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Features of inheritance of corporate rights in the People's Republic of China

Обновлено 31.01.2024 06:00

 

This article discusses the procedure for inheriting corporate rights in accordance with the current legislation of the People's Republic of China. The author conducts a comparative legal analysis of the regulation of hereditary succession in relation to shares, rights related to participation in and management of a legal entity in the People's Republic of China and the Russian Federation, identifies common law enforcement and theoretical problems in the implementation of citizens' hereditary rights. The author concludes that there is a need for further exchange of experience within the framework of the Russian-Chinese partnership in order to fill legislative gaps.

 

Keywords: inheritance, corporate rights, shares in the authorized capital, legal entities, participant status, the Civil Code of the People's Republic of China.

 

In modern conditions, the Asian direction is becoming more relevant and significant for the interests of our state. Already today, the Russian Federation and the People's Republic of China (hereinafter referred to as the PRC) have been able to build such a reliable line of cooperation, in which the mutual exchange of experience and opinions contributes to solving many internal legal problems. An in-depth study of Chinese legislation and doctrine in the field of inheritance of property allows us to identify general trends and key vectors of the development of inheritance law, as well as expand the horizons of research for the subsequent implementation of new legal concepts. Special attention should be paid to the issue of inheritance of corporate rights of company participants in China in comparison with a similar transfer of rights in our country.

Hereditary succession as one of the ways to determine the fate of various rights and obligations that previously belonged to one person <1> can generate a number of contradictions in law enforcement practice. The problems associated with the transfer of corporate rights in the order of inheritance are known to almost any legal system these days. The Chinese legislator, in turn, systematically improves the legal regulation of inheritance of shares, shares and participation rights in a legal entity, taking into account the contradictions arising in the theoretical and practical planes. At the moment, relations related to the inheritance of corporate rights in the People's Republic of China are regulated by the Civil Code and the Law on Companies.

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<1> Begichev A.V., Slutu P.D. On the question of criticism of singular succession in hereditary legal relations // Hereditary law. 2021. N 2. pp. 7-11.

 

It should be noted that hereditary succession in the current civil legislation of China presupposes inheritance of property. The provisions of the Civil Code of the People's Republic of China determine the order of inheritance of personal (private) legitimate property left after the death of an individual <2>. Prior to the entry into force in January 2021 of the Chinese Civil Code, the norms governing inheritance relations were contained in the Inheritance Law of 1985. <3> This Law set out a list of objects related to the personal property of the testator and included in the inheritance. It included income; house, money savings, household items; trees, livestock, poultry; cultural and historical values, printed materials; means of production, the possession of which is permitted by law; copyrights, rights arising from patent legislation, property rights; other legitimate property of a citizen. There is no such list in the current Civil Code of China, as well as any mention of corporate rights as an object of hereditary property. The Civil Code of the People's Republic of China as a whole does not contain special provisions on inheritance of certain types of property, as well as conflict of laws rules governing cross-border inheritance relations <4>.

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<2> The Civil Code of the People's Republic of China (adopted by the 3rd session of the National People's Congress of the Thirteenth convocation on May 28, 2020).

<3> The Law of the People's Republic of China "On Inheritance" (adopted by the 3rd session of the National People's Congress of the Sixth convocation on April 10, 1985).

<4> For more information about the legal regulation of hereditary legal relations in the People's Republic of China, see: Vaseva Yu.N. General provisions on inheritance and inheritance by will under the new Civil Code of the People's Republic of China // Basic provisions of the Civil Code of the People's Republic of China: comparative legal analysis: Collection of Articles / Edited by P.V. Krasheninnikov, L.Yu. Mikheeva; Research. the center is private. the rights of S.S. Alekseev under the President of the Russian Federation. M.: Statute, 2022. pp. 157-177.

