JC Master Research | Typical Cases in the Corporate Equity‑Change Phase — Equity Transfer Disputes 2

First-instance judgment 1. Dismiss the plaintiff (defendant in the counterclaim), a certain company in Guangdong, of its claims; 2. Annul the provision in the Asset Purchase Agreement entered into between the plaintiff (defendant in the counterclaim), a certain company in Guangdong, and the defendant (plaintiff in the counterclaim), a certain biotechnology company, whereby the defendant (plaintiff in the counterclaim) agreed to purchase, by way of cash payment of RMB 99,224,252.31, a 4.023% equity interest in a certain advertising joint-stock company held by the plaintiff (defendant in the counterclaim), a certain company in Guangdong; 3. The court filing fee for the main action, amounting to RMB 538,820, and the court filing fee for the counterclaim, amounting to RMB 268,961, totaling RMB 807,781, shall be borne by the plaintiff (defendant in the counterclaim), a certain company in Guangdong. Dissatisfied with the first-instance judgment, the said company in Guangdong has filed an appeal.

 

Second-instance judgment : The appeal is dismissed, and the original judgment is afofficeed. Dissatisfied with the second-instance judgment, a certain company in Guangdong filed a petition for retrial with the Supreme People’s Court.

 

Retrial Ruling : The application for retrial filed by a certain company in Guangdong is dismissed.

The court’s final judgment holds that:

 

I. Whether the original judgment erred in its findings regarding the facts of fraud in this case. On September 7, 2017, a certain biotechnology company (a publicly listed joint-stock company, hereinafter referred to as Party A) entered into an Asset Purchase Agreement with Chen and 36 other shareholders of a certain advertising joint-stock company (a non‑listed public company), including a Guangdong‑based company (hereinafter collectively referred to as Party B). The agreement stipulated that, pursuant to the valuation report issued by a certain asset appraisal and real estate valuation office as of June 30, 2017, the total equity value of the advertising company amounted to RMB 2,470,600,000. Accordingly, the assessed value of the 96.21% equity interest in the target assets was determined to be RMB 2,377,040,300. Based on this valuation, the parties agreed to set the final transaction price for the target assets at RMB 2,372,614,500. The biotechnology company acquired the 96.21% equity interest in the advertising company held by the 36 transferors through a combination of share issuance and cash payment. Specifically, the biotechnology company was required to pay RMB 99,224,252.31 in cash to the Guangdong‑based company for its 4.023% equity interest in the advertising company. The Asset Purchase Agreement further provided: “The Transferor (the Guangdong‑based company) hereby represents, warrants, and undertakes to Party A (the biotechnology company) as follows (except for any matters inconsistent with the following representations, warranties, and undertakings that the Transferor had already disclosed to Party A on or prior to the date of execution of this Agreement): all materials promptly provided by the Transferor to Party A are true, accurate, and complete, containing no false statements or material omissions, nor have they concealed any information whose disclosure would affect the execution or performance of this Agreement; the financial statements of the Target Company (the advertising company) and its subsidiaries faithfully and fairly reflect the assets, liabilities—including contingent liabilities, liabilities of uncertain amounts, and disputed liabilities—and the profits or losses of the Target Company and its subsidiaries as of the respective reporting dates; both Party A and Party B each warrant that, should any of the foregoing representations, undertakings, or warranties prove materially untrue or contain material omissions resulting in losses to the other party, the party making such representations, undertakings, or warranties shall provide full compensation to the other party, except for losses arising from matters inconsistent with the aforementioned representations, warranties, and undertakings that Party A or Party B had previously disclosed to the other party prior to the execution of this Agreement.” In addition, the Guangdong‑based company, in its “Statement and Undertaking Regarding the Truthfulness, Accuracy, and Completeness of Information Provided in Connection with This Transaction” (hereinafter referred to as the “Undertaking”), pledged that all information provided or disclosed under the asset purchase agreement is true, accurate, and complete, and assumed individual and joint liability, with the signing page duly stamped and conofficeed. With respect to the aforementioned information, The court of first instance has already ascertained that the target company, a certain advertising office, engaged in practices such as inflating bank deposits, presenting inaccurate profit figures, fabricating accounts receivable, and concealing guarantees and liabilities. Accordingly, the original judgment’s finding that the target advertising company and its de facto controller, Mr. Chen, intentionally provided false information and deliberately concealed the true facts—thereby constituting fraudulent conduct with respect to the conditions under which the investor, a certain biotechnology company, accepted the equity transfer—is well-founded. Consequently, this Court does not accept Guangdong Company’s application for retrial, which contends that the original judgment erred in basing its ruling on the “Letter of Commitment” that the parties had expressly agreed to rescind.
 

