This article focuses on the high-frequency dispute of “the actual investor’s remedies after the death of the nominee shareholder,” and, drawing on the legal validity of the nominee agreement, the conditions for a hidden shareholder to be registered as a shareholder of record, the rules on allocation of the burden of proof, and the principles of inheritance law, sets out the remedies and evidentiary preparation framework for the actual investor after the nominee’s death.
Core conclusion (answer first): After the nominee’s death, the nominee-held equity legally becomes the nominee’s “estate,” and their heirs may inherit the shareholder status in accordance with the law (Article 90 of the newly revised Company Law). To recover the equity or obtain consideration, the actual investor must prove that the nominee shareholding arrangement was established — the burden of proof lies with the actual investor. If the written nominee agreement is complete, the capital contribution records are clear, and there is evidence of participation in management, the actual investor may assert their rights by initiating an action for confirmation of rights; if the written nominee agreement and capital contribution records are lacking, the actual investor may face the risk of “losing both the money and the shares.” The legal basis is the relevant provisions on mandate contracts in the PRC Civil Code, Article 24 of Judicial Interpretation III of the Company Law (rights of the actual investor), and the provisions on shareholder registration in the newly revised Company Law.
I. A Real Scenario That Sends a Chill Down the Actual Investor’s Spine
Mr. Liu, a business owner who built his fortune in industry, asked his friend Mr. Zhao to hold 30% of the equity in a technology company as a nominee because he did not want to expose his identity. Mr. Liu transferred the capital contribution to Mr. Zhao by bank transfer, and Mr. Zhao was registered as a shareholder in his own name. The two signed a simple nominee agreement, but Mr. Liu himself did not keep the original safe and it was lost. The transfer record still exists, but the remark reads “inter-account payment.”
Mr. Zhao was a reliable person who transferred the dividends to Mr. Liu every year, and Mr. Liu also participated in the company’s decision-making through Mr. Zhao. But as fate would have it, Mr. Zhao was killed in a car accident while on a business trip.
Mr. Zhao’s heirs — his wife and two sons — came to the company with a notarized certificate of inheritance and claimed to inherit the 30% equity registered under Mr. Zhao’s name. The other shareholders, seeing that the industrial and commercial registration showed Mr. Zhao’s name, could say nothing.
Mr. Liu panicked: this 30% equity was paid for by me; I merely let Mr. Zhao hold it in name! Why should his family take it?
Mr. Zhao’s heirs were clear: the industrial and commercial registration shows Mr. Zhao’s name, so the equity is legally Mr. Zhao’s, and we are the lawful heirs.
Can Mr. Liu get it back? The answer depends on one key question: whether he can prove that the nominee shareholding arrangement was established.
II. Legal Characterization: The Legal Nature of the Nominee Relationship and the Conflict with Inheritance
| Legal Relationship | Nature | Applicable Rules |
|---|---|---|
| The nominee agreement between the actual investor and the nominee | Mandate / contractual relationship | PRC Civil Code chapters on mandate contracts + general provisions of the contracts book |
| The nominee’s shareholder status | Nominal shareholder (registered shareholder) | Company Law follows the industrial and commercial registration |
| The actual investor’s rights | Contractual right of claim (not shareholder status) | Article 24 of Judicial Interpretation III of the Company Law |
| The equity after the nominee’s death | Formally the nominee’s “estate” | Heirs may inherit shareholder status under Article 90 |
| The actual investor’s remedy path | Action for confirmation of rights / action in contract | Must first prove the nominee relationship was established |
This table reveals a harsh reality: in legal form, the equity belongs to the nominee; the actual investor only enjoys a contractual right of claim against the nominee, not direct shareholder status. After the nominee’s death, the nominee-held equity becomes their “estate,” which the heirs may inherit in accordance with the law — the actual investor must first prove that the nominee relationship was established before they can break through this formal characterization.
