The implementation of the new Company Law of China has ushered in an era for equity transfer in limited liability companies that is "more standardized, more transparent, and stricter." Equity transfer is not merely the simple exchange of a contract and payment; it is a series of nested legal actions, from the initial agreement to transfer to the final change in shareholder status. Neglecting details such as other shareholders' pre-emptive rights, amendments to the shareholder register and industrial and commercial registration, and the status of capital contribution for the shares can create potential for disputes. Only by fully understanding the legal provisions and carefully designing the transaction steps can equity transfer become a smooth and secure "handover of rights."

I. Can Equity Be Transferred at Will?
No. Equity transfer refers to the legal act whereby a shareholder, in accordance with legal provisions and the company's articles of association, transfers all or part of their equity in the target company to another person, resulting in a change in the company's shareholders. The essence of this act is the transfer of the shareholder's qualifications, rights, and obligations (including both property rights and non-property rights) to the transferee. Equity transfer is an important means for shareholders to realize investment gains or cut losses, and a key manifestation of struggles for corporate control. However, due to the dual nature of limited liability companies as both capital-association and person-association entities, the law and the company's articles of association impose certain restrictions on equity transfer.

Firstly, Equity Transfer Must Comply with the Company's Articles of Association
Restrictive provisions in the company's articles of association regarding equity transfer are formed by consensus to safeguard the company's interests. However, it is important to note that restrictions in the articles of association are subject to limitations. Provisions that are illegal or violate the principles of company law should not be deemed valid. Specifically:
① If restrictive clauses in the articles of association conflict with mandatory provisions of laws and administrative regulations, such clauses shall be confirmed as invalid and not legally binding on shareholders. The equity transfer contract signed by a shareholder in violation of such clauses remains valid.
② If restrictive clauses in the articles of association result in a prohibition of equity transfer, and such terms violate the basic principle of free transfer of equity, depriving shareholders of their fundamental rights, they shall be invalid. The equity transfer shall not be invalid due to violation of these restrictive terms.
In practice, common types of restrictive clauses in articles of association include:
① Mandatory transfer upon loss of specific position: When a shareholder's employment relationship with the company is terminated (e.g., resignation, transfer, dismissal, retirement), the company shares they hold must be handled according to the methods stipulated in the articles of association, typically involving repurchase by the company or transfer to other shareholders.
② Restrictions on transfer for shareholders with specific roles: Imposing restrictions on the timing and proportion of equity transfer for shareholders who play key roles in company operations or possess trade secrets, such as senior management and core technical personnel.
③ Setting approval procedures for equity transfer: For example, stipulating that equity transfers require approval by a specific majority of the board of directors or shareholders' meeting.
Secondly, if the Articles of Association contain no special provisions, the Company Law provisions must be followed.
Transfer of equity between shareholders is not restricted. However, when transferring equity to a non-shareholder, the pre-emptive rights of other shareholders must be ensured:
① The transferring shareholder shall notify other shareholders in writing of matters such as the quantity, price, payment method, and term of the equity transfer. Other shareholders have a pre-emptive right under equivalent conditions.
② If other shareholders do not respond within thirty days of receiving the written notice, they are deemed to have waived their pre-emptive right. If two or more shareholders exercise their pre-emptive right, they shall negotiate to determine their respective purchase proportions; if negotiation fails, the pre-emptive right shall be exercised based on their respective capital contribution proportions at the time of transfer.
It is worth noting that the Company Law revised in 2023 deleted the condition from the 2018 Company Law requiring that external transfers must obtain the consent of shareholders representing more than half of the voting rights, simplifying the procedural rules for external equity transfers.
 
