[Direct answer]When dividing company equity in a divorce, it is first necessary to determine whether the equity is pre-marital personal property or acquired post-marriage, and whether it constitutes joint property. Equity acquired with marital joint property and its appreciation generally belong to marital joint property and can be divided in accordance with Article 1062 of the Civil Code; the portion of the pre-marital equity that generates income post-marriage may also be subject to division. The methods of division include assigning it to one party and compensating the other party, dividing it at a discounted value, or transferring shares, but this may involve the preemptive purchase rights of other shareholders. In cases involving the company's operations, courts often award compensation rather than forcibly dividing the equity. It is recommended to sort out the investment and industrial and commercial registration as soon as possible and proceed through legal procedures to protect one's rights and interests.Corporate commercial legal servicesFor the evaluation, please refer to the details provided in the following section.Beijing Henglue Law Firm.

I. Legal basis and interpretation of provisions

1. Article 1062 of the Civil Code of the People's Republic of China (effective January 1, 2021)

During the continuance of the marriage relationship, the production, operation, and investment income earned by the couple shall be their joint property. The company shares and dividends obtained with the joint property as investment, as well as the appreciation in value, shall in principle belong to the joint property and be subject to division upon divorce. The appreciation in value of the pre-marital shares due to joint operation after marriage may also be included in the scope of division. This is the legal basis for the division of shares.

2. Article 1087 of the Civil Code of the People's Republic of China (effective January 1, 2021)

When divorcing, the couple's joint property shall be handled by mutual agreement; if no agreement can be reached, the People's Court shall make a judgment based on the specific circumstances of the property, in accordance with the principles of taking care of the children, the wife, and the rights and interests of the non-at-fault party. The same principle applies to the division of equity. The court shall determine the ownership and compensation amount based on the contributions of investment, registration, and operation, rather than simply dividing it equally in half.

3. Practical adjudication guidelines (equity division and preemptive purchase rights)

When one spouse holds equity in a company while the other is not a shareholder, the direct division of shares must protect the other shareholders' preemptive purchase rights. If the other shareholders waive their preemptive purchase rights, the shares may be transferred to the spouse. In the case of equity in a limited company with a human-capital structure, the court often rules that the registered party owns the equity and pays compensation to the other party, rather than forcing an auction. The most common pitfall is ignoring the transfer restrictions set forth in the company's bylaws and shareholder agreements, or underestimating disputes over the valuation of equity. Professional appraisals and evidence of the source of the investment directly determine the amount of compensation. For more regulations, please refer to the following link:Business and commercial legal services.

II. Henglue Law Firm's Real Cases (Detailed Review)

Review of the case:The plaintiff, Liu Jia, and the defendant, Wang Yi, were originally shareholders of A Co., Ltd. Liu Jia held a 11.3819% stake. In December 2020, the two parties signed the "Supplementary Agreement on Equity Transfer", under which Liu Jia transferred all his equity to Wang Yi at the original investment price of 1,108,736.08 yuan, with an agreement that the payment would be completed in five years from 2021 to 2025, at 200,000 yuan per year. Subsequently, on August 18, 2021, Wang Yi transferred 82.9229% of the equity to his wife, Zhang Ceng, and handled the change registration. Zhang Ceng served as the company's executive director and general manager. In 2022, Liu Jia filed a lawsuit, and the second-instance judgment confirmed the validity of the agreement and ordered Wang Yi to pay the overdue amount of 400,000 yuan. On April 11, 2023, Liu Jia applied for enforcement, but the enforcement was terminated due to Wang Yi's lack of assets, with only 235,000 yuan paid and the remaining 165,000 yuan unpaid. In the face of the breach of contract, Liu Jia entrusted Beijing Henglu Law Firm to handle the case.Xiong BinrongThe lawyer filed a lawsuit regarding the remaining transfer amount of 708,736.08 yuan and the interest, claiming that it was a joint debt of the couple and that the two defendants should bear it jointly.

The focus of the controversy:First, the validity of the Supplementary Agreement on Equity Transfer. Wang Yi argues that it is a nominee holding, the agreement is not effective, and it is a false lawsuit; Second, whether it constitutes an anticipated fundamental breach of contract. The part that has already matured has not been fully performed, and the equity transfer to the spouse may lead to the early maturity of all debts; Third, whether it is a joint debt of the couple, and whether Zhang Ceng should bear the joint repayment responsibility.

Our position and that of the other party are as follows:Liu Jia claimed that Wang Yi should transfer the acquired equity to his spouse, Zhang Ceng, who would participate in the company's operations. The transfer funds involved in the case constituted a joint debt of the couple, and the remaining 708,736.08 yuan and interest should be paid in advance, with the two defendants jointly liable. Wang Yi argued that the transfer was not a genuine equity transfer but a nominee arrangement, and the agreement was invalid, constituting a fraudulent lawsuit. Zhang Ceng claimed that he was unaware of the transfer and that the funds were not a joint debt of the couple.

