For actual investors, the primary risks associated with entrusting equity to a third party for holding on their behalf revolve around three key aspects. Firstly, there's the risk concerning the validity of the escrow agreement. Secondly, there's the risk that the escrowed equity, being in the name of the third party, might be disposed of or executed upon by that third party. And thirdly, there's the risk of non-fulfillment of the escrow agreement by nominal shareholders.

1. Effectiveness Risk of the Escrow Agreement

Article 24 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III), referred to as "Judicial Interpretation of the Company Law III," serves as the fundamental rule for determining the validity of shareholding arrangements within a limited liability company. It stipulates that unless there are circumstances that render a contract invalid as per the law, the courts should recognize such contracts as valid. The validity of equity holding agreements is essentially governed by the same principles. However, certain high-risk scenarios, such as those involving listed companies or enterprises subject to strict regulations (e.g., insurance companies and commercial banks,Areas in which foreign investment is prohibited in the negative list of foreign investment), may lead to the invalidation of escrow agreements due to potential violations of national laws and regulations. In addition,  Recent judicial practice has emphasized cases where agreements violate requirements related to financial security, market order, and national macro-policy.

2. Risk of Disposal of Shares

Article 25 of the Third Judicial Interpretation of the Company Law addresses the risk associated with the disposal of shares held by nominal shareholders. It outlines circumstances under which such disposals may be deemed valid or invalid, along with the corresponding liabilities. Mitigating this risk involves setting clear procedures for the transfer of equity interests in shareholders' agreements and articles of association. However, there's also the possibility of non-compliance by nominal shareholders, necessitating more direct measures such as requiring them to pledge the equity interests they hold.

3. Risk of Enforcement

Similar to the risk of disposal of equity, this risk involves potential judicial coercion due to the debt obligations of nominal shareholders. Unlike disposal, which is an active behavior on the part of nominal shareholders, enforcement typically involves passive actions by creditors, leading to the risk of judicial coercion and subsequent disposal or inheritance of shares.

4. Risk of Shareholdings Being Divided or Inherited

According to relevant legal provisions, shareholdings may be claimed for inheritance by heirs or divided by spouses of nominal shareholders, particularly in cases involving personal relationships. This poses complex disputes, especially in situations where direct evidence of the relationship is lacking. Mitigating this risk involves thorough consideration of the credibility and creditworthiness of nominal shareholders, along with clear agreements regarding the ownership and transfer of equity interests.

5. Risk of Nominee Shareholder's Refusal to Return Equity Interest

In some cases, nominal shareholders may refuse to cooperate with actual contributors in transferring shareholding, leading to disputes and legal action for resolution.

In conclusion, while entrusting equity to third parties in China offers certain benefits, it's crucial for actual investors to be aware of and mitigate the associated risks through clear agreements, thorough due diligence, and proactive legal measures.