II. Which Entities Enjoy the Pre-emptive Right?
The Shareholder's Pre-emptive Right is a system established to balance the trust foundation among shareholders and the transferability of equity as a property right, aiming to give existing shareholders of a limited liability company priority in acquiring equity.
① Shareholders who disagree with the external transfer enjoy the pre-emptive right. Shareholders who agree to the external transfer also enjoy the pre-emptive right; their "agreement" does not constitute a blanket waiver of their purchase interest in the equity.
② When a natural person shareholder's status changes due to inheritance,原则上 other shareholders do not enjoy a pre-emptive right, unless otherwise stipulated in the articles of association or agreed by all shareholders.
③ When a court transfers a shareholder's equity through compulsory enforcement procedures, other shareholders enjoy a pre-emptive right under equivalent conditions, but it must be exercised within twenty days from the court's notice.
④ Whether a shareholder with deficient capital contributions enjoys the pre-emptive right needs to be determined based on the articles of association or shareholders' resolutions. As deficient contributions do not cause the loss of shareholder status (unless lawfully removed by a shareholders' resolution), if the articles of association or shareholders' resolutions impose no restrictions on shareholders with contribution deficiencies, they enjoy the pre-emptive right by virtue of their shareholder status.
 
III. How is "Equivalent Conditions" for the Pre-emptive Right Determined?
"Equivalent Conditions" are the substantive requirement for the shareholder's pre-emptive right. Correctly identifying "equivalent conditions" is a prerequisite for exercising the pre-emptive right. Specifically, identification should be based on the following five factors: whether the quantity of shares is the same, whether the transfer price is the same, whether the payment method is the same, whether the performance period is the same, and whether other contract factors are the same, such as penalty clauses, ancillary obligations, or the ability to provide business opportunities.

Regarding the transfer price, it is important to note that if the transferring shareholder colludes maliciously with a third party to set a fictitiously high price to avoid other shareholders' pre-emptive rights, the other shareholders have the right to use the true transfer price between the colluding parties as the standard for determining "equivalent conditions."

 
IV. What is the Exercise Period for the Pre-emptive Right?
① A shareholder of a limited liability company claiming the pre-emptive right to purchase the transferred equity should submit a purchase request within the exercise period stipulated in the company's articles of association after receiving the notice.
② If the articles of association do not specify an exercise period or the specification is unclear, the period specified in the notice shall prevail.
③ If the period specified in the notice is shorter than thirty days or no exercise period is specified, the exercise period shall be thirty days.
It is important to note that the exercise period for the shareholder's pre-emptive right is a fixed period and does not allow for suspension, interruption, or extension.
 
V. What Forms Can the Equity Transfer Notice Take?
The legal text requires the transferring shareholder to notify other shareholders in writing, primarily for evidence preservation and facilitating registration procedures. However, in practice, other reasonable methods that can confirm receipt may also be used to notify other shareholders. Specifically, the following situations exist:
① Issuing a public announcement that becomes known to the other shareholders. For example, if the transferring shareholder has evidence proving that other shareholders raised objections regarding the announcement's content to the transferor or others after its issuance, it can be deemed that the other shareholders were aware of the equity transfer matter, and the announcement can be considered equivalent to written notice.
② Statements made by the transferring shareholder during litigation, arbitration, or other legal proceedings regarding the external equity transfer or pre-emptive rights, which become known to the other shareholders.
③ Although the transferring shareholder notified other shareholders orally, there is evidence proving that the other shareholders were already aware.
 
VI. How is the Time Point for Equity Change Determined?
From the time it is recorded in the shareholder register, the equity transferee can claim the exercise of shareholder rights against the company. When a shareholder transfers equity, they shall notify the company in writing, requesting an amendment to the shareholder register; if registration change is required, they shall also request the company to handle the change registration with the company registration authority. If the company refuses or fails to respond within a reasonable period, the transferor and transferee may initiate legal proceedings in accordance with the law.
It is important to note that unless the equity transfer contract explicitly stipulates that the transferee has the right to terminate the contract if the equity change registration is not completed, the failure to complete the registration is insufficient to deem the purpose of the equity transfer contract frustrated. If the transferring shareholder agrees to cooperate with the registration, the transferee does not have the right to terminate the contract.


