Key Takeaways

  • A shareholding entrustment agreement allows one person (the actual shareholder) to entrust another (the registered shareholder) to hold shares on their behalf.
  • Such agreements must include clear details on parties, share percentages, duration, termination conditions, and supporting documents.
  • Risks include potential abuse by the entrusted shareholder, lack of recognition of the dormant shareholder, and complications if shares are frozen or seized.
  • Mitigation measures include liquidated damages clauses, notarization, clear allocation of rights (voting, dividends), and careful recordkeeping.
  • Additional best practices involve defining transfer restrictions, dispute resolution methods, exit mechanisms, confidentiality obligations, and governance rights to strengthen enforceability.
  • Entrustment is particularly sensitive in foreign investment contexts, where regulations may limit ownership and agreements may face scrutiny.

Entrusted Shareholder Agreement Overview

An entrusted shareholder agreement is a formal agreement between certain shareholders and a corporation in which so-called “dummy” shareholders—or more officially, registered shareholders—will hold the shares of a different major shareholder for a specified period of time. In doing so, they will assume both the liabilities and the rights of the shareholder for so long as they serve as the registered shareholder.

Entrusted Shareholder Agreement Requirements

To be valid, an entrusted shareholder agreement should detail the following:

  • The company’s name and address.
  • The shareholder’s names and addresses.
  • The percentage of shares to be allocated to each shareholder.
  • The place and date of the agreement’s creation.
  • The length of the agreement.
  • The conditions under which the agreement may be terminated.

Shareholders involved in such an agreement must acknowledge or present certain financing documents, such as:

  • The exclusive consulting and service agreement.
  • The share disposition agreement.
  • The share pledge agreement.
  • The business operation contract.
  • The power of attorney between dummy shareholders.

All shareholders and all other parties involved must be in complete agreement on all points for the agreement to move forward.

Key Clauses in a Shareholding Entrustment Agreement

Beyond the basic requirements, a well-drafted shareholding entrustment agreement should cover certain critical clauses to minimize conflicts:

  • Transfer restrictions: Specify that the entrusted shareholder cannot transfer or dispose of shares without prior written approval.
  • Voting arrangements: Clarify whether the registered shareholder must vote strictly according to the actual shareholder’s instructions.
  • Dividend distribution: Detail how profits will be transferred to the actual shareholder to avoid disputes.
  • Exit mechanisms: Provide clear terms for unwinding the arrangement, including buy-back rights, valuation methods, or triggers for termination.
  • Confidentiality and non-compete clauses: Prevent misuse of sensitive company or shareholder information.
  • Dispute resolution: Define governing law, arbitration or court jurisdiction, and remedies in case of breach.

These clauses provide additional safeguards that go beyond the standard elements, ensuring that the arrangement is not only legally enforceable but also practical in operation.

Risks of Entrusted Shareholder Agreements

Entrusting others to hold shares for you can be a risky enterprise. The following are the main risks that doing so can entail:

  • The status of dormant shareholder is not officially recognized; only the status or registered shareholder is.
  • It is not easy to change the status of dormant shareholder to registered shareholder.
  • The registered shareholder could intentionally damage the interests of the dormant shareholder.
  • The registered shareholder could also have their shares executed by the court or frozen if it serves their purposes.

To counter these risks, the following steps are highly recommended:

  • Have significant liquidated damages set into an entrustment agreement and have that agreement notarized; these liquidated damages will deter the registered shareholder from acting against the dormant shareholder’s interests.
  • Notify other shareholders and concerned parties about the entrusted shareholder agreement so that they may in turn notify you if anything is amiss with the handling of your shares.
  • Keep detailed records of all transactions with the entrusted shareholder, as well as any relevant documents, such as the contribution certificate, entrustment agreement, and shareholder’s resolution.
  • Clearly define what rights the registered shareholder will have, whether they be dividend rights, voting rights, or others. Written approval should provided to entrust these rights.

Above all though, one should be sure that the parties they are entering into agreement with are highly trustworthy individuals.

Regulatory and Practical Considerations

While shareholding entrustment agreements are commonly used to navigate ownership restrictions, particularly in foreign investment structures, they come with heightened risks:

  • Regulatory compliance: Some jurisdictions may not legally recognize entrustment agreements, meaning the actual shareholder’s interests could be disregarded in official records.
  • Third-party enforcement: Courts may prioritize the rights of registered shareholders, especially in disputes with creditors or regulators.
  • Fraud and bad faith: Entrusted shareholders could act against the interest of the actual investor, diverting dividends or exercising control inappropriately.
  • Investment disputes: In joint ventures or multi-shareholder companies, other investors may challenge the legitimacy of entrustment structures.

Because of these risks, it is advisable to include notarization, liquidated damages, and disclosure to relevant parties as protective measures. For complex arrangements, consulting legal counsel is strongly recommended.

Frequently Asked Questions

  1. What is a shareholding entrustment agreement?
    It is a contract where an actual shareholder entrusts another person (registered shareholder) to hold and exercise rights over shares on their behalf.
  2. Is a shareholding entrustment agreement legally binding?
    Yes, if properly drafted and notarized, but enforceability depends on local laws and recognition of such arrangements.
  3. What risks come with shareholding entrustment agreements?
    Risks include fraud, abuse by the entrusted shareholder, non-recognition by courts, and exposure to creditors’ claims.
  4. How can risks be minimized in entrustment agreements?
    By including liquidated damages, notarization, clear voting/dividend rights, dispute resolution mechanisms, and strict transfer restrictions.
  5. When are entrustment agreements commonly used?
    They are often used in jurisdictions with foreign ownership restrictions, or where investors wish to remain discreet in corporate filings.

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