Appeal court finds in favor of foreign investor

An appeal made by a local Chinese man who established a company with a foreign shareholder but refused to give stock rights to the latter was rejected on Thursday by the Shanghai No.1 Intermediate People's Court. The court's ruling cited China's new Foreign Investment Law as the basis for protecting the equal ownership rights of the foreign investor.

This is China's first such case since the law took effect on January 1. Prior to this, the Chinese-Foreign Equity Joint Ventures Law restricted foreigners from setting up firms with Chinese partners. But the new law places no such restrictions on ownership.

Earlier the first-instance court ordered the man, surnamed Zhang, to return stock rights to the foreign shareholder. Unsatisfied with the verdict, Zhang appealed to the intermediate court.

According to the court, Zhang met a Chinese-American in 2009 and they established a trading company in Shanghai to provide import and export services for the latter's foreign firm.

However, under the Chinese-Foreign Equity Joint Ventures Law, the Chinese American was not allowed to set up a joint venture enterprise with Zhang. To solve this problem, Cheng, the younger brother of the plaintiff as well as a Chinese national, got involved in this matter and the foreign shareholder's investment later became stakes held by Zhang and Cheng.

On November 3, 2009, the Chinese American paid a total of 510,000 yuan (US$71,992) and specified that 260,000 yuan was to be put under Zhang's name while the remainder was put under Cheng. Zhang and Cheng respectively gave another 250,000 yuan and 240,000 yuan for their own investments.

The company was set up with registered capital of 1 million yuan, with Zhang holding 51 percent of shares and Cheng holding 49 percent. On November 10, 2009, the trio signed an agreement on the allocation of the shares — the Chinese American had 51 percent, Zhang had 25 percent and Cheng had 24 percent.

After the company started running, the Chinese American asked Zhang to return the 26 percent stake under Zhang's name and give it to Cheng. This request was refused by Zhang, who denied that he held any shares for the Chinese American  and insisted that his 51 percent stake belonged to him.

The Chinese American eventually brought the company and Zhang to court and demand the return of his shares. Although losing the lawsuit, Zhang appealed and claimed that the agreement they mentioned was for another company and the e-mail address involved in the e-mails the Chinese American provided as evidence is not his.

The Shanghai No.1 Intermediate People's Court said the agreement clearly showed that the three people are shareholders of the company and the Chinese American owned 51 percent of the shares after investing 510,000 yuan.