Kevin Jun Lin, Corporate Lawyer

When many entrepreneurs read the previous article explaining that the articles of association may provide that “equity shall not be inherited,” their first reaction is: if I simply write a clause in the articles of association stating “equity shall not be inherited,” does that settle the matter once and for all?

The answer is: not so simple.

In practice, we have seen far too many cases where such inheritance-exclusion clauses were drafted in a way that backfired. This article explains exactly the boundaries of such a clause’s validity.

I. Two Concepts That Must Be Distinguished: Shareholder Status vs. the Property Interest in Equity

First, let us clarify a core distinction:

• Shareholder status (a personal right): the right to participate in the company’s management, such as attending shareholders’ meetings, exercising voting rights, and serving as a director;
• The property interest in equity (a property right): the right to obtain economic benefits, such as dividends, distribution of residual assets, and proceeds from equity transfer.

Article 90 of the newly revised Company Law permits the articles of association to exclude the inheritance of shareholder status—meaning that “upon your death, your family members do not automatically become company shareholders or participate in the company’s management.”

But note: the property interest in equity constitutes estate and is protected by the inheritance provisions of the PRC Civil Code; no person and no article of the articles of association has the power to deprive anyone of it.

II. The Correct and Incorrect Ways to Draft a “No Inheritance of Equity” Clause

Incorrect drafting (likely invalid):

“Upon a shareholder’s death, all of their equity shall vest in the company, and the heir may assert no rights whatsoever.”

This wording also strips the heir of their property interest, directly violating the inheritance provisions of the PRC Civil Code, and the court will most likely hold it invalid. In practice, some courts have gone further and held the entire clause invalid, thereby restoring the default rule for the inheritance of shareholder status—a classic case of the company’s own actions backfiring.

Correct drafting (valid in practice):

“Upon a shareholder’s death, their lawful heir does not automatically acquire shareholder status. The company or its designated shareholder shall have the right, within six months, to repurchase all of the deceased shareholder’s equity at a price equal to the equity value corresponding to the audited net assets. Pending full payment of the repurchase price, the heir shall be entitled to the corresponding dividends.”

This wording preserves the property interest, provides an exit mechanism, and specifies the valuation method. It accords with the spirit of the Company Law while respecting the heir’s property rights, and courts will generally uphold it.

III. Five Practical Points to Avoid Pitfalls

1. What is excluded is “shareholder status,” not the “entire equity”: make clear that what the heir receives is the “cash consideration” rather than the “equity”;
2. You must leave an exit for the heir: either the company repurchases the equity or the other shareholders acquire it; the equity must not be left “stranded in the heir’s hands”;
3. The repurchase price must be reasonable: a clause setting a price manifestly below market value will be held invalid as manifestly unfair;
4. Unanimous consent of all shareholders is required: any amendment to the articles of association must be signed by all shareholders; an amendment passed by only a two-thirds majority may be held invalid for infringing the rights of an individual shareholder;
5. Pair it with a shareholders’ agreement: the articles of association set out the framework, while the shareholders’ agreement spells out the details (repurchase procedure, payment deadlines, liability for breach), providing double protection.

IV. How to Proceed When Inheritance Actually Occurs

Assuming the articles-of-association clause is valid, upon a shareholder’s death:

• The heir confirms in writing the waiver of shareholder status, or the company initiates the repurchase procedure;
• The other shareholders exercise their right of first refusal in the order and proportion prescribed by the articles of association;
• The company determines the repurchase price using the agreed valuation method and executes an equity repurchase agreement;
• The company completes the registration of the change with the administration for market regulation, and the heir receives the cash consideration.

It is best to have a lawyer involved throughout the process—because an error at any stage, whether valuation, taxation, or registration, may trigger further disputes.

V. Conclusion

A “no inheritance of equity” clause is a double-edged sword: used well, it secures the company’s long-term stability; used poorly, the clause becomes invalid and disputes multiply.

The test boils down to one sentence: the articles of association may decide “who becomes a shareholder,” but can never decide “who gets the money.”

Take out your articles of association and see—did you get it right?

📩 Reply “Articles Validity” to our direct message, and I will help you review whether the inheritance clause in your articles of association is valid.

Disclaimer

This article is provided for general reference only and does not constitute legal opinion or advice. For specific legal issues, please consult a qualified lawyer. The cases in this article are adapted from real events, and the company names and details involved have been anonymized.

Lawyer Kevin Jun Lin

Senior Corporate Lawyer · Industry Legal Practice Expert

💬 Feel free to share your views and reasoning in the comments

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If you need professional support in shareholders’ agreements, review of investment terms, or equity disputes, please contact Lawyer Kevin Jun Lin (Shenzhen Corporate Lawyer) for a one-on-one consultation.