Avoiding Family Affairs-Related Risks in the Construction and Processing of Chinese Entrepreneurs’ Overseas Enterprises

Avoiding Family Affairs-Related Risks in the Construction and Processing of Chinese Entrepreneurs’ Overseas Enterprises

Within the trend of wealthy Chinese’s globalized asset allocation, stock rights have become a main carrier of wealth. Chinese entrepreneurs constructing complex corporate structures overseas (especially in offshore locations) is a long-established trend, but the difference between Chinese and foreign family laws and the complexity of the jurisdiction and application of laws in family disputes may result in entrepreneurs being hit hard by family-related risks, in spite of having attempted to create impregnable business empires. Therefore, isolating family assets from family disputes, guaranteeing the continuous inheritance of family assets, and avoiding family affairs-related risks has become extraordinarily important.  

  1. I. The Supreme Court of the UK piercing a multi-tiered enterprise structure in a divorce case

(I) Case background

Mr. H (“Husband”) and Mrs. M (“Wife”) have been married for many years and have four children. During a divorce dispute, the British court granted custody of the four children to the Wife and required the Husband to pay a huge amount of child support and alimony to the Wife. After the judgment was effected, the Husband refused to pay the alimony. The

Wife filed an ancillary relief suit in a divorce dispute with the court. The Husband is the actual controller of a group company with seven high-value properties:

The Supreme Court of the UK granted that the Husband was the beneficial controller of such a structure and ordered the company to transfer the real estates into the Wife’s name, thereby offsetting the huge amount of alimony and child-care support that the Husband had refused to pay.

(II) Lawyers’ analysis

Within the written judgement of over 40 pages issued by the Supreme Court, seven judges cited the reasons why they “piercing the veil of the company”, and dismantled the company structure. They identified the company’s real estates as the actual controller’s personal assets: “This is not just a matter of piercing the veil of the company. It is the Husband who is the beneficial controller of the company. The company is only holding the seven properties on trust for the Husband."


The reasons for the above-mentioned conclusions are as follows: 

1. The Husband’s personal capital flow is mixed up with the capital flow of the company. 

2. The Husband can discretionarily handle the company’s properties. The properties and assets of the company are equivalent to the belongings of the Husband.

3. The exclusive actual controller of the company is the Husband. There are no other shareholders. All profits of the company are controlled by the Husband directly and indirectly.

This is a domestic case within the Common Law System. The judges used their discretionary power to dismantle the complex corporate structure, and directly identified the properties controlled by the corporate structure as personal properties of the actual controller.


  1. II. The freezing of all relevant equity interests belonging to the controller of a Hong Kong listed company in BVI and Hong Kong

(I) Case background

The actual controller (“Husband”) of a Hong Kong listed company and his spouse (“Wife”) have been married for many years. During the marriage, the Husband privately disposed of all of the shares of the listed company at low prices. The lawyer helped the Wife initiate legal proceedings and apply for the freezing order, the disclosing order and the investigating order before litigation with the court in a certain city in China, the Eastern Caribbean Supreme Court, the BVI High Court, and the Hong Kong High Court.

Finally, two courts issued three orders respectively:

1. Injunction order

This prohibits the Husband and relevant companies from transferring and disposing of the stock rights in question, and all other interests such as dividends and income related to the stock rights in question. It freezes all bank accounts belonging to the Husband and relevant companies in Hong Kong;

2. Disclosure order

The Husband is required to disclose all information related to the stock rights in question, including dividends and any changes to relevant interests, and to update the court and his spouse with such information.

3. Inspection order

If the Wife deems the above-mentioned information disclosed by the Husband to be incomplete or untrue, she may file an application with the court to investigate relevant assets belonging to the Husband.

(II) Lawyers’ analysis

Unlike in the first case, the judges of the Eastern Caribbean Supreme Court in the  High Court of Justice Virgin Island issued the Injunction order before litigation, and then consulted the legal opinions of by Chinese lawyers: 

Firstly, according to the provisions of the Marriage Law and the judicial explanations numbered II and III, unless special agreements are reached, items of property (including investment interests and their added value) acquired by a husband and wife during the period in which they are under the contract of marriage are the common property of the husband and wife. Therefore, the assets disposed of by the Husband in this case are the couple’s common property. The Chinese system of “couples’ common property” is different from the system of “couples’ separately-owned property” within the Common Law System.

Secondly, according to the provisions of the Marriage Law and judicial explanation number I, both the husband and the wife have equal rights over the couple’s common property. As for the disposal of major assets, the husband and the wife shall reach an agreement through consultation on the basis of equality, but in this case, the Husband didn’t obtain consent from the Wife and didn’t inform the Wife of the assets’ disposal.

According to relevant regulations in the Property Law, the Opinions on Several Issues concerning the Implementation of the General Principles of the Civil Law and the Contract Law, malicious acts by a Husband such as disposing of the jointly-owned assets violate the property rights and interests of the Wife, and should therefore be considered invalid.

In this case, the UK court and the Hong Kong court referred to Chinese law and froze all the Husband’s stock rights overseas.

