Viewpoint... Legal analysis of the repurchase of shares held by investors in the target company of equity investment.

Published:

2022-09-29

1. Foreword In the process of equity investment, in order to reduce the investment risk, the investor will often require the underlying company as the financier or its actual controller or shareholders to buy back the shares of the underlying company held by the investor when the agreed conditions are triggered. The more common repurchase subject is the actual controller, shareholders or their related parties of the target company, and on the premise that the relevant subject does not violate other regulatory provisions, the use of this method can effectively reduce the investment risk and ultimately promote the cooperation between the investment and financing parties. This article does not discuss this method too much. However, in practice, we will also encounter the request of the relevant parties to directly repurchase the investor's equity by the target company, and this paper focuses on the effectiveness, operability, and possible risks of such repurchase behavior of the target company. 2. legal analysis (I) the relevant provisions of the Company Law 1. Relevant regulations of limited liability company Article 74 of the Company Law stipulates that under any of the following circumstances, a shareholder who votes against the resolution of the shareholders' meeting may request the company to purchase its equity at a reasonable price:(1) the company has not distributed profits to shareholders for five consecutive years, and the company has made profits for the five consecutive years and meets the conditions for profit distribution stipulated in this Law;(2) the company merges, divides or transfers its main property;(3) When the term of business as stipulated in the articles of association expires or other reasons for dissolution as stipulated in the articles of association arise, the shareholders' meeting passes a resolution to amend the articles of association so that the company survives. Within 60 days from the date of adoption of the resolution of the shareholders' meeting, if the shareholders and the company cannot reach an equity purchase agreement, the shareholders may bring a lawsuit to the people's court within 90 days from the date of adoption of the resolution of the shareholders' meeting. The above-mentioned rights are often referred to as the "right of dissenting shareholders to request share repurchase" of a limited liability company, which is clearly defined in the company's corporate law. At the same time, other chapters of the company law do not prohibit limited liability companies from directly buying back shares held by shareholders. 2, the relevant provisions of the company limited by shares. Article 142 of the Company Law stipulates that a company may not purchase shares of the Company. However, except in one of the following circumstances:(1) reduction of the company's registered capital;(2) merger with other companies holding shares in the Company;(3) use of shares for employee stock ownership plans or equity incentives...... The above provisions provide for specific circumstances in which a joint stock company buys back shares held by shareholders. From the above provisions alone, there is no prohibition on the repurchase of shares by the subject company in the Company Law, and there seems to be no obstacle to the repurchase of shares by the company, but in practice it is prone to investment risks, disputes and disputes, as detailed in the analysis below. Relevant Provisions of (II) Nine Minute Minutes According to the "Minutes of the National Court Civil and Commercial Trial Work Conference" issued by the Supreme People's Court: "Where an investor requests a target company to repurchase its shares, the people's court shall conduct a review in accordance with the mandatory provisions of Article 35 of the Company Law on" shareholders shall not withdraw their capital contributions "or Article 142 on share repurchase. After review, if the target company has not completed the capital reduction procedure, the people's court shall reject its claim." In the process of the subject company repurchasing the investor's equity, it is necessary to use the subject company's own funds to pay the repurchase price, the substantive result of which is: the investor recovers the equity investment. If no procedure is taken in the repurchase process, shareholders may be suspected of evading capital contributions, while the underlying company's assets due to the repurchase resulting in a reduction in solvency, is also not conducive to the protection of the rights and interests of the company's creditors. Therefore, the nine people's minutes clearly state that the court should reject the request for repurchase without capital reduction. That is, the completion of the capital reduction procedure is a prerequisite for the repurchase. Conditions to be met and procedures to be performed to (III) the capital reduction of the subject company As mentioned earlier, the completion of the capital reduction procedure is a prerequisite for the repurchase, and the completion of the capital reduction procedure has a significant impact on the execution of the repurchase, and the relevant provisions on the conditions and procedures to be met for the capital reduction are as follows: 1. Internal procedures of the company Article 37 of the Company Law, the shareholders' meeting shall exercise the following functions and powers:(7) to make a resolution on the increase or decrease of the registered capital of the company; 2. External procedures of the company Article 177 of the Company Law, when a company needs to reduce its registered capital, it must prepare a