II. The issue of whether the court of first instance, on its own initiative, obtained evidence that should not have been obtained and rendered a judgment based on unverified evidence. With respect to the facts of fraud at issue, the court of first instance has already relied on evidence contained in the “Assessment Report” issued by a certain asset appraisal office—specifically, the “Detailed List of Cash and Bank Deposits Verification and Assessment”—as well as on materials such as the “Accounts Receivable Verification and Assessment Details” included in the “Summary Table of Current Asset Verification and Assessment” for Zhejiang某 Company, a subsidiary audited by a certain accounting office; the “Accounts Receivable Verification and Assessment Details” under the “Summary Table of Current Asset Verification and Assessment” for Xi’an某 Company, another subsidiary; and the “Notes on Significant Matters” in the audit report and the “Special Notes” in the assessment report, which address guarantees, contingent liabilities, material contracts, and significant litigation. These materials are sufficient to establish the existence of fraudulent conduct in this case. Accordingly, Guangdong某 Company’s claim for retrial—that the court of first instance erred in basing its judgment on facts established through the public security authorities’ investigative records obtained ex officio, and that such reliance deprived Guangdong某 Company of its right to present a defense—is inconsistent with the foregoing circumstances and is therefore not accepted by this Court.

1. In the context of an equity transfer, the target company, the ultimate controlling shareholder, and the shareholders acting as the transferors shall provide the investor (i.e., the equity transferee) with truthful, accurate, and complete documents, data, and information, ensuring that there are no false records or material omissions and that no information is concealed which, if disclosed, would affect the execution or performance of the agreement. If any party intentionally provides false information or conceals the true facts, such conduct shall constitute fraud against the investor, and the target company, the ultimate controlling shareholder, and the shareholders shall bear the corresponding legal liabilities for their fraudulent acts.

 

2. In equity transfers, the transferee shall assume sole responsibility for its own interests and, prior to acquiring the equity interest, shall independently engage professional offices and experts to conduct business, legal, and financial due diligence, and, where necessary, also undertake tax, human resources, cultural, and other relevant due diligence. Due diligence is a critical tool for the transferee to safeguard its rights and avoid unnecessary losses arising from information opacity.

The Civil Code of the People’s Republic of China (This case is governed by Article 148 of the General Provisions of the Civil Law of the People’s Republic of China, which came into force on October 1, 2017, and by Paragraph 2 of Article 54 of the Contract Law of the People’s Republic of China, which came into force on October 1, 1999.)

Article 148 A civil legal act entered into by one party through fraud, resulting in the other party acting against their true intention, may be rescinded upon the request of the defrauded party to the people’s court or an arbitration institution.

Article 152 The right of revocation shall be extinguished in any of the following circumstances:

(1) The party concerned fails to exercise the right of revocation within one year from the date on which it knew or ought to have known the grounds for revocation, or, in cases of material misrepresentation, within ninety days from the date on which it knew or ought to have known the grounds for revocation.

(2) Where a party has been subjected to coercion and fails to exercise the right of revocation within one year from the date the coercive act ceases;

(3) After becoming aware of the grounds for revocation, the party expressly states or demonstrates through its conduct that it has waived its right to revoke.

If the party concerned fails to exercise the right of revocation within five years from the date on which the civil legal act took place, such right shall lapse.
 

The Criminal Law of the People’s Republic of China
 

Article 266 [Fraud] Whoever defrauds public or private property in a relatively large amount shall be sentenced to fixed-term imprisonment of no more than three years, criminal detention, or public surveillance, and fined or only fined; if the amount is huge or other serious circumstances exist, the offender shall be sentenced to fixed-term imprisonment of no less than three years but no more than ten years, and fined; if the amount is especially huge or other particularly serious circumstances exist, the offender shall be sentenced to fixed-term imprisonment of no less than ten years or life imprisonment, and fined or have property confiscated. Where this Law provides otherwise, the provisions thereof shall prevail.
 

Article 224 [Crime of Contract Fraud] Where any of the following circumstances exists, and with the intent of illegal possession, a person obtains property from the other party by deception during the conclusion or performance of a contract, and the amount involved is substantial, the offender shall be sentenced to fixed-term imprisonment of no more than three years or criminal detention, and fined or only fined; if the amount is huge or other serious circumstances exist, the offender shall be sentenced to fixed-term imprisonment of no less than three years but no more than ten years, and fined; if the amount is particularly huge or other particularly serious circumstances exist, the offender shall be sentenced to fixed-term imprisonment of no less than ten years or life imprisonment, and fined or have property confiscated.

(1) Entering into a contract by means of a fictitious entity or by impersonating another person;

(2) Providing as security forged, altered, or invalidated negotiable instruments, or other false certificates of title;

(3) Lacking actual capacity to perform, deceiving the other party into continuing to enter into and perform the contract by first performing a small‑value contract or partially performing the contract;
 

(4) Fleeing after receiving goods, payment, advance payments, or security property from the other party;

(5) Obtaining the other party’s property by other means.