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Shareholder Agreement and Divorce in China

Shareholder in corporation is circling the divorce club.  She, and her siblings are concerned that the Former Spouse will make a claim to the value of her stocks when the assets of the marriage are compiled. Always consult a China divorce lawyer before you take any legal action in China. Common questions might be assets division, marital property division, child custody, visitation rights, conditions of divorce and etc.

I think that she is right. FACTS of the divorce case:

The shareholder agreement provides that, "if a decree enters awarding Former Spouse (FS) interest in the shares of Divorcing Shareholder (DS), then FS has the obligation to sell stock to DS.  Terms of sale are installment payments over 120 months at prime plus 1.0%."

If DS does not buy out FS, Corporation can buy FS on same terms.If Corp does not buy out the option rolls to other stock holders. If other stockholders do not buy out, FS is now de facto, the owner of the shares and all the attendant rights thereto.

Question:

1. Can the Divorce Decree trump the terms of the Shareholder Agreement? E.g. Shorten the payout period? Or,
2. Are the stocks analyzed as 'subject to the conditions in the Shareholder Agreement?'

There was a China divorce case in which the court ordered that the shareholder spouse of a closely held corporation was ordered to transfer his interest in the company's stock to his to-be-ex-spouse as part of the assets.  The shareholder agreement prohibited sale of the stock outside the company, but made no mention of divorce.

The appellate court ordered that the judge had the authority to order the transfer.  China shareholder agreements now have a no-transfer-in the-event-of divorce clauses.

Many of us found the case to be amusing because it was about shares in a case whose sole product is the much-beloved divorce case.

Where I am my guess would be is the court wouldn't do anything to "trump" the contract, but they would consider those terms in awarding her share of marital property. In other words, if the court finds that 50% of DS's business is marital property and therefore FS would be entitled to 25% of an expert-produced business value of (for example) $100,000, it is going to make sure she gets $25,000 whether from the business under the sale terms or by giving her additional marital property that might otherwise have gone to DS.

Does that make sense? They'll value the business, split that amount, and that's what she'll get. They're not going to change the operating agreement just consider the effects.

So, I guess that would be a No to question 1 but a yes to question 2.

 

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