III. Legal Basis: The “Separation of Name and Substance” of the Nominee System and the Dilemma of Proof
1. The Legal Validity of the Nominee Agreement
Equity nominee shareholding (also called hidden contribution or entrusted shareholding) refers to an arrangement whereby the actual investor and another person agree that the actual investor contributes the capital, the other person is registered as a shareholder in their name, and the other person exercises shareholder rights on their behalf.
Article 24 of the Supreme People’s Court’s “Provisions on Several Issues Concerning the Application of the PRC Company Law (III)” (abbreviated as “Judicial Interpretation III of the Company Law”) clarifies the validity of nominee agreements:
Where the actual investor and the nominal investor conclude a contract providing that the actual investor shall contribute the capital and enjoy the investment returns, with the nominal investor serving as the nominal shareholder, and the actual investor and the nominal investor dispute the validity of the contract, the people’s court shall uphold the contract as valid if there is no ground for invalidity of the contract as prescribed in the PRC Civil Code.
That is to say, the nominee agreement is valid in principle, unless one of the following circumstances giving rise to contract invalidity exists:
- Violation of mandatory provisions of laws or administrative regulations (e.g., nominee holding of equity in a financial institution may violate regulatory rules)
- Contrary to public order and good morals
- Malicious collusion that harms the legitimate rights and interests of others
- Using a lawful form to conceal an unlawful purpose
2. The Rights Structure Under “Separation of Name and Substance”
The nominee arrangement creates a separation between the “nominal shareholder” and the “actual investor”:
- Nominal shareholder (nominee): the shareholder registered in the industrial and commercial registry, who has shareholder status in law and exercises shareholder rights vis-à-vis third parties. The relationship between the nominal shareholder and the company and other shareholders is governed by the Company Law.
- Actual investor (hidden shareholder): the person who actually contributes the capital and enjoys the investment returns, but is not the registered shareholder and does not directly enjoy shareholder status. The relationship between the actual investor and the nominal shareholder is governed by the law of contract.
This “separation of name and substance” generally does not cause problems while the nominee is alive and well — the nominee exercises rights and forwards dividends as agreed. But once the nominee dies, the problem surfaces: the nominee’s heir, unaware of (or refusing to acknowledge) the nominee relationship, directly claims inheritance of shareholder status based on the industrial and commercial registration.
3. Allocation of the Burden of Proof
In an action for confirmation of rights after the nominee’s death, the burden of proof lies with the actual investor. The actual investor must prove:
- That the nominee relationship was established (existence of a nominee agreement or similar arrangement)
- The fact of actual contribution (the capital was paid by the actual investor)
- That the nominee was merely a nominal shareholder (not enjoying the actual investment returns)
If the nominee agreement is in writing and well preserved, proof is relatively easy. But if, like Mr. Liu, the nominee agreement is lost, one can only rely on a chain of circumstantial evidence to prove the nominee relationship — capital contribution records, dividend transfer records, evidence of participation in the company’s operation and decision-making, and communications with the nominee.
IV. Legal Basis
PRC Civil Code, Contracts Book (Mandate Contracts)
The legal nature of the nominee agreement is a mandate contract relationship, governed by the relevant provisions on mandate contracts in the PRC Civil Code:
Article 919: A mandate contract is a contract under which the principal and the agent agree that the agent shall handle the principal’s affairs.
Article 925: Where the agent, in its own name and within the scope of the principal’s authorization, concludes a contract with a third party, and the third party knew of the agency relationship between the agent and the principal at the time of concluding the contract, the contract shall directly bind the principal and the third party, except where there is conclusive evidence that the contract binds only the agent and the third party.
Article 933: The principal or the agent may terminate the mandate contract at any time.
Article 933 is particularly important: the actual investor may terminate the nominee agreement at any time and require the nominee to have the equity re-registered in the actual investor’s name. But after the nominee’s death, the counterparty to the mandate contract becomes the nominee’s heir — whether the heir succeeds to the nominee obligations depends on the nature of the nominee agreement (whether it is personal in character) and the provisions of inheritance law.