  1. III. Chinese court invalidates the endowment of the shareholders of an American listed company

(I) Case background

After years of marriage, the shareholder of an American listed company (“Husband”) and his spouse (“Wife”) are involved in a divorce dispute. Before the two parties have reached an agreement on the division of property, the Wife discovered that the Husband had already endowed the stock rights of the American listed company that he held to his brother. The Wife initiated legal proceedings with the intention to invalidate such an endowment of stock rights. The Supreme Court and a local high court reviewed the case and, based on the jurisdiction and the case facts, made a judgment that the endowment of the stock rights was invalid. 

(II) Lawyers’ analysis

The Chinese court directly made a judgment that the Chinese citizen’s endowment of the stock rights of the listed company was invalid according to Chinese laws. For the legal basis of this judgment, refer to the analysis and legal opinion in Case II above. It was no doubt a significant breakthrough within the judicial practice of family dispute cases involving foreign interests, and it also sounded an alarm to entrepreneurs disposing of their stock rights overseas. Even if they dispose of stock rights overseas, any improper disposal may be judged by the Chinese court as being invalid in domestic cases.

  1. IV. Risk avoidance for Chinese entrepreneurs in cross-border domestic disputes

Entrepreneurs often focus on the commercial operations of their business and ignore potential domestic risks. It is extremely regrettable when a strategic business genius who builds an impregnable business empire suffers major losses due to family affairs-related risks such as the above-mentioned cases. If enough importance is attached to these risks during cross-border capital operations, appropriate measures for risk prevention and avoidance can be planned as early as possible to enable entrepreneurs to deal with the risk calmly.

(I) Using agreements to avoid family affairs-related risks

Compared with complicated operations like trusts and foundations, formal agreements are a legal method of avoiding domestic risks at a lower cost, and with relatively simple procedures.

1. Cross-border prenuptial agreements and marital agreements

Prenuptial agreements can be a positive breakthrough within the “couples’ common property” legal system. Entrepreneurs can reach an agreement on the ownership of both parties’ assets with their spouses in advance. If the two parties agree that the stock rights and interests of the entrepreneur are in his exclusive possession, these stock rights shall be deemed the personal properties of the entrepreneur. Whether it is a listing, a trust, or a transfer, the stock rights of the entrepreneur’s company shall be isolated from domestic risks. If no prenuptial agreement is reached, the entrepreneur may sign a marriage agreement with his/her spouse to define the ownership of both parties’ assets. This can achieve the same results as a prenuptial agreement.

Cross-border prenuptial agreements and marriage agreements have a cross-border effect which maintains the conditions of the agreement in all jurisdictions related to the properties of the entrepreneur, and enables the entrepreneur to effectively handle and arrange assets on a global scale. 

2. A letter of consent from your spouse

If two parties fail to reach an agreement on the arrangement of all assets, it is better to obtain a letter of consent from your spouse regarding the individual disposal of stock rights under his/her name, thus avoiding domestic risks to the greatest possible extent.

3. Cross-border will-planning

If an entrepreneur doesn’t make arrangements or provisions for his/her properties after they pass away, or they only make a will in one jurisdiction where his/her properties are distributed, or one that is only valid in his/her place of residence, or they do not take into account the global distribution of his/her properties, it may lead to one of the most frequent cross-border domestic disputes that people face in life. Just like with cross-border prenuptial agreements, the global planning of your will is a tool for avoiding subsequent family affairs-related disputes and equal importance should be attached.

(II) Isolating family assets from entrepreneurs’ personal assets

Within both a Chinese legal framework and the Anglo-American legal system, the independent corporate integrity of a company should not be challenged. If entrepreneurs don’t place emphasis on isolating their corporate assets from their family assets, the corporate integrity of the company is very likely to be denied, and its long-established complex corporate structure may even be dismantled. We can reverse the criteria for structures deemed “invalid” by the UK Supreme Court. Attention should be paid to the following aspects: 

  1. Isolating corporate assets and accounts from the actual controller’s domestic assets and accounts
  1. Diversification of stockholders within the company’s shareholding structure

3. The actual controller shall not be the sole beneficiary in the shareholding structure 

(III) Litigation strategy to deal with risks

In the three cases above, when a multinational family enterprise encounters family affairs-related risks, the parties involved must not underestimate the risks involved. Only by responding quickly and proactively and developing a comprehensive cross-border litigation strategy can the interests be maximized and the losses be minimized. 

While constructing cross-border equity structures to prevent commercial procedures and financial risks, Chinese entrepreneurs should also be vigilant about the impact of family affairs-related risks on family enterprises. From the start, one should carefully arrange properties, establish firewalls against family affairs risks, and define family assets verus assets separately owned by the husband and wife, and establish the boundaries of the couple’s jointly-owned properties so as to stimulate the sustainable growth of family industries, continue to pass on family enterprises through generations, and ensure that family relations are harmonious, and rock-solid.

Lawyers: Gao Mingyue, Gaojie

 Guantao Law Firm Shanghai Office

March 19, 2018

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