Shareholders Relationships

In most jurisdictions, shareholders are given the option to freely organize their relationships through the adoption of shareholders agreements. In China however, the rigidity of the PRC Company Law and the required prior approval of the competent Chinese authorities, deprive shareholders agreements from their main advantages.
For instance, in WFOEs and ECJ (which are the most common forms of FIEs), voting rights and dividend distributions shall be allocated in proportion to shareholders’ respective equity contributions. It is therefore not possible under PRC law to adopt preferential classes of shares and/or voting agreements.
In addition, in practice, it is very unlikely that the competent Chinese authorities will approve the adoption of extraordinary provisions. Still, to be enforceable, shareholders agreements shall be approved and registered by the said authorities.
This is one of the reasons why the interposition of a Hong Kong holding company is often suggested to foreigners investing with several partners. Indeed, corporate rules in Hong Kong, which is a traditional common law jurisdiction, are more flexible in comparison with those in mainland China. Therefore, partnerships can be more efficiently fashioned at the Hong Kong level and backed up by a shareholders agreement which can validly provide preferential dividends and/or voting rights, organize various exit scenarios, adopt non-competition provisions, management arrangements, etc. It should also be noted that a shareholders agreement concluded in Hong-Kong can be subject to either Hong Kong law or another jurisdiction’s law (French law for example).

October 2015

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