Shareholders’ Rights During the First 90 Days After the Incorporation of a Joint-Stock Company
After establishing a joint-stock company (JSC), the founding shareholders of the JSC typically have 90 days from the date the Business Registration Certificate is issued (the Capital Contribution Period) to pay for the shares they subscribed to upon the establishment of the JSC (Subscribed Shares). Under the 2020 Enterprise Law, it is reasonable to assume that during the Capital Contribution Period, founding shareholders who have not fully paid for the shares they registered to purchase will retain all shareholder rights, including the right to transfer the unpaid shares. However, the drafting of the 2020 Enterprise Law may give rise to the view that during the Capital Contribution Period, founding shareholders only have voting rights.
The ambiguity arises from two provisions in Article 113 of the 2020 Enterprise Law:
Article 113.5 of the 2020 Enterprise Law stipulates that a person contributing capital to a Joint Stock Company becomes a shareholder of the Joint Stock Company as of the time when (i) that person completes payment for the subscribed shares and (ii) that person’s information is recorded in the shareholder register, except as provided for in Article 113.2 of the 2020 Enterprise Law; and
Article 113.2 of the 2020 Enterprise Law stipulates that during the capital contribution period, a shareholder’s voting rights shall be determined based on the number of shares they have subscribed to.
Reading these two provisions, one could argue that if a founding shareholder has not fully paid for the registered shares within the capital contribution period, by default, the founding shareholder will not be considered a shareholder under Article 113.5 of the 2020 Enterprise Law, and thus will have no shareholder rights (including voting rights), except for the shareholder rights granted to founding shareholders under Article 113.2 of the 2020 Enterprise Law. Since Article 113.2 of the 2020 Enterprise Law only addresses voting rights, voting rights are the sole rights granted to founding shareholders.
Such an interpretation of the law is inconsistent with the assumptions established in other provisions of Article 113 of the 2020 Enterprise Law and the operations of a Joint Stock Company as generally defined in other sections of the 2020 Enterprise Law. The aforementioned assumption is that, during the Capital Contribution Period, founding shareholders will have all shareholder rights even though they have not fully paid for the shares they have subscribed to. This can be found in the following provisions:
Article 113.2 of the 2020 Enterprise Law itself refers to founding shareholders as “shareholders” rather than “contributors”; therefore, it can be argued that (i) Article 113.2 of the 2020 Enterprise Law implies that even if founding shareholders have not fully paid for the shares they have subscribed to, they are still considered shareholders during the capital contribution period and thus possess all rights. shareholder rights and (ii) the fact that Article 113.2 of the 2020 Enterprise Law only refers to voting rights does not limit the scope of shareholder rights granted to founding shareholders during the Capital Contribution Period;
Article 113.4 of the 2020 Enterprise Law requires founding members who fail to pay for the registered shares in question to bear financial liability to the Joint Stock Company equal to the total par value of the registered shares until the Company’s charter capital is adjusted downward by the amount of unpaid registered shares. By stipulating the financial liability of the joint-stock company as the total par value of the subscribed shares (including the unpaid subscribed shares) for the founding shareholders, this provision implies that the founding shareholders are deemed to have paid for the subscribed shares during the capital contribution period. , and therefore, are considered shareholders and possess all shareholder rights during that period; generally, this would lead to numerous complications and unsatisfactory consequences in the application of the 2020 Enterprise Law if founding shareholders only have voting rights during the capital contribution period. For example, if founding shareholders do not have the right to convene a general meeting of shareholders, they would lose an important right to protect their interests; And
Interestingly, under Articles 47.2 and 47.5 of the 2020 Enterprise Law, founding members of a limited liability company are referred to as members and are deemed to have the rights and obligations of members (not limited to voting rights) corresponding to their committed capital contribution ratio.
