The court confirmed that the quality of the transferred equity was not in accordance with the agreement, but rejected the request for the return of the difference

Partnership Guide | Author: Li Li

This is the 911st text of Li Li's blog and partnership guide public account

The court confirmed that the quality of the transferred equity was not in accordance with the agreement, but rejected the request for the refund of the difference

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In terms of the types of contracts stipulated in the law, which type of equity transfer contract should it belong to? Is it classified in the contract of sale or in an atypical contract?

In practice, especially in the litigation practice of the courts, the equity transfer contract is more regarded as a kind of sale contract. In the absence of provisions in special laws such as the Company Law, the legal determination of contracts is based on the legal provisions of the sales contract.

The type of contract of sale and purchase is the boss of the types of contracts stipulated in the law, and it is also a model. There is a legal basis for my statement. The Civil Code of the People's Republic of China clearly stipulates:

Article 646 Where the law has provisions on other contracts for compensation, follow those provisions; if there are no provisions, the relevant provisions of the sales contract shall be applied by reference.

For other paid contracts, as long as there is no special provision of the law, reference must be made to the provisions of the Civil Code on the sale and purchase contract. Therefore, it is actually more appropriate to classify the "Equity Transfer Contract" into the sales contract and not pay attention to academic meticulousness.

Two days ago, some netizens criticized me under the notes I shared, believing that the articles I wrote did not directly enter the topic, and there were too many things written in front. Of course, in principle, I don't reply to any comments, because I don't know people well.

But, casually, some things are just a matter of perspective. Some netizens may think that the notes or ideas I write about legal practice should be in a professional style, like the one on the dissertation website or in a legal magazine.

However, I do not take these notes shared every day as what legal papers or professional articles, it is just my study notes, and it is some messy notes, see the excerpt, think of the analysis, do a summary, just like in a book according to their own needs to make notes, do not pay attention to beauty, do not pay attention to complete, because that is to match the needs of personal work, whether it is suitable or not only they know.

In these notes, not written does not mean that it is not important, most likely because it is already familiar to my chest, there is no need to take notes again. Those who have written are not necessarily important, but are likely to have merely discovered a new situation, a new point of view, or a clue to thinking. Even those excerpts are not necessarily correct and reasonable, and are likely to be wrong, but they are not more special and wrong.

Daily continuous work summary and study is a normal life, a process of chatting with legal practice, and constantly updating your big head. So, in the eyes of some readers, it may be more nonsense. But, I need this nonsense and I need to share this.

Back to the point, the agreement on the quality of equity is actually quite difficult to agree on in practice. People who have experience in contract operation practice must know that such a standard must find an objective evaluation standard, otherwise the quality cannot be determined. However, such an objective evaluation criterion is not easy to find.

Some people may say that equity can be evaluated. However, the asset valuation of equity and the valuation of equity in the investment circle are completely different things. Equity asset appraisal, there are standardized, operational standards, is the need for professional appraisal institutions to do, although relatively objective, but the asset appraisal of the equity value, often and the market value of the gap is very large. Market transactions are willing to accept the valuation of equity, and few people are willing to determine the equity price according to the asset valuation when transferring an equity, unless it involves state-owned assets. But the problem is that equity valuation is a very non-objective standard, there is no statutory standard, there is no operating norm in the industry, and there is no limit to the qualifications of the subject, and anyone can carry out equity valuation.

So, going back, how do you say the quality criteria for equity are set? In the operation of equity investment contracts, there is a practice that the equity transaction price after the contract is agreed upon shall not be lower than the transaction price of the shares, otherwise the transferor must compensate the value of the difference to itself. However, such a clause can hardly be said to be an agreement on the quality of equity.

From my practical experience, there is no way to agree on the quality standards of equity, and equity transferees should control the risks of equity transfer contracts from other angles.

In the case mentioned today, the plaintiff is expected to be very upset after seeing the court's judgment. Because, on the one hand, the court found that the quality of the equity was problematic, but on the other hand, because the plaintiff did not submit evidence to prove the difference in quality, it rejected the plaintiff's claim for the return of the difference.

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The basic facts of the case

Plaintiff: Company A, transferee of equity.

Defendant: Company B, equity transferee.

Target Company: Company A

On June 18, 2013, the plaintiff and the defendant signed the Shanghai Property Rights Transaction Contract, stipulating that the transaction base date was September 30, 2012, the defendant held 100% of the equity of Company A, and the plaintiff agreed to transfer 90% of the equity at a price of 117 million yuan.

Clause 1.3 of the Contract stated that, as assessed by Audit of Accounting Firms and Asset Appraisal Limited, as of the basis date of the transaction, the valuation of Company A was $129,398,200 and the value of the subject matter of the transaction was $116,458,400.

In article 1.4 of the contract, the defendant promised that, in addition to the matters that had been disclosed to the plaintiff, the subject of the property rights transaction and the target enterprise did not have any matters that were not disclosed or omitted in the asset appraisal report, audit report, or that could affect the assessment results or have a material adverse impact on the target enterprise and the value of its property rights. The defendant also promised in Articles 10.1 and 10.5 of the contract that no assets or debts were concealed, that all supporting documents and materials involved in property rights transactions were true, complete and valid, and that there was no deliberate concealment of any debts, disputes, litigations, etc. that had a material adverse impact on this contract.

