What rights does a share pledge attribute to the pledgee? Are there any arguments against exercising such rights? What are the formal requirements for its establishment?

There is no specific provision regarding rights of pledgees in cases of share pledge.

As general pledge rules are applicable to both movables and rights, pledgees are entitled to:

(a) Possession of the pledged property (Arts 208 and 229 of the Property Right Law);

(b) Collection of the fruits out of the pledge property accrued from the pledged property, unless otherwise stipulated in the pledge contract (Art. 213 of the Property Right Law).

From the perspective of share pledge by publicly listed companies, “fruit” is specified to include “shares offered to shareholders for free and dividends etc.” and such incurred fruit shall be jointly pledged (Art. 35 of PRC Measures for Administration of Share-Pledged Loans of Securities Companies).

A pledgee is not allowed to use or dispose of the pledged property, unless otherwise agreed by the pledgor (Art. 214 of the Property Right Law).

Arguments for exercising such rights include (i) challenging the preconditions as specified in Question 3 above for establishment of such pledge, or (ii) excluding the right to collect fruits via mutual agreement (Art. 213 of the Property Right Law).

For the formal requirement to establish a valid share pledge, please refer to Question 3 above. It was not until 2008 that China issued the regulations relating to the registration of share pledges (Measures for the Registration of Share Pledge with Industry and Commerce Administration Authorities effective as of 1 October 2008). Before that, all companies in China in which foreign companies had invested had great difficulties in officially setting up a share pledge.