 

Corporate rights represent a relatively new type of subjective rights of citizens for Chinese legislation and are found in Chinese civil law exclusively as "participant rights", "shareholder rights" and "investor rights". In connection with the above, the issues of inheritance and the procedure for the transfer of corporate rights required additional consolidation in the Law on Companies <5>. It seems that it is extremely important for the heirs and the company itself to coordinate the application of the provisions of the two laws regarding the transfer of corporate rights in the order of inheritance. Russian civil legislation, on the contrary, contains a special regulatory requirement regarding the inheritance of corporate rights as a separate type of property. Special legislation specifies the provisions of the Civil Code and defines the procedure for transferring a share to an heir within the framework of hereditary succession <6>.

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<5> The Law of the People's Republic of China "On Companies" (adopted by the 5th session of the National People's Congress of the Eighth convocation on December 29, 1993).

<6> See, for example: Federal Law No. 14-FZ of February 8, 1998 "On Limited Liability Companies" (as amended by Federal Law No. 114-FZ of 04/16/2022). Art. 21 // SZ RF. 1998. N 7. Art. 785; 2022. N 16. Article 2616.

 

In accordance with Article 75 of the Law of the People's Republic of China on Companies, in the event of the death of an individual who is a participant in the company, his legitimate heir has the right to inherit the status of a participant, unless otherwise provided by the company's charter. This rule raises a number of questions among legal scholars and Chinese legal practitioners.

Firstly, what is really the object of hereditary property within the meaning of the above-mentioned article? How do the categories "participant status" and "corporate rights" relate? It should be noted that Chinese inheritance legislation practically does not contain legal concepts that are enshrined in the rules on hereditary succession. Some scientists argue that the concept of "participant status" in this provision should be replaced by the term "shares" <7>. This statement is supported by the argument that the object of inheritance should be property, while the nature of the participant's status is of a different nature, and its scope is not clearly established by the current Chinese legislation. Nevertheless, the participants (shareholders) themselves play a key role in the company's management structure, respectively, the content of their status affects the organization of the legal entity's activities. This distinguishes the participant's status as an object of inheritance from personal property provided for by the Civil Code of the People's Republic of China, and therefore requires separate legal regulation in special laws. The judicial interpretation of the concept of "participant status" is interesting. The Supreme People's Court of the People's Republic of China has determined the status of a company participant as the basis for the acquisition and exercise by participants of the rights and obligations of a company participant <8>. Taking into account the peculiarities of the above judicial interpretation, Chinese jurists propose to understand the inheritance of the participant's status as a special complex inheritance, which includes the transfer of both property and non-property (organizational and managerial) rights and corresponding obligations of a company participant <9>. Thus, it can be concluded that the status of a participant in a Chinese company is determined rather through the category of the participant's legal capacity, which unambiguously covers corporate rights, but is not identical with them.

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<7> Li Fei. The Civil Code and the exercise of the rights of a company participant by co-heirs // Journal of Wuhan University (Philosophy and Social Science). 2021 (74). N 4. pp. 161-171 (in Chinese).

<8> Review of the Supreme People's Court of the People's Republic of China "On some issues related to the consideration of cases on corporate disputes" 2004.

<9> Zhang Dahai. Research on legal issues of inheritance of shares in the authorized capital of limited liability companies: review of Article 76 of the Law of the People's Republic of China on Companies // Law enforcement. 2008 (98). N 4. pp. 103 - 112 (in Chinese).

 

It should be recognized that the Russian legal order is familiar with the problem of uncertainty of such objects, which, by virtue of Article 1176 of the Civil Code of the Russian Federation <10>, are subject to transfer in the order of hereditary succession. This article is referred to as "Inheritance of rights related to participation in business partnerships and societies, production cooperatives", however, the regulation itself does not regulate the transfer of corporate rights to heirs, namely the mechanism of inheritance of property in the form of shares and shares in the capital and (property) of a legal entity. The contradiction is based on the fact that currently it is not determined at the legislative level whether corporate rights are independent objects of property that are part of the inheritance estate, or they relate to the very rights that are associated with participation in a corporation. The notary community, based on arbitration practice, adheres to the point of view that shares and units are considered as a way to consolidate corporate rights and obligations for a specific person <11>. If these objects are included in the inheritance, the acceptance of such inheritance means the transfer to the heirs of the deceased person of the right to be a participant in a society, partnership or production cooperative, taking into account possible prohibitions and restrictions.

