A son sues his father—what drama is Li Guoqing's family stirring up now?

Compiled from: China News Service, Huanqiu.com, 'People's Justice (Cases)' 2019 Issue 17
 
Case review
On the evening of August 9, 2020, Dangdang founder Li Guoqing posted on his personal Weibo that he and Yu Yu were sued by their son, with the aim of asking the court to confirm the validity of the agreement for holding Dangdang shares on their behalf. According to previous disclosures by Dangdang, Yu Yu holds 52.23% of the shares, Li Guoqing holds 22.38%, their child holds 18.65% (held on their behalf by the parents), and two management partnership enterprises hold 3.58% and 2.93% of the shares, respectively. The incident quickly spread on Weibo and other media, sparking extensive discussion among netizens.

 

 
[1] Relevant laws and regulations
[1] General Principles of the Civil Law
Article 153
Civil legal acts that violate mandatory provisions of laws and administrative regulations are invalid, except where such mandatory provisions do not result in the invalidity of the civil legal act.
 
A civil legal act that violates public order and good customs is void.
 
 
[1] General Principles of the Civil Law
Article 154
A civil legal act in which the actor and the counterparty collude maliciously to harm the legitimate rights and interests of others is invalid.
 
 
Contract Law of the People's Republic of China
Article 52
The contract is invalid in any of the following circumstances:
(1) One party concludes a contract through fraud or coercion, harming the interests of the state;
(2) Malicious collusion, harming the interests of the state, collectives, or third parties;
(3) Conceal illegal purposes under a legal guise;
(4) Damaging the public interest;
(5) Violation of mandatory provisions of laws and administrative regulations.
 
 
Supreme People's Court Provisions on Several Issues Concerning the Application of the (III) (2014 Amendment)
Article 24
If the actual contributor and the nominal contributor of a limited liability company enter into a contract agreeing that the actual contributor will provide capital and enjoy investment rights, while the nominal contributor serves as the nominal shareholder, and a dispute arises between the actual contributor and the nominal shareholder regarding the validity of the contract, the people's court shall recognize the contract as valid, unless the circumstances stipulated in Article 52 of the Contract Law apply.
 
If the actual contributor and the nominal shareholder referred to in the preceding paragraph have a dispute over the ownership of investment rights, and the actual contributor claims rights from the nominal shareholder on the grounds that they have actually performed their capital contribution obligations, the people's court shall support this. If the nominal shareholder denies the rights of the actual contributor on the grounds of the entries in the company's shareholder register or the records of the company registration authority, the people's court shall not support this.
 
If the actual contributor requests the company to change shareholders, issue a capital contribution certificate, record in the shareholder register, record in the company's articles of association, and handle registration with the company registration authority without the consent of more than half of the other shareholders, the people's court will not support it.
 
 
Supreme People's Court Provisions on Several Issues Concerning the Trial of Disputes Involving Foreign-Invested Enterprises (I)
Article 15
If a contract stipulates that one party actually invests while the other acts as the nominal shareholder of a foreign-invested enterprise, and there are no invalidating circumstances specified by laws or administrative regulations, the people's court shall deem the contract valid. If a party claims the contract is invalid or has not taken effect solely on the grounds that it has not been approved by the foreign-invested enterprise approval authority, the people's court shall not support it.
 
When the actual investor requests the nominal shareholder of a foreign-invested enterprise to perform the corresponding obligations according to the agreement between the two parties, the people's court shall support it.
 
If the parties have not agreed on profit distribution, and the actual investor requests the nominal shareholder of a foreign-invested enterprise to deliver the profits obtained from the foreign-invested enterprise, the people's court shall support it. If the nominal shareholder of a foreign-invested enterprise requests the actual investor to pay necessary remuneration, the people's court shall support it at its discretion.

