Sundial successfully obtained a second-instance overturned and winning judgment for its client in the case of the actual controller of a listed company returning the original equity rights held on behalf of the client.

 Article 25 of the Supreme People's Court's Provisions on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) confirms the legal effect of equity holding on behalf of others in limited liability companies. Therefore, there are cases of equity holding on behalf of others in limited companies in practice. However, for listed companies, it is one of the essential requirements for an initial public offering (IPO) that the issuer's share ownership must be clear and there are no significant ownership disputes over the shares held by the controlling shareholders. To meet the relevant regulatory requirements for going public, under the guidance of securities service institutions, issuers will basically clean up the situation of shareholding on behalf of others during the IPO process. Therefore, after a joint-stock company is issued and listed, there are very few cases of disputes arising from equity holding on behalf of others, and it is even rarer to find cases where the equity held by the controlling shareholders or actual controllers of listed companies is determined to be held on behalf of others.

Recently, the securities litigation team of Sundial Law Firm, led by lawyers Hong Qunjun and Xiong Meifang, represented a case of equity holding dispute between a founding shareholder and the actual controller of a listed company and obtained a winning judgment in the second-instance overturned decision. It is highly exemplary and practical and has become a typical case with high research value in the field of corporate equity disputes:

In November 2021, Wang, one of the founding shareholders of a Growth Enterprise Board-listed company, Shenzhen [Company Name] Electric Co., Ltd., filed a lawsuit against the listed company and its actual controller, Fang, in Tianhe District Court of Guangzhou, requesting Fang to return approximately 7.51 million shares of the listed company held on behalf of Wang and the corresponding benefits of the shares. However, the first-instance court held that the fact of equity holding on behalf of others did not stand and dismissed Wang's first-instance claims. After the first-instance defeat, Wang entrusted Xinda Law Firm as his second-instance agent to appeal and represent him in the second instance.

As a professional law firm with over 30 years of experience in the fields of corporate, securities, and investment and financing legal services, Sundial Law Firm assigned the team of lawyer Hong Qunjun, who has rich experience in securities litigation, to handle the case. Relying on the long-term accumulated rich experience in providing issuance legal services for listed companies and profound litigation expertise, the Xinda lawyers conducted a comprehensive review of the materials provided by the client and the first-instance situation. They checked the historical evolution, equity changes, and corresponding business registration archives of the listed company and collected and organized more than ten years of communication records. After several months of efforts, they finally combed through a large number of original materials and electronic information and sorted out a series of key evidence on the background of the equity holding on behalf of others, the capital contribution of the held equity, the evolution of equity, and the exchange of equity. They also completed the relevant notarization procedures, forming a complete chain of evidence that strongly proved the existence of the equity holding on behalf of others. As a result, they finally obtained the recognition of the second-instance court, Guangzhou Intermediate People's Court, and the court made the final judgment accordingly: to revoke the original first-instance judgment, to determine that the actual controller and controlling shareholder of the company, Fang, held the equity of the listed company on behalf of Wang, and to order Fang to pay Wang 50% of the cash value of 8,347,007 shares of the listed company and the corresponding cash dividends, and interest on the funds.

In the above case, although the Sundial lawyers strongly maintained the legitimate rights and interests of the parties with their profound experience in securities and litigation, it can also be seen from the case that "equity holding on behalf of others" is still a high-risk commercial arrangement. There are still many risks for the actual investors to realize the corresponding equity rights in practice, and it is very easy to cause disputes due to the nominal investors' regrets. Such disputes not only increase the transaction costs of commercial entities but also affect the long-term and stable development of the company. Therefore, the Xinda lawyers suggest that related "equity holding on behalf of others" should be arranged with caution. During the performance of equity holding on behalf of others, it is necessary to actively and comprehensively collect relevant evidence in a timely manner to better deal with potential risks.

For companies planning to go public, the Sundial lawyers suggest that the arrangements for equity holding on behalf of others should be sorted out and restored in a timely manner. The new Company Law, which will come into effect on July 1, 2024, stipulates in Article 140 that "listed companies shall disclose information on shareholders and actual controllers in accordance with the law, and the relevant information shall be true, accurate, and complete. It is prohibited to hold shares of listed companies on behalf of others in violation of laws and administrative regulations." Shareholding on behalf of others in listed companies is also a behavior explicitly prohibited by the new Company Law.