Discuss equity penetration calculation.

In the previous installment, we discussed the穿透 calculation of shareholder numbers; let’s also briefly cover equity penetration calculation here. Equity penetration is actually quite straightforward to understand: it involves tracing ownership upward layer by layer until reaching the ultimate investor—be it an individual, a private equity fund, or an asset management company—to ascertain the ultimate investor’s equity stake, control rights, and associated risks. 1. Equity. The calculation method is simple: multiply and sum up the equity held by the same investor across different layers—for instance, the investor’s direct equity stake in a given layer, multiplied by that layer’s equity stake in the next lower layer. For example, Mr. Zhang holds 100% of Company A; Company A holds 50% of Company B, while Mr. Zhang also directly holds 30% of Company B; Company B holds 40% of Company C, while Mr. Zhang directly holds 20% of Company C. Then Mr. Zhang’s aggregate equity stake in Company C amounts to 52% (20% + 30% × 40% + 100% × 50% × 40%), making him the de facto controlling shareholder of Company C. 2. Control rights. Absent special arrangements such as differentiated board voting rights, managerial operational authority, or unequal voting rights per share, control rights align with equity ownership.

The money has been paid and the signatures affixed—but then the majority shareholder sells the same equity to someone else. To whom does the equity ultimately belong?

II. Real-World Cases Case One: Involving Cui Cui Moulong and Yu Moulin were originally shareholders of Century Company. Glory Company, Yan Fei, and three other individuals forged Cui Moulong’s and Yu Moulin’s signatures and, using fraudulent documents, transferred Cui’s and Yu’s shares into their own names (the first ‘transfer’), completing the relevant industrial and commercial registration changes. Subsequently, Glory Company, Yan Fei, and the other three individuals transferred those same shares to Sun Mouyuan and four others (the second transfer). Prior to signing the agreement, Sun Mouyuan and the other five transferees reviewed the industrial and commercial registration records and confirmed that Glory Company et al. were duly registered shareholders; they paid fair consideration (a transfer price of RMB 27 million, plus additional payments made on their behalf by Municipal Construction Company); they completed the industrial and commercial registration change; and Sun Mouyuan assumed the role of the company’s legal representative and participated in its management and operations. Cui Moulong and Yu Moulin sued, seeking confirmation that the equity be ‘restored to its original owners.’ After reviewing the case, the Supreme People’s Court held: First, the initial transfer was based on forged signatures and thus did not reflect Cui Moulong’s and Yu Moulin’s true intentions; accordingly, the transfer was legally invalid, and Glory Company et al. lacked authority to dispose of the shares. Second, prior to acquiring the shares, Sun Mouyuan and the other five transferees specifically visited the local industrial and commercial administrative authority to verify the company’s equity registration, fulfilling their duty of prudent review. Third, no evidence indicated that Sun Mouyuan and the other five acted in bad faith during the acquisition; moreover, the transfer price was reasonable and the industrial and commercial registration change had been completed. Fourth, Sun Mouyuan and the other five qualified as bona fide purchasers and lawfully acquired the equity. Consequently, Cui Moulong and Yu Moulin had no right to reclaim their shareholder status; instead, they could seek compensation for their losses from Glory Company and the other infringing parties separately. Key Takeaway: This case established the applicability of the doctrine of bona fide acquisition in disputes involving ‘double sale of the same equity.’ The most critical lesson for minority shareholders is this: do not assume that, merely because someone forged documents to transfer your equity, you can automatically restore your shareholder status. If a bona fide third party has already completed the industrial and commercial registration change and actively exercised shareholder rights, courts will prioritize transactional security over your original shareholder status. Your proper remedy lies in claiming damages from the infringing party—not in attempting to reclaim the equity from the bona fide third party. Case Two: Involving Chen In this case, Chen Mou entered into a share transfer agreement with Taihe Company to acquire equity in Taihe Agricultural Company. Chen Mou paid the transfer price; although the shareholder register had not yet been formally updated, he had already begun exercising shareholder rights in practice. Later, Taihe Company transferred the same equity to Li Jingjing and Zhao Rugang and completed the industrial and commercial registration change. Chen Mou sued, seeking confirmation of equity ownership. The Chengdu Intermediate People’s Court held: First, upon effectiveness of the share transfer agreement between Chen Mou and Taihe Company, the bundle of equity rights had already transferred from the transferor to the transferee; thus, Chen Mou had acquired the equity in Taihe Agricultural Company. Second, Taihe Company’s subsequent transfer of the same equity to Li Jingjing and Zhao Rugang constituted unauthorized disposition. Third, Li Jingjing and Zhao Rugang were employees of Taihe Agricultural Company; considering their own statements—claiming ignorance of the equity being registered under their names—their assertion lacks credibility; furthermore, as equity acquirers, Zhao Rugang should have investigated the equity’s status. Fourth, and more importantly, Chen Mou had filed suit with the court of first instance on July 21, 2017, asserting rights over the disputed equity; Li Jingjing and Zhao Rugang should therefore have been aware of this fact. Ultimately, the court determined that Li Jingjing and Zhao Rugang did not qualify as bona fide purchasers, and the equity remained vested in Chen Mou.

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