Can dormant shareholders of foreign-invested enterprises under Chinese law request confirmation of shareholder qualifications
On January 1, 2020, China's Foreign Investment Law was officially implemented, implementing a pre-establishment national treatment plus negative list management system for foreign investment. According to the Chinese Supreme People's Court's "Provisions on Several Issues Concerning the Trial of Dispute Cases Concerning Foreign-Invested Enterprises (1)", the three judicial review standards established in Article 14 should be changed to: 1. The actual investor has actually invested . 2. More than half of other shareholders other than nominal shareholders agree. 3. In the restricted fields included in the foreign investment negative list, the people's court and the parties concerned shall obtain the consent of the competent authority of the foreign-invested enterprise to change the actual investor into a shareholder during the litigation period; for most of the permitted fields outside the negative list, It is no longer necessary to obtain the consent of the competent authority of foreign-invested enterprises.
※Pre-establishment national treatment and negative list management system
On January 1, 2020, the Foreign Investment Law was officially implemented. This law is China’s basic law in the field of foreign investment. The original Sino-foreign joint venture enterprise law, the Sino-foreign cooperative enterprise law, and the foreign-funded enterprise law were abolished at the same time. One of the most obvious changes in the foreign investment law is the full implementation of the pre-establishment national treatment and negative list management system for foreign investment. The so-called pre-establishment national treatment refers to the treatment given to foreign investors  at the stage of investment access no less than that of domestic investors; the so-called negative list management refers to China gives foreign investors national treatment if their investment outside the negative list(some foreign investment in specific fields were forbidden invested by the foreigner)
 In fact, the system was first implemented on a trial basis in the China (Shanghai) Pilot Free Trade Zone, and later promoted in major free trade zones across the whole China country. According to the "Special Management Measures for Foreign Investment Access (Negative List) (2021 Edition)" issued by the National Development and Reform Commission and the Ministry of Commerce, foreign investors are not allowed to invest in fields prohibited from foreign investment in the negative list of foreign investment access; The non-prohibited investment fields in the country are subject to foreign investment access permits; the fields outside the negative list of foreign investment access are managed in accordance with the principle of consistency between domestic and foreign capital. It can be seen that under the negative list management system, foreign investment fields can be divided into prohibited access, restricted access, and access areas outside the list. In the field of access, the previous case-by-case approval system has been changed to a reporting system; in the field of restricted access, the approval system is still maintained. This change has a major impact on foreign-related commercial trials, especially on the determination of the validity and review standards of relevant investment contracts.
※Effectiveness of contracts between domestic natural persons and foreign investors to establish foreign-invested enterprises
Article 2 of the New Foreign Investment Law clearly stipulates that: Foreign-invested enterprises refer to enterprises wholly or partly invested by foreign investors and registered and established in China in accordance with Chinese laws. At the same time, Article 3 of the "Regulations for the Implementation of the Foreign Investment Law" further clarifies that other investors in Article 2 of the Foreign Investment Law include Chinese natural persons.
Article 2 of the Interpretation of the Foreign Investment Law stipulates: For an investment contract formed in a field that is not on the negative list for foreign investment access, if the parties claim that the contract is invalid or not effective on the grounds that the contract has not been approved by the relevant Chinese administrative department, the court would not support it. Where the investment contract was signed before the implementation of the Foreign Investment Law, but the people's court has not made an effective judgment when the Foreign Investment Law came into force, the new terms of the law shall apply to determine the validity of the contract. Apparently, the Chines Supreme Court takes the date of effective judgment as the time standard to determine the validity of relevant contracts. Therefore, as long as the judgment is made after the official implementation of the New Foreign Investment Law, the previous investment contract of the parties should be determined to be legal and valid even it didn’t get approval from the relevant Chinese administrative department.
※Judicial Review Requirements for Dormant Foreign Shareholders to Be Named
For a long time, due to China's implementation of the approval system in the field of foreign investment, special review requirements have been adopted in judicial practice for lawsuits involving foreign dormant shareholders who require their names to be revealed. According to the latest provisions of the Foreign Investment Law, the court should re-examine the following three criteria:
First，the dormant shareholders should have actually invested.
Dormant shareholders require their names to be revealed. Whether it is a domestic-funded company or a foreign-funded enterprise, it is a prerequisite that the dormant shareholders have actually invested. The main judgment standard in judicial practice is whether the dormant shareholder has actually contributed capital.
Second,half of other shareholders other than the nominal shareholder recognize the dormant shareholders’ shareholder status.
According to the previous judicial review standards,dormant shareholders in foreign-invested enterprises request to be named, must be approved by all shareholders other than the nominal shareholder.However, for domestic companies, Article 24 of the "Company Law Provisions (3)" stipulates: the actual investor requests the company to change shareholders, issue a capital contribution certificate, record it in the register of shareholders, record it in the company's articles of association, and go through the registration process with the company registration authority, shall be approved by more than half of the other shareholders of the company.. According to the principle of national treatment for investment fields outside the negative list of the Foreign Investment Law, foreign-invested enterprises should enjoy the same treatment as domestic-funded enterprises. It means that dormant shareholders in foreign-invested enterprises request to be named, must be approved by half of shareholders other than the nominal shareholder.
Third,make different decisions on whether the scope of the company outside the negative list or not.
Since the Foreign Investment Law adopts the pre-establishment national treatment and negative list management system, which divides foreign investment fields into prohibited access categories, restricted access categories, and access categories outside the negative list, this judicial review will obviously be as follows: (1) For prohibited investment fields, the Foreign Investment Law clearly prohibits the entry of foreign capital, and the relevant investment contracts are naturally invalid, and there is no possibility of foreign investors being revealed. (2) As for investment fields with restricted access, the examination and approval system is still retained, that is, foreign capital can enter only after the approval of the competent authority . If the authority disagrees, the people's court shall reject the dormant shareholder's request .(3) For the investment fields outside the negative list, since the Foreign Investment Law stipulates that foreign capital enjoys national treatment and is managed on the same principle as domestic and foreign capital, the change of the actual investor into a shareholder matter does not require the approval of foreign-invested enterprises.The people's court can make a judgment by itself to support the dormant shareholder's request.
To sum up, whether the dormant shareholders of foreign-invested enterprises under Chinese law can request confirmation of shareholder qualifications or not depends on the above-mentioned three terms.