Case Summary:

(By Zhang Fan) A and B are married. After being married, the couple established a real estate company through joint investment, by which A holds eighty percent of the shares and the owns the remaining twenty percent. C and D wish to purchase all of the company’s shares, to which both A and B agree. Additionally, both participate in the preliminary negotiation with C. Afterwards, however, negotiation was only carried out between A and C, and A signed on behalf of B on the concluded Share Transfer Contract, Shareholders Decision, and the documents prepared for the change of administration. As provided in the Share Transfer Contract, A’s eighty percent share option would be transferred to C, and B’s twenty percent share option would be transferred to D. B did not sign her name on the contract. After the payment by C to A for the share transfer, both parties went to the Administration for Industry and Commerce to register the change. Now the share holding of the company is eighty percent for C and twenty for B (B never took care of the registration transferring ownership to D).

Bringing suit, B claimed the following: after the preliminary negotiation with C, she did not wish to transfer her shares, and therefore left the negotiation. But, her husband, A, concealed the whole process from her and forged her signature. All these actions damaged her interests. For this reason, B filed a lawsuit against A, C, and the company demanding that the court rule that the Share Transfer Contract containing her signature not be legally binding and that the share transfer between A and C damaged her priority right, and that therefore the transfer is invalid.

The legal issues in the case

I. Effectiveness of the share transfer contract registered under B’s name

In the case, B claimed that she never signed the contract, the agreement violated her expressed intent, and is thus invalid. After the hearing, the court held that although B did not sign the contract, in consideration of the spousal relationship between A and B, A’s action constituted the apparent agency. (Note: Simply put, apparent agency means that the opposite party in the transaction has adequate reasons to believe that the unauthorized agent enjoys agency and is able to complete the transaction). Therefore, A’s signature on the contract is valid, and because there was nothing in the content of the contract that violated the mandatory rules in the laws or administrative regulations, so the contract is effective. On these grounds, the court rejected B’s claims.

II. The character of of A’s handling of the shares under his name

1. A’s shares are joint spousal property

According to the relevant provisions of China’s Marriage Law, when a husband and wife have make no agreement over ownership of property, except for property that the law stipulates belongs to one party, all other property is joint spousal property. For this reason, the company established after A and B’s marriage is joint property, and any profits or gains from transfer are also joint property.

2. Does A have the right to handle the shares under his name that are spousal joint property?

As provided in Judicial Interpretation I of the Marriage Law:

If a husband or the wife must, on account of something outside of everyday life, make a major decision on the handling of their spousal property, a fair and equal negotiation must be carried out between the two parties, and a consensus must be reached. When the third party has adequate reason to believe that the action is based on the mutual assent of the spouse, the other party may not fight against the third party action made in good faith by claiming that he or she was unaware or did not agree to the action.

The key question in the case is whether C was a good faith third party. According to the facts of the case: 1) both the husband and wife had participated in the preliminary negotiation (this was confirmed by both the husband and wife); 2) as stated by C and the another witness, after the conclusion of the share transfer contract, A and B came to the witness’s office and discussed matters related to the share transfer (both the husband and wife denied this statement); 3) after the conclusion of the share transfer, A and B registered a new company at the original address of the former company’s place of business; 4) the last installment of the payment was transferred to the account of the new company jointly operated by A and B, and B is the executive director and legal representative of the new company; 5) A held a copy of B’s ID card.

Based on these facts, the court decided that C had adequate reason to trust that B was aware of and made no objection to A’s share transfer. For this reason, C was a good faith third party, and A’s actions were effective.

III. B’s priority right on A’s share transfer as a shareholder that is also A’s wife

In the case, the court further held that the spousal relationship between A and B means that their ownership of the company’s shares is common ownership rather than co-ownership. Because of this, the couple’s property is mixed, and no concept of mutual purchase could be applied. Therefore, B has no priority over it.

The case was heard through the first and second instance, and the court ultimately denied all of B’s claims.

Reminder from the attorney:

1. In cases where a husband or wife signs on behalf of the other for a transfer of property under his or her name or transfers jointly owned property, the other party to the transaction must be wary and do everything it can to have both parties sign the contract in front of it. This can guard against the other party in the couple claiming that he or she had no awareness of the transfer and avoid a lawsuit.

2. In this case, the court’s confirmation that apparent agency was established and the transfer was effective required a series of evidence showing that C had adequate reason to believe that A had authorization. So, if one party has signed the contract, aside from getting written confirmation that he has authorization (ideally a power of attorney), it is also necessary in the course of the transaction to maintain any evidence to demonstrate the couple’s awareness of each others’ conduct and the joint intention.

3. It is necessary to note, in under any circumstances, signing documents in others’ always has great risk of being legally void.

Lawyer Contacts

You Yunting：86-21-52134918  youyunting@debund.com/yytbest@gmail.com

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