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<10> The Civil Code of the Russian Federation (Part three) of November 26, 2001 N 146-FZ (as amended by Federal Law No. 287-FZ of 07/01/2021) // NW RF. 2001. N 49. St. 4552; 2021. N 27. St. 5115.

<11> See: Methodological recommendations on the topic "On inheritance of shares in the authorized capital of limited liability companies" (approved at the meeting of the Coordinating and Methodological Council of the Notary Chambers of the Southern Federal District, S-K FO, Central Federal District of the Russian Federation on 28-29.05.2010) and the Definition of the Supreme Arbitration Court of the Russian Federation dated September 7, 2009 N YOU-11093/09.

 

Secondly, Article 75 of the PRC Law on Companies mentions legitimate heirs. Are the heirs under the will and the beneficiaries legitimate heirs within the meaning of this article? Chinese scientists put forward two points of view <12>: 1) an expansive interpretation, by virtue of which legitimate heirs are all heirs of the deceased recognized by the legislator; 2) a restrictive interpretation, according to which legitimate heirs are exclusively heirs under the law <13>, specified in Articles 1127-1129 of the Civil Code of the People's Republic of China. It seems that the concept of "legitimate heirs" should nevertheless include all persons who, in accordance with Chinese law, are entitled to claim inheritance, including heirs by will and beneficiaries. The Russian legislator uses the concept of "heirs" in matters of inheritance of corporate rights" <14>.

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<12> Tian Jinhua. Analysis of inheritance of shares in the authorized capital of limited liability companies // China Buisness. 2021. N 22. pp. 69-71 (in Chinese).

<13> For more information about inheritance by law in the People's Republic of China, see: Novikova N.A. Novellas of the inheritance law of the People's Republic of China (analysis of the norms on inheritance by law and acceptance of inheritance) // The main provisions of the Civil Code of the People's Republic of China: comparative legal analysis: Collection of articles / Edited by P.V. Krasheninnikov, L.Yu. Mikheeva; Research. the center is private. the rights of S.S. Alekseev under the President of the Russian Federation. M.: Statute, 2022. pp. 157-177.

<14> Federal Law No. 14-FZ of February 8, 1998 "On Limited Liability Companies" (as amended by Federal Law No. 114-FZ of 04/16/2022) // SZ RF. 1998. N 7. St. 785. 2022. N 16. St. 2616.

 

Thirdly, Chinese law does not determine the moment when the heir acquires the status of a company participant. In this regard, in the fields of science and law enforcement of the People's Republic of China, there is a discussion about when exactly the legitimate heir acquires corporate rights and the possibility of exercising them. Some legal scholars believe that these rights are transferred by default to the heir who accepted the inheritance from the date of the opening of the inheritance. Others believe that the transfer of corporate rights and the acquisition of participant status occurs from the moment the corresponding entry is made in the register <15>. In addition, it is necessary to take into account possible prohibitions and restrictions that may be provided for by the company's charter. Often, in order to protect the interests of a legal entity, the company's participants fix in the charter a special procedure for transferring a share to the legitimate heirs of a deceased participant. To do this, they can include in the constituent document a condition on the need to obtain consent to join the company's participants, as well as provide for a ban on the transfer of shares in the order of inheritance with payment to the heir of the actual value of the share. In addition, it can be assumed that the property rights of a company participant arise from the heir from the moment the inheritance is opened, whereas the heir acquires non-property (organizational and managerial) rights after receiving all necessary consents and becoming a member of the company.

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<15> Xu Qiansheng. The logic of the provisions of Article 75 of the Law on Companies // Journal of Henan University of Economics and Law. 2020. N 2. pp. 58-65 (in Chinese).