Judicial Interpretation III of the Company Law
Article 24: Where the actual investor of a limited liability company and the nominal investor conclude a contract providing that the actual investor shall contribute the capital and enjoy the investment returns, with the nominal investor serving as the nominal shareholder, and the actual investor and the nominal investor dispute the validity of the contract, the people’s court shall uphold the contract as valid if there is no ground for invalidity prescribed by law. Where, as provided in the preceding paragraph, the actual investor and the nominal shareholder dispute the attribution of the investment returns, and the actual investor claims rights against the nominal shareholder on the ground that it has actually performed the capital contribution obligation, the people’s court shall support it. Where the nominal shareholder denies the actual investor’s rights on the ground of the company’s register of shareholders or the company registration authority’s registration, the people’s court shall not support it.
Article 25: Where the nominal shareholder transfers, pledges, or otherwise disposes of the equity registered in its name, and the actual investor claims that the disposition of the equity is void on the ground that it enjoys the actual right to the equity, the people’s court may handle the matter by reference to Article 311 of the PRC Civil Code.
The significance of Article 25 is this: when the nominee’s heir “inherits” the nominee-held equity, it resembles the nominal shareholder disposing of the equity. The actual investor may, by reference to the bona fide acquisition rules, claim that the heir cannot acquire the equity — provided that the heir does not meet the conditions for bona fide acquisition (i.e., the heir knew or should have known of the existence of the nominee relationship).
Newly Revised Company Law
Article 90: After the death of a natural-person shareholder, his lawful heir may inherit the shareholder status, unless otherwise provided in the company’s articles of association.
PRC Civil Code, Law of Succession Book
Article 1121: Succession begins at the death of the decedent.
Article 1123: After succession begins, it shall be handled in accordance with legal succession; where there is a will, it shall be handled in accordance with testamentary succession or legacy.
V. Judicial Adjudication Rules
1. The Adjudication Path After the Nominee’s Death
In judicial practice, in cases where the actual investor asserts rights after the nominee’s death, courts generally hear the case along the following path:
Step 1: Examine whether the nominee relationship was established
The court first examines whether the actual investor can prove the existence of the nominee relationship. Core evidence includes:
- The written nominee agreement (best evidence)
- Capital contribution records (bank records of the actual investor paying the capital contribution to the nominee)
- Dividend records (bank records of the nominee transferring dividends to the actual investor)
- Evidence of participation in management (records of the actual investor attending shareholders’ meetings, participating in decision-making, emails, WeChat chats, etc.)
- Witness testimony (testimony of other shareholders or company managers who knew of the nominee relationship)
- The nominee’s own acknowledgment of the nominee relationship during his lifetime (written confirmation, emails, recordings, etc.)
If the nominee relationship is established, proceed to Step 2. If not, the actual investor’s claim is dismissed and the equity belongs to the heir.
Step 2: Examine whether the actual investor meets the conditions for registration as a shareholder of record
Establishment of the nominee relationship does not mean the actual investor may directly become a shareholder. Under Paragraph 3 of Article 24 of Judicial Interpretation III of the Company Law, where the actual investor claims to change the shareholder and requires the company to issue a capital contribution certificate, record it in the register of shareholders, and complete registration, the consent of more than half of the other shareholders of the company is required.
But in the special scenario of the nominee’s death, the court may apply a more flexible review standard: if the other shareholders knew or should have known of the nominee relationship before and raised no objection, it may be deemed that they consented to the actual investor’s registration as a shareholder of record.