VII. Can the Doctrine of Bona Fide Acquisition Apply to Equity Transfer?
Yes. If a nominal shareholder disposes of the equity registered under their name without the consent of the actual contributor, the doctrine of bona fide acquisition may apply. The premise for applying the bona fide acquisition doctrine is that the equity transfer contract is valid but the transferor has no right to dispose of the equity. Therefore, if the equity transfer contract has grounds for invalidity, there is no room for applying the bona fide acquisition doctrine. It is important to note:
① If the equity transferee knows of the shareholding agreement between the nominal shareholder and the actual contributor but proceeds without the actual contributor's consent, the transferee does not qualify as a bona fide acquirer.
② Remedies in case of unauthorized disposal of equity:
➣ If the equity has not been transferred to the transferee, the actual contributor can assert rights against the transferee. The parties to the transfer contract cannot demand specific performance of the contract, but the transferee can claim compensation from the nominal shareholder.
➣ If the transferee ultimately acquires the equity, the actual contributor cannot reclaim the equity. The nominal shareholder, by violating the shareholding agreement, infringes upon the actual contributor's equity rights, and the actual contributor can claim compensation from the nominal shareholder who performed the disposal act.
 
VIII. Does the Rescission Rule for Installment Sale Contracts Apply to Installment Equity Transfer Contracts?
No. Article 634 of the Civil Code stipulates the circumstances for statutory rescission of installment sale contracts. Installment sales typically occur between businesses and consumers, where the seller has usually already delivered the subject matter to the buyer, but the buyer has not yet paid the full price, posing certain risks for the seller regarding price recovery. However, in installment equity transfer contracts, even if the transferor has recorded the transferee in the shareholder register and completed the change registration, the equity as the subject matter still resides within the company. Thus, it lacks the特殊性 of retaining ownership of the subject matter to secure payment. Furthermore, equity transfer contracts have dual legal consequences, internal and external. For parties outside the contract, legal acts such as entry into the shareholder register and registration with the administration for industry and commerce create reliance interests for indefinite third parties. Abruptly rescinding the contract is detrimental to corporate governance and transaction security.

 
IX. Liability of the Original Shareholder Who Transfers Equity Before the Contribution Deadline for Company Creditors?
Under the subscribed capital contribution system, shareholders whose contribution period has not expired legally enjoy the benefit of time. Equity for which the capital contribution has not been paid up before the expiration of the subscription period can be transferred. When company debts cannot be repaid and circumstances triggering acceleration of shareholders' contribution obligations exist, company creditors can claim acceleration of the contribution obligations of the current shareholder whose contribution period has not yet expired. The liability of the original shareholder (transferor) for company debts arising before the transfer should be viewed as follows:
① For transfers of equity with unexpired contribution periods occurring after July 1, 2024, the transferee assumes the obligation to pay the corresponding capital contribution. If the transferee fails to pay the contribution in full and on time, the transferor bears supplementary liability for the contribution not paid on time by the transferee.
② For transfers of equity with unexpired contribution periods occurring before July 1, 2024, the following approach should be used to determine if the original shareholder should be liable for company debts:
The previous Company Law and related judicial interpretations regulated the original shareholder's liability from the perspective of preventing shareholders from abusing the benefit of the contribution period to maliciously evade debts and harm the interests of company creditors. If the original shareholder knew of the company's external debts and the company's inability to repay them at the time of transferring the equity externally, then the original shareholder acted with intent to harm the creditors' interests and should bear supplementary compensation liability for the debts that the company cannot repay, within the limit of their subscribed capital contribution.
The existence of intent to harm creditors' interests by the original shareholder can be judged from the following aspects:
➣ Timing of the equity transfer, e.g., whether the company's debts had already been incurred at the time of transfer.
➣ Whether the transfer conduct complies with market norms. Was consideration agreed upon? Was the consideration fair? Did the transferee participate in company operations after the transfer? Did the original shareholder still exercise de facto control over the company?
➣ Other factors. For example, whether the transferee had the ability to contribute capital, repay debts, and manage operations; whether there was a special relationship between the transferee and the original shareholder.