TYGlobe

In the operation of a limited liability company, shareholder withdrawal is a common occurrence with complicated underlying causes. At the individual level, it may be triggered by financial needs or changes in career orientation. From the internal perspective of the company, incompatible business philosophies, management disorder, imbalanced interest distribution and other factors may also prompt shareholders to form the intention to withdraw. In terms of the external environment, white-hot industry competition, unfavorable economic conditions, changes in policies and regulations and other factors will also drive shareholders to choose to withdraw.

Regardless of the reasons therefor, the withdrawal of a shareholder shall be carried out in compliance with laws and regulations, so as to guarantee the smooth and stable proceeding of the withdrawal. Among the multiple approaches for a shareholder to withdraw from a company, voluntary equity transfer is the most common and prevalent method. This article will give a detailed introduction to this method hereinafter.

I. Transferee of Equity Transfer

Shareholders may transfer their equity interests either among the existing shareholders of the company, that is, transferring the equity interests they hold in the company to familiar "long-standing partners"; or go beyond the circle of the company's shareholders to seek suitable equity transferees externally. This is just like a transaction, where you may either choose to cooperate with acquaintances, or try to develop new cooperative partners.

II. Procedures for Equity Transfer

It should be noted that the articles of association of a company function as the "constitution" of the company. Where there are special provisions on equity transfer in the articles of association, such provisions shall be applied as a matter of course. In the absence of such special provisions, the matter shall be handled in accordance with the provisions of the Company Law of China, that is:

(I) Internal Transfer Procedures

The transferring shareholder and the internal transferee immediately reached a meeting of minds and formed a consensus on equity transfer.

2. The two parties shall conclude an equity transfer contract, and the transferee shall make the payment as agreed upon.

3. Pay relevant taxes and fees in accordance with the law.

4. The industrial and commercial alteration registration has been completed, and hereupon the internal equity transfer has been successfully concluded.

(II) Procedures for External Transfer

The transferring shareholder and the external transferee reach a consensus on equity transfer.

2. The transferring shareholder shall notify other shareholders in writing of such matters as the quantity, price, payment method and time limit of the equity transfer (other shareholders are entitled to the preemptive right under the same conditions).

3. Where other shareholders fail to respond within 30 days from the date of receipt of the notice, or respond that they will not exercise their right of first refusal under the same conditions, the transferor shareholder may conclude an equity transfer contract with the external transferee, and the transferee shall make payment in accordance with the agreement.

4. Pay relevant taxes and fees pursuant to the law.

5. The industrial and commercial alteration registration has been completed, and the external equity transfer has been successfully concluded.

III. Key Factors Affecting the Validity of Foreign-related Equity Transfer Contracts

Where a transferring shareholder intends to exit the company smoothly, there is one critical pitfall that shall be strictly avoided, that is, the right of first refusal of other shareholders shall not be infringed, which is centrally reflected in the legality of the "notification" served to other existing shareholders.

The so-called "unlawful notices", in the author's opinion, mainly include the following categories:

No notice whatsoever was given.

2. Improper Notice: including but not limited to inappropriate notification methods, incomplete notification content, and the time limit granted to other shareholders for exercising their rights being less than 30 days, etc.

3. The content of the notification is false and untrue, including such circumstances as fraud (e.g. fraudulent misrepresentation of the equity transfer price and imposition of additional restrictive conditions on equity transfer at the time of notification) and malicious collusion with external transferees, among others.

From the perspective of judicial practice, where the first two circumstances of failure to notify or improper notification arise, the external equity transfer contract shall be valid in principle. Whereas in the event of the third circumstance, whether the equity transfer contract is valid, revocable or null and void shall be determined comprehensively in accordance with the relevant provisions on the validity of contracts under the *Civil Code of the People's Republic of China*.

Where a transferring shareholder unilaterally notifies other shareholders by fraudulent means (the external transferee is unaware of such fraud), if other shareholders conclude an equity transfer contract with the transferring shareholder on the basis of exercising their pre-emptive right under the same conditions, such equity transfer contract shall be highly likely to be revoked; if other shareholders do not exercise their pre-emptive right and the transferring shareholder still enters into an equity transfer contract with the external transferee, such equity transfer contract shall be valid in principle.

Where a transferring shareholder colludes maliciously with an external transferee to damage the legitimate rights and interests of other shareholders, the equity transfer contract concluded therefrom shall be void in principle.

IV. A valid equity transfer contract still bears the risk of being rescinded.

Whether other shareholders of a company waive their preemptive rights plays a critical role in the smooth performance of the equity transfer contract. Where other shareholders waive the exercise of such right, the claims of the external transferee for continued performance of the contract, delivery of equity, and completion of industrial and commercial registration may be upheld by the people's court. Where other shareholders demand to exercise their preemptive rights, the equity transfer contract concluded between the transferor shareholder and the external transferee may eventually be terminated due to the failure to achieve the contractual purpose.

For external transferees, where an equity transfer contract is rescinded on the grounds of impossibility of performance and failure to realize the contractual purpose, the transferee may claim the return of the equity transfer payment, compensation for losses, or assumption of liability for breach of contract from the transferor shareholder, among others.

V. Recommendations for Transferring Shareholders

To avoid various potential disputes that may arise subsequently, the transferring shareholder shall strictly "notify" other shareholders in accordance with the provisions of the law. The main requirements are as follows:

1. Give a complete notice to other shareholders of such matters as the quantity, price, payment method and time limit of the equity transfer; where possible, the draft text of the equity transfer contract to be executed may also be provided to other shareholders concurrently.

2. The notification may be made either by notifying each shareholder individually or by issuing a unified "notification" at the shareholders' meeting. Whichever method is adopted, the relevant written records shall be properly preserved for future verification.

3. The "30-day response period" prescribed by law shall not be shortened, that is, other shareholders shall be given a minimum of 30 full days as the period for exercising their rights.

6. Special Legal Services for Shareholders' Withdrawal from Companies

TYGlobe Law Firm provides special legal services for shareholders' exit from companies, and its service scope mainly covers the following aspects:

Legal Analysis and Scheme Design of Exit Methods

2. Drafting and review of legal documents;

3. Procedural Compliance and Risk Control

4. Dispute resolution, litigation/arbitration representation, etc.

Through the aforementioned comprehensive, professional special legal services, we are committed to providing one-stop solutions for shareholder withdrawal, so as to enable shareholders to exit the company smoothly with peace of mind in a complex legal environment.