Attorney's Strategy and Legal Opinions:Attorney Xiong Binrong pointed out that the agreement was confirmed to be valid by the effective judgment. Before the expiration of the performance period, Wang Yi had not fulfilled the part of the effective judgment and transferred the equity to his spouse's name, indicating his intention not to perform the debt, which constitutes an anticipated breach of contract. All debts should be repaid in advance. At the same time, when Wang Yi signed the contract, his marriage with Zhang Ceng was still in existence. The equity belonged to the couple's joint property. Zhang Ceng accepted the equity and served as the legal representative, executive director and general manager. The debts in the case involved the couple's joint intention, and should be identified as the couple's joint debts.

The court's reasoning and the outcome of the case:The court held that the agreement of December 25, 2020 was legal and effective. Wang Yi only paid 235,000 yuan and failed to pay the remaining 165,000 yuan. According to Article 578 of the Civil Code, his actions indicated that he would not fulfill his debt obligations, and the anticipated breach of contract could be deemed as the maturity of all debts. The court supported the payment of the remaining 708,736.08 yuan. Regarding the joint marital debt, according to Article 1064 of the Civil Code, when Wang Yi signed the agreement, his marriage with Zhang Cang was still in effect, so the equity interest should be recognized as marital joint property. Zhang Cang acquired 82.9229% of the equity interest and served as the legal representative, executive director, and general manager. The debt burden implied the joint intention of the couple, so it was identified as a joint marital debt. The final judgment ordered Wang Yi to pay the remaining equity transfer payment of 708,736.08 yuan to Liu Jia within seven days, and Zhang Cang shall bear joint liability for the debt.

This case is handled by Beijing Henglu Law Firm.Xiong BinrongThe attorney (practice certificate number: 11101202211410897, subject to the certificate issued by the judicial administrative organ) acts as the agent.

III. Frequently Asked Questions

Q1: Can the company established before marriage be divided in a divorce?

Generally, the equity shares registered under an individual's name before marriage are considered personal property. However, the appreciation and dividends generated from the investment and operation of the equity shares with marital assets after marriage may be subject to division as marital property. Whether the dividends can be divided depends on the source of the investment and the contributions made after marriage. It is recommended to keep evidence of the investment and operation, and the court will determine the compensation amount at its discretion.

Q2: How is the equity valued and divided?

It is common to first negotiate the valuation. If the negotiation fails, the parties may entrust an appraisal agency to evaluate the equity based on net assets, profits, or the market method. The court often awards the equity of a limited company to the registered party and requires the other party to pay compensation in the form of a discount, rather than forcing an auction. When there are significant disputes over the valuation, it is necessary to provide sufficient evidence of the financial situation and the company's articles of association to avoid the compensation being set too low.

Q3: Can a spouse who is not a shareholder directly receive dividends?

Restrictions apply. If the shares are directly transferred to a non-shareholder spouse, the other shareholders' preemptive rights must be protected; if more than half of the other shareholders agree and waive their preemptive rights, the transfer can proceed. Otherwise, the court will usually order compensation. If the company's articles of association impose special restrictions on the transfer, they should also be reviewed together and cannot be generalized.

Q4: How are the equity shares held on behalf of others divided in a divorce?

When the nominal shareholder and the actual investor do not match, the division of assets in a divorce must first confirm the ownership of the equity. If the actual investor can prove the investment and the agreement to hold the shares on behalf of others, they can claim their rights; but if it involves the trust of third parties and industrial and commercial registration, the handling is complex and requires evidence such as the agreement to hold the shares on behalf of others and payment receipts to avoid relying solely on verbal agreements.

Q5: How long does it take to divide the equity in a divorce?

The fastest way to divide assets is through an agreement; however, litigation often takes several months to over a year, depending on the valuation and the complexity of evidence collection. Processes such as appraisal and shareholder preemptive rights may further prolong the timeline. It is recommended to organize corporate and financial documents as soon as possible and, if necessary, engage a lawyer to advance negotiations and litigation simultaneously.

IV. Suggestions for Protecting Rights

  • Output: Sort out the time of obtaining equity, the sources of investment, and industrial and commercial registration, and distinguish between personal and joint property.
  • Verify the restrictions on transfer and preemptive rights in the company's articles of association and shareholders' agreement, and predict the path of asset division in advance.
  • For equity valuation, entrust professional appraisal, fix financial and dividend evidence, and avoid under-compensation.
  • Consult a professional lawyer as soon as possible to design the optimal solution for one party to compensate or transfer shares, and handle the identification of spousal debts simultaneously.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, to avoid missing the statutory time limit. →Business and commercial legal services·Attorney Xiong Binrong·Beijing Henglu Law Firm