After the signing of the above-mentioned contract, by June 19, 2013, the plaintiff had paid 117 million yuan for the equity transfer, and the Shanghai United Property Rights Exchange issued the corresponding transaction certificate. On June 24, 2013, Company A held a shareholders' meeting and formed a minutes stating that the plaintiff had acquired 90% of the equity of Company A and the defendant held 10% of the equity; from now on, all the operation and management rights of Company A were formally transferred, including assets, seals, finances, archives and cash assets.

At the trial, the plaintiff and the defendant unanimously confirmed that the above-mentioned audit report and asset appraisal report did not include a greening project and contract between Company A and Company B. The plaintiff was unaware of this contract and the outstanding debt of RMB4,979,041.68 owed by Company A to Company B for the project as a result of this contract, and did not know until the debt entered the litigation procedure.

The plaintiff argued that the defendant seriously breached the contract and failed to disclose to the plaintiff the fact that Company A owed Company B the amount of money for the project, which affected the assessment results of the target enterprise and the value of its property rights, resulting in the plaintiff paying an additional 4,481,137.50 yuan (4,979,041.68 yuan ×90%), and the price should be reduced, and the defendant should return the overpaid transfer payment to the plaintiff and compensate for the corresponding interest loss.

The plaintiff's claim was to order the defendant to compensate the plaintiff for the losses caused to the plaintiff by concealing the debts of the target enterprise of RMB5,719,494.61 and to pay interest.

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The court of first instance first held that the quality of the equity was not in accordance with the agreement:

...... Equity transfer is the sale and purchase of equity, and now the plaintiff, based on the equity transfer contract, believes that the quality of the subject equity is not in line with the agreement, and requires the defendant to return the overpaid equity transfer payment, so it is necessary to first determine whether the quality of the subject equity is not in accordance with the agreement.

Clause 1.3 of the contract indicates that the equity transfer price involved in the case is determined on the basis of the audit report and the asset appraisal report. Further, under clause 1.4 of the contract, the defendant was obliged to ensure that the transfer of equity did not have circumstances that were not disclosed in the two reports that might affect the results of the assessment. However, in fact, neither of the two reports disclosed the subcontracting payment of Company A to Company B. The debt was later determined by the judgment to be nearly 5 million yuan, which was enough to affect the assessment of the net assets of the target company, but the impact was not taken into account when the contract determined the equity transfer price, and the quality of the equity, that is, the actual value, was bound to be inconsistent with the contract. ......

The court of first instance then held that the plaintiff's existing evidence could not calculate and prove the difference in the quality of the equity:

The Court held that, first of all, equity, that is, shareholders' equity, is reflected in the equity enjoyed by the owner after deducting liabilities from the assets of the target company. Although the project money owed by Company A to Company B is a liability, the carrying amount of the creditor's rights and debts is not necessarily equivalent to the appraisal value, and the appraisal value is not necessarily equal to the equity price agreed upon by the parties. In particular, because equity has the dual attributes of property rights and membership rights, although the rights contained in equity, such as dividend rights and asset distribution rights, have a certain relationship with the economic interests of shareholders, the value of their rights cannot be simply measured in monetary terms. The equity transfer price of RMB117 million in this case does not correspond exactly to the valuation of the subject equity of RMB116,458,400.

Secondly, the Court noted that the Schedule of Asset Appraisal Reports treated a receivable of $1,699,328.04 from Company A to Company B as a bad debt and was not included in the Company's assets for valuation. However, after the completion of the equity transfer in this case, after the ... The arbitral award, the claim has been realized in RMB3,044,950.16. The claim is also sufficient to affect the assessment of the net assets of the target company, but this impact is not taken into account when the contract determines the equity transfer price. Although the previous conclusion that the quality of the subject equity was not in accordance with the agreement is still true, unless the impact of the claims and debts omitted above is fully included in the scope of assessment and the market value of the subject equity at the base date is re-evaluated accordingly, it is impossible to determine whether the quality of the subject equity is higher or lower than that agreed in the contract, and whether the plaintiff is indeed damaged, let alone the extent of the damage. Based on this, on September 14, 2018, this court organized a conversation between the plaintiff and the defendant, clarified the burden of proof, and proposed to conduct the above audit assessment, but the plaintiff clearly stated that it did not agree with the audit assessment.

In summary, this court held that the plaintiff had the obligation to prove the existence or non-existence of the difference in price claimed, the amount and the facts on which it was calculated, and now the plaintiff's own evidence could not prove it, and refused to entrust a third party to audit and evaluate, and should bear adverse consequences in accordance with law.

In the end, the case rejected the plaintiff's claims in the first instance. The plaintiff appealed against the first-instance judgment to a Shanghai Intermediate Court. The second-instance judgment rejected the appeal and upheld the original judgment.