 

 
What is 'Equity Holding on Behalf'?
So-called equity holding on behalf refers to an arrangement of rights and obligations in which the actual investor (also known as a "nominal shareholder") provides the investment and enjoys the investment benefits, while the nominal shareholder acts as the shareholder in name only, as agreed between the actual investor and the nominal shareholder. In practice, the purposes for which actual investors adopt equity holding on behalf can be roughly divided into three categories:
(1) Evading legal restrictions. For example, Article 59 of the Civil Servant Law stipulates that civil servants shall not violate relevant regulations by engaging in or participating in profit-making activities, or by concurrently holding positions in enterprises or other profit-making organizations;
(2) Avoid identity restrictions. For example, corporate directors, senior executives, or key employees who have signed non-compete agreements with the company;
(3) Business operations. For example, using the reputation or business status of a nominal shareholder to promote the company.
 
 
 
Judicial perspective
 
Regarding the validity of proxy holding agreements, according to the current laws of our country, the situations in which a proxy holding contract is invalid mainly include:
(1) The contract violates mandatory provisions of laws and administrative regulations;
(2) Violates public order and good morals;
(3) Malicious collusion that harms the legitimate rights and interests of others.
 
It can be seen that Chinese law has considerable flexibility in stipulating the invalidity of nominee-holding contracts, especially regarding the provisions of the principle of public order and good morals. When a nominee-holding contract only violates non-mandatory provisions of laws or administrative regulations, or violates rules, local regulations, and other provisions of lower legal hierarchy, it provides judges with more room for interpretation and discretion.
 
一、 When recognizing the validity of a shareholding entrustment agreement, one should distinguish between mandatory provisions of effectiveness and mandatory provisions of administration.
 
According to the general consensus, mandatory provisions are divided into mandatory provisions of validity and mandatory provisions of administration. Therefore, when determining the validity of an equity holding agreement, one should distinguish between mandatory provisions of validity and mandatory provisions of administration, which is also one of the requirements of the Supreme People's Court for judicial recognition of contract validity.
 
Regarding the distinction and identification of the two, the relatively mature viewpoint in China now is Professor Wang Liming's three-part method:
 
First, according to laws and regulations, if violating a certain provision will result in the contract being invalid or not established, this provision is a mandatory one by law.
 
Secondly, although it does not violate mandatory laws and regulations, if it harms the national interest and the public interest, this also constitutes an effective provision;
 
Third, if it neither violates laws and regulations causing the contract to be invalid or unenforceable, nor harms national interests or social public interests, but only damages the interests of the parties, it is considered a prohibitive provision (also called an administrative provision). However, regarding the proxy holding of shares, currently only the "Interpretation (III) of the Company Law" explicitly clarifies its legal existence, and there are no provisions concerning proxy holding of shares in other laws and regulations. This also determines that in practice, there is no clear legal regulation stating that violating this provision will render a proxy holding agreement invalid.
 
In this case, judgment can only be made based on the second and third items of the above-mentioned tripartite method, namely whether the equity holding agreement violates laws and regulations, or whether it is implemented to circumvent laws and regulations. At this time, whether continuing to enforce the equity holding agreement will harm national interests and public interests is also key to determining whether the mandatory provisions violated by the equity holding agreement are of a validity nature. In other words, it is key to determining whether the equity holding agreement violates mandatory provisions of a validity nature. For example, in cases where public officials engage in business or run enterprises in the form of equity holding, it is clearly an act that damages national and public interests, and should be recognized as violating the mandatory provisions of laws and regulations. Correspondingly, the equity holding agreement should naturally be regarded as invalid.
 
 
二、 The determination of the validity of a nominee shareholding agreement needs to be based on the general principles of contract law to assess whether it violates the mandatory provisions of the law.
 
