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How Can Foreign Investors Personally Hold the Shares Previously Held by Others on Their Behalf?

Sun, 06 Jun 2021
Categories: Insights



Foreign investors can request the court to confirm their shareholder status, as shown in Carson Junping Cheng v. Shanghai Niuxinda Import & Export Co., Ltd.(2020), addressing a typical need after China’s Foreign Investment Law lifts certain restrictions.

In order to avoid regulation on foreign investment, some foreign investors once let others hold shares on their behalf. After the Chinese government relaxed the regulation, they can now request the court to confirm their shareholder status.

The Chinese Court confirmed the feasibility of the above practice in Carson Junping Cheng v. Shanghai Niuxinda Import & Export Co., Ltd. (上海纽鑫达进出口有限公司).

In May 2020, the Shanghai First Intermediate People’s Court rendered a final judgment, confirming the shareholder status of foreign investor Carson Junping Cheng.

I. Case background

On 10 Nov. 2009, Carson Junping Cheng, an American citizen, signed an agreement with two Chinese natural persons to set up Niuxinda, a trading company in Shanghai, agreeing that the three parties shall all be shareholders, with Cheng holding 51% equity.

According to the then restrictions on foreign investment, Chinese natural persons could not establish joint ventures with foreign investors. Therefore, the three parties agreed to set up the company in the name of the two Chinese investors, who then held the shares of Cheng respectively.

Later on, after the restrictions were lifted in China, Cheng requested to hold his shares personally, but was refused by the two Chinese investors.

Therefore, Cheng filed a lawsuit with the court for confirmation of his shareholder status and re-registration of the shares under his name.

On 2 Jan. 2020, the Pudong New Area Primary People’s Court of Shanghai rendered a first-instance judgment in favor of Cheng. See the civil judgment [(2019) Hu 0115 Min Chu No. 6248] ((2019)沪0115民初6248号) for details.

On 14 May 2020, the Shanghai First Intermediate People’s Court rendered a final judgment, upholding the first-instance judgment. See the civil judgment [(2020) Hu 01 Min Zhong No. 3024] ((2020)沪01民终3024号) for details.

II. Court views

The first-instance court supported Cheng’s request for the following reasons:

First, under the current Chinese law, foreign investors can act as shareholders in Chinese companies just like Chinese natural persons. 

The above-mentioned trading company was established in 2009, a time when the Law on Chinese-Foreign Joint Ventures (中外合资经营企业法) was applicable to the foreign investment. As stipulated in Article 1, “Foreign companies, enterprises, and other economic organizations or individuals … may establish joint ventures with Chinese companies, enterprises or other economic organizations”, the Chinese side did not include Chinese natural persons. However, the said Law had been abolished on 1 Jan. 2020.

The currently applicable law, the Foreign Investment Law (外商投资法), which came into effect as of 1 Jan. 2020, imposes no such restrictions. Article 3 of the Regulations for the Implementation of the Foreign Investment Law (外商投资法实施条例) further clarifies that “other investors” mentioned in Article 2 of the Foreign Investment Law include Chinese natural persons.

Therefore, there is no such legal regulation prohibiting foreign investors from acting as shareholders in Chinese companies now, that is, foreign investors can establish foreign-invested enterprises with Chinese natural persons.

Second, under the current Chinese law, Cheng’s investment in the trading company subject to no restriction/approval.

After the Foreign Investment Law becomes effective, China implements an administration system of pre-establishment national treatment plus a negative list, which means China gives national treatment to foreign investment outside the negative list.

In this case, the first-instance court wrote to the Shanghai Municipal Commission of Commerce, which then replied: “the field engaged in by Niuxinda does not fall under the scope of the Special Administrative Measures for Foreign Investment Access (the Negative List). There is no legal obstacle for us to handle the filing procedures of registering Carson Jun Ping Cheng as the shareholder of Niuxinda and changing Niuxinda’s company nature into a foreign-invested one.”

Therefore, there is no need for Cheng to go through special examination and approval procedures and there is no legal obstacle when Cheng requests to re-register himself as a shareholder of Niuxinda.

Accordingly, the first-instance court held that since the regulation on foreign capital had been relaxed, as a foreign investor, Cheng could reclaim the shares held by Chinese investors on his behalf.

III. Our comments

For a long time, due to China’s approval system in foreign investment, many foreign investors will entrust Chinese investors to hold their shares on their behalf in order to avoid regulation.

If a foreign investor requests to hold the shares himself, the court will review the request according to a judicial interpretation issued by the Supreme People’s Court (SPC) in 2010. [1]

According to the judicial interpretation, the foreign investor’s request will be supported by the court as long as the following three conditions are all met: 

(1) the de-facto investor has already made an investment; 

(2) other shareholders recognize the shareholder status of the de-facto investor; and 

(3) the court or the parties concerned have obtained the consent of the foreign-invested enterprise examination and approval authority on changing the de-facto investor into a shareholder during litigation.

However, the judicial interpretation was formulated based on the previous foreign investment regulation rules which have now been replaced by the Foreign Investment Law promulgated in 2019. So, what should the court do now?

Judge Huang Xin (黄鑫), the judge of the first-instance court, published an article commenting on this case.[2] In his opinion, the above three conditions should be changed to: 

(1) the de-facto investor has already made an investment;

(2) more than half of the shareholders other than the nominal shareholder recognize the shareholder status of the de-facto investor; and

(3) for investment areas covered by the Negative List, the court or the parties concerned shall obtain the consent of the competent authority for foreign-invested enterprise administration on changing the de-facto investor into a shareholder during litigation; for investment areas outside the Negative List, no consent from the competent authority for foreign-invested enterprise administration is required.


[1] 《关于审理外商投资企业纠 纷案件若干问题的规定(一)》

[2] 黄鑫.外籍隐名股东要求显名的审查标准[J].人民司法,2020(23):64-67.


Contributors: Guodong Du 杜国栋 , Liu Qiang 刘强

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