other interest of a member in a company is personal property.
(2) A share or other interest of a member in a company is transferable in accordance with the company’s articles.
Although recognised as personal property, company shares differ from other types of property and are unique in many ways. First, shares do not correspond directly to ownership of a ‘thing’ as in the case of other assets, such as apartment ownership, where the certificate of title represents ownership of the apartment.
Instead, shares confer rights on shareholders in respect of a company, which classifies as a legal person that can own property, enter into contracts and sue and be sued. Since a company is a legal person, the rights that shareholders exercise against a company are different from the rights that arise in relation to other assets.
In the case of a company, the most important rights conferred on shareholders are: the right to vote at shareholder meetings; the right to receive any profit (or dividend); the right to receive a distribution of any assets of the company after it is dissolved; and the right to transfer the shares to third parties (subject to any restrictions on transfer in the company’s articles of association and, in the case of listed companies, the rules of the stock exchange).
The right to vote (and thereby exercise a degree of control in respect of the company) and the right to transfer shares to third parties are similar to the rights that are enjoyed in respect of other assets.
However, the right to receive a dividend and the right to receive a distribution of any assets of the company after it is dissolved are more in the nature of an expectation than a right. This is because a dividend is payable only in the event that the company declares a dividend and there is no certainty that this will occur.
Further, the right to receive a distribution of any assets of the company after it is dissolved may have no value if the company is wound up and there are no remaining assets to distribute to shareholders after all of the company’s creditors have been paid.
The Civil Code of the People’s Republic of China has several provisions that relate to shares or equity. Article 125 provides that civil entities enjoy equity and other investment rights in accordance with the law. Article 440 recognises the proprietary nature of equity by providing that transferrable equity can be pledged.
However, equity does not fall into the category of immovable property or movable property. From a doctrinal perspective, ‘equity’ is generally treated as comprising both property rights and membership rights. Property rights include the right to receive dividends and the right to receive a distribution of residual property when the company is dissolved. Membership rights include the right to attend shareholders’ meetings and the right to vote.
Transferring share ownership in common law
In common law jurisdictions such as the Hong Kong Special Administrative Region and Australia, the legislation governing companies requires them to maintain a register of members (the term ‘members’ includes shareholders in the context of companies with a capital divided into shares). The Companies Ordinance in Hong Kong, for example, provides as follows:
627. Register of members
(1) A company must keep in the English or Chinese language a register of members.
(2) A company must enter in the register of members:
(a) the names and addresses of its members;
(b) the date on which each person is entered in the register as a member; and
(c) the date on which any person ceases to be a member.
(3) In the case of a company having a share capital, the company must enter in the register of members, with the names and addresses of the members, a statement of:
(a) the shares held by each member, distinguishing each share by its number so long as the share has a number; and
(b) the amount paid or agreed to be considered as paid on the shares of each member.
(4) A company must enter in the register of members the particulars required under subsections (2) and (3) within two months after the company has received notice of the particulars concerned.
Importantly, section 635 of the Companies Ordinance provides that: “In the absence of evidence to the contrary, the register of members is proof of any matters that are by this ordinance required or authorised to be inserted in the register.” These matters include the names of the company’s members.
Slightly different wording is adopted in Australia, where section 1072F(1) of the Corporations Act clarifies: “A person transferring shares remains the holder of the shares until the transfer is registered and the name of the person to whom they are being transferred is entered in the register of members in respect of the shares.” This makes it clear that legal (or formal) title to shares passes on registration of the transfer in the register of members.
In common law jurisdictions, however, a court applying the principles of equity may recognise that the beneficial interest in the shares has passed at an earlier point in time (for a discussion about the difference between the common law and equity, see China Business Law Journal, volume 3, issue 5: Law or equity?).
This earlier point often arises either when the purchase price is paid in full by the purchaser or when the contract is otherwise considered to be a valid and enforceable contract and a court would be willing to grant the purchaser an order of specific performance; namely, an order requiring the vendor of the shares to complete the share sale and transfer legal title in the shares to the purchaser.
Recognition of the purchaser as the equitable owner of shares is of great value to the purchaser because it means that the vendor holds the shares on trust for the purchaser. In addition, the purchaser’s proprietary interest in the shares can be protected by proprietary remedies.
If, for example, an innocent third party offers a higher price for the shares and the vendor enters into a second contract to sell the shares to a third party in breach of the first contract, the original purchaser under the first contract can obtain an injunction from a court to prevent the sale under the second contract.
In addition, if the sale to the innocent third party under the second contract has been completed and the third party has been recorded in the register of members, the original purchaser under the first contract may be able to claim that the vendor holds the proceeds paid by the third party for the purchase of the shares on trust for the original purchaser.
Transferring share ownership in mainland China
PRC law does not make express provision as to when a change of ownership occurs in respect of shares or equity in a company. This question has been the subject of extensive debate among legal scholars.
In the 2023 Revision of the Company Law, which came into effect on 1 July 2024, the following sentence in Article 86 appeared for the first time:
In the event of equity transfer, the transferee may claim the exercise of shareholder rights against the company from the time it is recorded in the register of shareholders.
Although the sentence clarifies that a purchaser may exercise shareholder rights against the company from the time it is recorded in the register of shareholders, it does not say that shareholders rights may only be exercised against the company from that time, or that the purchaser becomes the owner of the shares only from that time.
Accordingly, it has been argued by some scholars that the recording of the purchaser in the register of shareholders does not have a determinative effect. This is different from the legal effect of registration of immovable property rights (i.e. rights in respect of land), in respect of which the first paragraph of article 209 of the Civil Code provides as follows:
The creation, alteration, assignment, or extinguishment of immovable property rights shall become effective upon registration in accordance with law, and shall not take effect without registration, unless otherwise provided by law.
In addition, the new sentence does not resolve the question as to when a transfer of ownership occurs as between the vendor and the purchaser, and whether this is determined by agreement between the parties pursuant to the terms of the equity transfer agreement.
Various possibilities exist as to when a transfer of ownership occurs as between the vendor and the purchaser. These include the following possibilities:
- When the equity transfer agreement is signed;
- In accordance with the terms of the equity transfer agreement (i.e. when the equity transfer agreement provides that ownership will pass to the purchaser);
- When the purchase price for the shares is paid to the vendor by the purchaser;
- When the company records the name of the purchaser in the register of shareholders;
- When the transfer is recorded at the company registration authority (i.e. the State Administration for Market Regulation).
Based on a review of the academic literature, this columnist is of the view that, under the current law, the time at which the equity transfer becomes effective as between the vendor and the purchaser, both as a matter of contract and as a matter of property, is determined by the terms of the equity transfer agreement. If the equity transfer agreement provides that closing of the shares [股权交割] and the transfer of ownership [过户] will take place at a certain time, the equity transfer should be considered to take effect as between the vendor and the purchaser at that time.
Many legal scholars have called for law reform to clarify when ownership of shares passes under Chinese law. Some argue that the relevant time should be when the purchaser is recorded in the register of shareholders; others argue that the relevant time should be when the change of ownership is registered with the company registration authority.
Time will tell whether the position is clarified in the written law.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996 – 2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law. Andrew is currently Joint Associate Director of the Corporate Law and Financial Regulation Research Programme at the Melbourne Centre for Commercial Law and Honorary Associate Director (Commercial law) of the Asian Law Centre. Andrew has acted as a consultant to a broad range of organisations, regulators and governments in Australia and abroad. He served as Special Counsel and Acting General Counsel of the Australian Law Reform Commission between 2020 and 2024.
