2024.09.20
JunHe secured a full victory in a share redemption dispute for a well-known investment company listed on the NEEQ. The case was heard by Beijing No. 4 Intermediate People's Court in the first-instance proceedings. The Beijing High People's Court, as the court of second instance, affirmed the first-instance judgment and upheld all of the client’s claims.
The invested company in this case operates a renowned automobile industrial park in Beijing. The client as the investor had signed an Equity Transfer and Capital Increase Agreement and a Supplementary Agreement with a Hong Kong company and its PRC subsidiary as well as its actual controller, stating that the investor shall acquire the shares of the target company through an equity transfer and capital increase and that a share redemption shall occur when the target company is listed on the National Equities Exchange and Quotations. As the redemption condition had been triggered, JunHe acted on behalf of the client to file a lawsuit claiming that the target company and its actual controller pay the redemption price. The amount involved was approximately RMB 39 million.
This case was challenging because redemption is a bilateral behavior, but the client had transferred the shares before filing the lawsuit. It was difficult for the party entitled to the redemption right to claim for the share redemption because it no longer possessed the redeemed shares. This case also involved a risk of non-performance, and it was controversial in judicial practice whether the redemption right would be transferred with the transferred shares. The defendants argued that they no longer had the redemption obligation because the shares had been transferred. Prior to the first-instance hearing, the presiding judge informed JunHe that the lawsuit should be withdrawn, otherwise all claims would be dismissed.
The JunHe team argued that the redemption right was an independent contractual right, and the share transfer did not imply the concurrent transfer of the redemption right. The valuation adjustment mechanism indicated that for reasons such as asymmetric information, the investor and the financing party have to set expected targets. If the targets are not met, the financing party shall fulfill the compensation or redemption obligation it has committed to. Whether the financing party shall fulfill the redemption obligation depends on whether the target company has met the expected targets and is not causally related to the investor’s shareholding status. Additionally, the transferee in this case was the client’s affiliate and appeared in court as a third party. The transferee issued a written undertaking that it would deliver the redeemed shares to the redemption obligors. The JunHe team emphasized that whomsoever delivers the redeemed shares would not affect the obligors' rights, if they can be assured of the repossession of such shares.
Ultimately, the presiding judge at the Beijing No.4 Intermediate People's Court reversed his initial opinion. Both the first instance and second instance courts adopted the arguments put forward by JunHe and upheld all the client's claims.
It was difficult for the investor to exercise the redemption right when it had transferred the redeemed shares to others. In this case, the JunHe team demonstrated the independence of the redemption right and applied for the appearance in court of the transferee as a third party to dispel the court's doubts. This case may be referred to when handling similar disputes in the future.
Partner ZHAO, Zhen led JunHe’s team.