The determination of the validity of a nominee shareholding agreement needs to be based on the general principles of contract law, to judge whether it complies with legal provisions and whether it violates mandatory legal norms. This requires an analysis of the purpose of nominee shareholding. In our country, at present, nominee shareholding is generally divided into two categories:
 
(1) The purpose of circumventing the law. China's Company Law and other related regulations impose certain restrictions on investment fields, investment entities, investment proportions, and other aspects. For example, state organs are not allowed to establish companies, foreign investment must not be below a certain proportion, and the number of shareholders in a limited liability company must not exceed 50, and so on. To circumvent these restrictions, some investors use anonymous investment methods. For instance, an anonymous investor may establish a limited liability company through multiple nominal shareholders to bypass the strict regulations on single-person companies under China's Company Law.
 
For example, according to Article 31 of China's Civil Servant Law, it is prohibited for state employees to run or operate enterprises and to participate in other profit-making business activities. Civil servants, while fearing the national law but wanting to invest, use others' names for investment in order to circumvent the restrictions of Chinese law regarding the qualifications of contributing shareholders. Another example is anonymous shareholders appearing during the restructuring of small and medium-sized state-owned or collectively-owned enterprises. During the restructuring of small and medium-sized state-owned or collectively-owned enterprises, due to Article 24 of the Company Law limiting the number of shareholders in a limited liability company to fewer than 50, a considerable part of the enterprise restructuring work falls into difficulty.
 
To solve this problem, a phenomenon emerged where several employees pooled their resources and made investments in the company in the name of one employee with higher credibility. The employees registered with the company became the company's nominal shareholders, while the others who only invested but were not registered with the company became the company's beneficial shareholders.
 
(2) Not for the purpose of evading the law. Some anonymous investments are not made for the purpose of evading the law, but simply because the anonymous investors do not wish to disclose their financial situation, or because the anonymous investors do not want to invest in their own name, or due to reasons such as equity transfer actions.
 
For anonymous shareholding that does not involve circumventing the law, as long as the actual investor can prove the substantive elements, the law can fully recognize and protect their shareholder rights. However, if the anonymous investment is intended to evade prohibitive or restrictive provisions of the Company Law and other related regulations regarding investment areas, investors, or investment proportions, such anonymous investment will seriously endanger the authority of the Company Law and the safety of market transactions. Recognizing it would nullify the law’s regulatory and guiding functions and could potentially throw the social and economic order into chaos.
 
Therefore, when determining shareholder qualifications, these legal evasion behaviors should be regulated and sanctioned, adjusting the distorted legal relationships to a normative state, so that the illegal intentions of the parties cannot succeed. The scope of these laws should be interpreted broadly. In addition to the laws enacted by the National People's Congress and its Standing Committee, various departmental regulations and relevant rules regarding restrictions on undisclosed investments should also be observed.

 

 
[1] The author's perspective
According to Li Guoqing's Weibo content, Li Guoqing believes that the reason his son sued both him and Yu Yu this time is actually because Yu Yu is controlling everything behind the scenes. Since Li Guoqing and Yu Yu have already had irreconcilable disputes over shares of Dangdang.com, he naturally will not comply with Yu Yu's wishes. The author analyzes that Li Guoqing is very likely to claim the proxy shareholding agreement invalid based on Article 52 of the Contract Law next, which fundamentally stifles Yu Yu's intention to dilute the shares.
 
If Li Guoqing fails, that is, if the court confirms the validity of the proxy shareholding agreement, it does not necessarily mean that his son will automatically become the registered shareholder. According to Article 24, Paragraph 3 of the Supreme People's Court's Judicial Interpretation III on the Company Law, 'the transformation of an undisclosed shareholder into a registered shareholder' requires the consent of more than half of the shareholders. Therefore, confirming the validity of the proxy shareholding agreement is only the first step; the path of the Dangdang online stock dispute is still very long.
 
It is lamentable that the once exemplary couple who weathered the storms together and worked hard to achieve business success are now fighting to the death, even becoming a source of amusement for countless netizens. Even when the dispute over Dangdang's shares finally settles, who is the real winner?