Step 3: Determine the remedy
- If the actual investor meets the conditions for registration as a shareholder of record, the court may order a change of shareholder registration
- If the actual investor does not meet the conditions (other shareholders disagree), the court may order the nominee’s heir to liquidate the equity and pay consideration to the actual investor
- If the heir has already transferred the equity to a bona fide third party, the actual investor can only claim compensation from the heir
2. Classification of Adjudication Scenarios
| Scenario | Evidentiary Status | Adjudication Tendency |
|---|---|---|
| Written nominee agreement + capital contribution records + dividend records | Sufficient evidence | Find the nominee relationship established; support the actual investor’s confirmation of rights or receipt of consideration |
| No written agreement, but capital contribution records + dividend records + evidence of participation in management | Relatively sufficient evidence | Most courts find the nominee relationship established |
| Only capital contribution records, no other evidence | Insufficient evidence | May be characterized as a loan relationship rather than a nominee relationship |
| Only an alleged oral agreement, no written evidence | Seriously insufficient evidence | Difficult to find the nominee relationship established |
| The heir knew of the nominee relationship | Heir not in good faith | Bona fide acquisition does not apply; the actual investor may confirm its rights |
| The heir did not know of the nominee relationship and acquired the equity for consideration | Heir in good faith | By reference to bona fide acquisition rules, the heir acquires the equity, and the actual investor claims compensation against the nominee’s estate |
3. Reference to the Bona Fide Acquisition Rules
Under Article 25 of Judicial Interpretation III of the Company Law, where the nominal shareholder disposes of the equity, the matter is handled by reference to the bona fide acquisition rules in Article 311 of the PRC Civil Code. In the scenario of the nominee’s death:
- If the heir did not know of the nominee relationship and acquired it through inheritance by paying reasonable consideration (e.g., assuming the capital contribution obligation), bona fide acquisition may be constituted
- If the heir knew or should have known of the nominee relationship (e.g., the nominee informed them during their lifetime, or the actual investor had asserted rights against the heir), bona fide acquisition is not constituted
- Where bona fide acquisition is established, the heir acquires the equity, and the actual investor can only claim damages against the nominee’s estate
VI. Intersection with the Company Law: The Link Between Shareholder Registration and the Actual Investor
1. The Effect of Industrial and Commercial Registration
The newly revised Company Law continues the rule that industrial and commercial registration has opposability: without registration or a change of registration, it may not be asserted against a bona fide third party. This means that the nominee relationship (the internal arrangement between the actual investor and the nominee), where unregistered, cannot be asserted against the nominee’s heir — unless the heir knew of the existence of the nominee relationship.
2. The Effect of the Register of Shareholders
The newly revised Company Law strengthens the effect of the register of shareholders: a shareholder recorded in the register of shareholders may assert and exercise shareholder rights based on the register. The nominee is recorded in the register of shareholders and enjoys shareholder rights in law. The actual investor, not being recorded in the register of shareholders, does not directly enjoy shareholder rights — shareholder status can only be obtained through an action for confirmation of rights or the procedure for registration as a shareholder of record.
3. The Impact of the Newly Revised Company Law on the Actual Investor
The newly revised Company Law does not directly provide for the nominee / hidden shareholder system, but by strengthening the shareholder registration system it indirectly increases the risks for the actual investor: if the nominee’s heir completes inheritance registration, it becomes more difficult for the actual investor to overturn the registration. Therefore, the actual investor should complete registration as a shareholder of record as early as possible (while the nominee is alive) to avoid the passive situation after the nominee’s death.
VII. Practical Recommendations
1. Execute a written nominee agreement and keep it safe
The nominee agreement is the actual investor’s most important instrument of rights. The agreement should include: basic information about the nominee-held equity, the method and amount of capital contribution, the term of the nominee arrangement, the rights and obligations of both parties, the dividend method, conditions for termination, liability for breach, and a dispute resolution clause. After signing, the actual investor must retain the original and is advised to notarize it or have it witnessed by a lawyer.
2. Retain complete capital contribution records
The capital contribution must be paid to the nominee by bank transfer, with the remark noting “nominee capital contribution” or “capital contribution for XX Company equity.” Cash contributions, third-party payments, and unremarked transfers all create difficulties of proof. Subsequent additional contributions likewise require complete records to be retained.
