Shareholder exits are common in limited liability company operations, with complex underlying causes. From an individual perspective, these may stem from financial needs or career shifts. Internally, incompatible business philosophies, chaotic management, and imbalanced profit distribution often prompt shareholders to consider leaving. Externally, factors cutthroat industry competition, economic downturns, and regulatory changes can equally drive shareholders to seek new opportunities.
Regardless of the reasons, shareholders must exit in accordance with laws and regulations to ensure a smooth and orderly process. Among various exit methods for shareholders, voluntary transfer of company equity is the most common and widespread approach. This article will provide a detailed introduction to this method.
I. The object of equity transfer
Shareholders can transfer equity either within the company by transferring their shares to familiar "old partners" or by seeking sui transferees outside the shareholder circle. This is akin to a business deal you can choose to collaborate with existing acquaintances or explore new partnerships.
Ii. Equity transfer process
It should be noted here that the articles of association are the "constitution" of the company. If there are special provisions on equity transfer in the articles of association, they should be followed naturally. However, if there are no special provisions in the articles of association, they should be implemented in accordance with the provisions of the company law, that is:
(I) Internal transfer process
1. The transferring shareholder and the internal transferee are in agreement and reach an agreement on the transfer.
2. Both parties sign the equity transfer contract, and the transferee pays according to the agreement.
3. Pay relevant taxes and fees according to law.
4. Complete the industrial and commercial change registration, and then the internal equity transfer is successfully completed.
(2) Transfer process
1. The transferring shareholder and the external transferee reach an agreement on the transfer.
2. The transferring shareholder shall notify the other shareholders in writing of the number, price, payment method and time limit of the equity transfer (the other shareholders shall have the right of first purchase under the same conditions).
3. If other shareholders do not reply within 30 days from the date of receiving the notice or do not exercise the preemptive right under the same conditions, the transferring shareholder may sign a share transfer contract with the external transferee, and the transferee shall pay according to the agreement.
4. Pay relevant taxes and fees according to law.
5. Complete the industrial and commercial change registration, and successfully complete the equity transfer to the outside world.
III. Key factors affecting the validity of foreign equity transfer contracts
If the transferor wants to exit the company smoothly, there is a minefield that must not be stepped on, which is not to infringe the preemptive purchase right of other shareholders, and this is mainly reflected in the "notice" to other existing shareholders is legal.
The so-called "illegal notice", the author believes that mainly includes the following categories:
1. No notice at all;
2. Improper notice: such as inappropriate way of notice, incomplete content of notice, insufficient exercise period given to other shareholders for less than 30 days;
3. False and untrue contents of the notice: such as fraud or malicious collusion with external transferees such as falsely reporting the equity transfer price or adding restrictive conditions for equity transfer when issuing the notice.
Judicial practice shows that if the first two scenarios of failure to notify or improper notification occur, the external equity transfer contract remains generally valid. However, when encountering the third scenario, the validity of the equity transfer contract must be comprehensively evaluated in accordance with the provisions on contract validity under the Civil Code of the Peoples Republic of China. This comprehensive assessment determines whether the contract is valid, revocable, or invalid.
When a transferring shareholder unilaterally notifies other shareholders (without the external transferees knowledge) through fraudulent means, if other shareholders subsequently sign a share transfer agreement with the transferring shareholder exercising their preemptive right to purchase under equivalent conditions, such agreement is highly ly to be revoked. However, if other shareholders fail to exercise their preemptive right and the transferring shareholder still enters a share transfer agreement with the external transferee, the agreement shall generally remain valid.
the transferring shareholder and the external transferee collude in bad faith to damage the legitimate rights and interests of other shareholders, the equity transfer contract signed thereby shall be invalid in principle.
IV. There is still a risk that the effective equity transfer contract will be terminated
Whether other shareholders of the company waive their preemptive purchase rights plays a crucial role in the smooth execution of equity transfer agreements. If other shareholders relinquish their rights, the court may support the external transferees claims regarding continued contract performance, equity delivery, and business registration procedures. However, if other shareholders insist on exercising their preemptive purchase rights, the equity transfer agreement between the transferring shareholder and the external transferee may ultimately be terminated due to unachievable contractual objectives.
As for the external transferee, if the equity transfer contract is terminated because it cannot be performed and the purpose of the contract cannot be realized, the transferee may request the transferring shareholder to return the equity transfer payment, compensate for losses or bear the liability for breach of contract.
V. Suggestions to the transferring shareholders
In order to avoid the possible disputes in the future, the transferring shareholder must strictly comply with the legal provisions to "inform" other shareholders. The main ones are:
1. Notify other shareholders of the number, price, payment method and time limit of the equity transfer in a complete manner, and if possible, inform other shareholders of the proposed text of the equity transfer contract;
2. The notification method may be chosen to notify each shareholder separately or to "inform" all shareholders at the shareholders meeting. However, no matter which method is used, written records shall be kept for future verification.
3. The "30-day reply period" stipulated by law cannot be shortened, that is, the minimum period of 30 days should be given to other shareholders to exercise their rights.
Special legal services for shareholders to exit the company
Tianyu Law Firm provides special legal services for shareholders to exit the company, which mainly include the following aspects:
1. Legal analysis and program design of exit methods;
2. Drafting and reviewing legal documents;
3. Procedure compliance and risk control;
4. Dispute resolution and litigation/arbitration representation, etc.
Through the above comprehensive and professional special legal services, we are committed to providing a one-stop solution for shareholders to withdraw from the company, so that shareholders can exit the company safely and smoothly in a complex legal environment.