 

There is a similar problem in our regulatory legal regulation. According to paragraph 4 of Article 1152 of the Civil Code of the Russian Federation, an accepted inheritance is recognized as belonging to the heir from the date of the opening of the inheritance, regardless of the time of its actual acceptance, as well as regardless of the moment of state registration of the heir's right to inherited property, when such a right is subject to state registration. By virtue of paragraph 1 of Article 1114 of the Civil Code of the Russian Federation, the day of the opening of the inheritance is the day of the death of a citizen. At the same time, the heir claiming a share in the authorized capital of the organization is obviously limited in the exercise of corporate rights before officially joining the participants, and also in some cases needs to obtain the consent of other participants. In Russian law enforcement practice, there are several positions regarding the moment of transfer of corporate rights to the heir. Thus, the courts link the moment of transfer of corporate rights to the heir: 1) from the moment the notary issues the certificate of inheritance <16>; 2) from the moment of making an entry about the heirs of the deceased participant in the Unified State Register of Legal Entities <17>; 3) from the moment of opening the inheritance, i.e. the death of a citizen - participant (member) of the organization <18>. It seems that for Russian legal regulation, the use of an integrated approach, i.e. determining the moment of transfer of property and non-property (organizational and managerial) rights of a participant in a legal entity separately, can solve problems associated with the transfer of shares, units and shares in the order of hereditary succession.

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<16> See, for example: Resolution of the FAS of the Northwestern District of March 29, 2010 in case N A56-47055/2009; Resolution of the FAS of the Central District of August 4, 2011 in case N A36-3192/2010.

<17> See, for example: Resolution of the Federal Antimonopoly Service of the Far Eastern District of August 30, 2011 N F03-3646/2011 in case N A59-2658/2010; Resolution of the Eighth Arbitration Court of Appeal of May 5, 2011 in case N A46-13898/2010.

<18> See, for example: Resolution of the Federal Antimonopoly Service of the Far Eastern District of March 5, 2012 N F03-96/2012 in case N A73-14693/2010; Decision of the Fourth Arbitration Court of Appeal of December 4, 2012 in case N A78-4412/2012.

 

In order to coordinate the interests of the company and the heir, maintain trusting relations between the participants, ensure the stability of corporate legal relations and the normal functioning of the company's business activities, Chinese lawyers suggest paying attention to the following recommendations. First of all, it is necessary to clearly and in detail prescribe the procedure for inheriting shares in the company's charter. In addition, the company's participants should try to foresee the future of their corporate rights during their lifetime, for example, through such an effective tool as a will <19>. Along with the fact that in case of death of a company member, it is recommended to choose a trust management model. The trustee is able to protect the rights of the heirs and the company and establish a balance of interests in which nothing prevents the further unhindered development of the business and the realization by the heirs of their legitimate opportunities.

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<19> For more information about wills in the People's Republic of China, see: Alekseenko A.P. Characteristic features of the Civil Code of the People's Republic of China // Actual problems of Russian law. 2021. Vol. 16. N 12(133). pp. 199 - 211.

 

Nowadays, inheritance law is designed not only to ensure the stability of family and kinship relations and the permanence of the social functions of inherited property, but also to support the interests of normal civil and commercial turnover <20>. The system of inheritance of corporate rights in China is being consistently reformed, taking into account emerging law enforcement and theoretical problems. The improvement of the inheritance procedure is aimed at assisting subjects of hereditary legal relations in the realization of their rights and eliminating all potential contradictions in the transfer of objects of hereditary property. Problematic issues of inheritance of corporate rights in China and Russia have certain similarities, in connection with which we can observe the unity of views of scientists in the study of controversial areas of inheritance law. This circumstance creates a favorable ground for further cooperation and promising dynamics of the Russian-Chinese partnership in the legal field, which is especially relevant in the context of a deep transformation of modern society.

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<20> Begichev A.V. The current state of inheritance law in foreign countries // Notary Bulletin. 2013. N 2. pp. 38-44.