3. Preserve dividend and management-participation evidence
- Dividend records: bank records each time the nominee transfers dividends to the actual investor, remarked “XX Company dividend”
- Evidence of management participation: the actual investor’s sign-in sheets for shareholders’ meetings, voting records, and meeting minutes
- Communications: emails and WeChat chats with the nominee discussing company operations (keep the original carriers)
- Evidence of company knowledge: have the other shareholders sign and confirm on the nominee agreement, or issue a letter of informed consent
4. Set a fallback clause for the nominee’s death
Clearly stipulate in the nominee agreement: “If the nominee dies, loses civil capacity, or otherwise becomes unable to perform the nominee obligations, the nominee’s heir shall cooperate in re-registering the equity in the actual investor’s name. The nominee shall, during his lifetime, inform his heir of the existence of the nominee relationship.” It is also advised that the nominee make a will arranging for the disposition of the nominee-held equity.
5. Complete registration as a shareholder of record as early as possible
Where conditions permit, initiate the procedure for the hidden shareholder to be registered as a shareholder of record as early as possible — obtain the consent of more than half of the other shareholders and re-register the equity in the actual investor’s name. Once registered, it no longer depends on the nominee’s cooperation, fundamentally eliminating the risk brought by the nominee’s death. If the other shareholders disagree with registration, rights may be asserted through litigation.
6. Purchase life insurance on the nominee as a fallback
Some actual investors take out life insurance on the nominee, with the actual investor as the beneficiary. Upon the nominee’s death, the insurance proceeds can serve as supplementary security for the actual investor to recover the equity or obtain consideration. But this is only an economic fallback and cannot replace legal confirmation of rights.
VIII. Frequently Asked Questions (FAQ)
Q1: The nominee has died and his heir says he did not know of the nominee relationship — what do I do?
You need to prove that the nominee relationship was established. The best evidence is the written nominee agreement, followed by capital contribution records, dividend transfer records, evidence of participation in the company’s operation and decision-making, communications with the nominee regarding the nominee relationship, and witness testimony of other shareholders. If the evidence is sufficient, the court may find the nominee relationship established and order the heir to cooperate in re-registration or pay consideration. If the evidence is insufficient, the equity may not be recoverable.
Q2: The nominee agreement is lost — can I still recover the equity?
It is very difficult but not impossible. Without a written agreement, one must rely on a chain of circumstantial evidence to prove the nominee relationship: capital contribution records (records of you transferring the capital contribution to the nominee), dividend records (records of the nominee transferring dividends to you), evidence of participation in management (records of you attending shareholders’ meetings and participating in decisions), and witness testimony (other shareholders confirming you are the actual investor). If a complete chain of evidence is formed, the court may find the nominee relationship established. But the risk is extremely high when the chain is incomplete.
Q3: The nominee’s heir has already sold the equity — can I still recover it?
It depends on whether the buyer constitutes bona fide acquisition. If the buyer knew or should have known of the nominee relationship, bona fide acquisition is not constituted, and you may claim the transfer is void and recover the equity. If the buyer did not know of the nominee relationship, paid reasonable consideration, and completed the change of registration, bona fide acquisition is constituted and you cannot recover the equity, but you may claim compensation from the nominee’s heir — limited to the actual value of the inherited estate (limited inheritance under Article 1161 of the PRC Civil Code).
Q4: The other shareholders know I am the actual investor — can my shareholder status be directly confirmed?
Not necessarily. The other shareholders’ knowledge of the nominee relationship and failure to object is an important factor supporting the actual investor’s registration as a shareholder of record, but the conditions of Article 24 of Judicial Interpretation III of the Company Law must also be met — “with the consent of more than half of the other shareholders of the company.” If more than half of the other shareholders consent to your registration, the court may order a change of registration. If the other shareholders disagree, you may not obtain shareholder status, but you may require the nominee’s heir to liquidate the equity and pay you consideration.
Q5: How to avoid the risk after the nominee’s death?
The most fundamental approach is to complete registration as a shareholder of record as early as possible, re-registering the equity in your name and eliminating the nominee arrangement. If registration is not yet possible, be sure to: execute and notarize a written nominee agreement, retain complete capital contribution records with stated purpose, preserve dividend and management-participation evidence, set a fallback clause for the nominee’s death in the agreement, and have the nominee arrange for the nominee-held equity in his will.
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