balance sheet and a list of property. The company shall notify the creditors within 10 days from the date of making the resolution to reduce the registered capital, and make a public announcement in the newspaper within 30 days. The creditor shall have the right to require the company to pay off its debts or provide corresponding guarantee within 30 days from the date of receipt of the notice, or within 45 days from the date of announcement if the notice is not received. Possible risks of (IV) the underlying company's repurchase 1. According to Article 37 of the Company Law, the company shall perform internal decision-making procedures in accordance with the provisions of the Company Law and the Articles of Association before capital reduction. If other shareholders object, the capital reduction and repurchase procedures may not be carried out. 2, the subject company triggered the repurchase conditions, many cases are due to the company's operating conditions in general, or even face more debt. Article 177 of the Company Law provides for the protection of creditors as a result of the change in the company's solvency as a result of the capital reduction, which results in the loss of shareholders and the loss of creditors' interests. However, in practice, it is very difficult for a company to pay off all its debts in order to reduce its capital or to provide security that meets the requirements of creditors, thus failing to meet the requirements of the company law for the protection of creditors. At the same time, in view of the fact that the company's capital reduction should be registered by the industrial and commercial administration department in accordance with the law, and after telephone consultation with the industrial and commercial administration departments in many places, the staff all said that if the relevant documents indicate that the creditors have objections to the relevant debt settlement arrangements or debt guarantees for the capital reduction, the industrial and commercial registration authority will not handle the relevant change registration. In particular, if the company has an economic dispute and enters into judicial or arbitration proceedings, it is difficult to go through the capital reduction procedures. 3. Supervision of state-owned assets If the subject enterprise is a state-controlled enterprise, the capital reduction procedure and whether the capital reduction price is in line with the state-owned regulatory provisions should also be considered when reducing capital, and if the difference between the capital reduction price and the then equity assessment price is too large, it may also lead to violation of the relevant state-owned regulatory provisions. 4. Consequences of flawed capital reduction and repurchase procedures Even if the company does not meet the conditions for capital reduction through improper means to reduce the procedures and pay the repurchase price, the company or shareholders are still exposed to legal risks. After searching, in judicial practice, some courts hold that if the company does not obtain the consent of the creditors when reducing its capital, it should bear supplementary liability for the creditor's debt within the scope of the capital reduction. For example,(2011) Shanghai No.1 Zhongmin No.1 (Min) Zhongzi No. 1458 Civil Judgment: The appellant shall bear supplementary compensation liability to the appellee for the debts of XC Company within the scope of capital reduction. According to the judgment of the case, if the creditors of the target company do not agree, even if the investor recovers the investment through capital reduction, there is still the possibility of recovery. 5, the target company repurchase default, the investor rights more difficult. (1) According to the clear provisions of the above-mentioned nine people's minutes, the court shall reject the request for repurchase without capital reduction. Under the premise that the company is unable to fulfill the capital reduction procedures in any of the above, it is difficult for the investor to require the underlying company to assume the repurchase liability through litigation. (2) Even if the investor's claim is changed to require the company to reduce its capital, there is a dispute as to whether the court should intervene in the acceptance of such claims, and there is a greater risk of losing the case if the capital reduction is not resolved by the shareholders' meeting and the creditors raise objections. 3. Conclusion In summary, for matters related to the repurchase of shares held by the investor of the winning company in the equity investment: (I), in the case of a limited liability company, there is no prohibition in the company law on the direct repurchase of shares by the company; in the case of a limited liability company, the company may repurchase shares only under certain conditions. Although the effectiveness of repurchase agreements is not directly affected, both limited liability companies and joint stock companies are more difficult to implement in the practice of direct acquisition of shares by companies, prone to disputes, and more difficult for investors to defend their rights after disputes. (II), in the structure of investment transactions where there is a real need for gambling repurchase, it is proposed that the actual controller, shareholders or their related parties of the company should assume the equity gambling and repurchase obligations, and if the subject company is required to provide credit enhancement, the subject company may consider providing joint and several liability guarantee for the payment of the above-mentioned gambling repurchase price. (III) relevant investment entities should also pay attention to complying with the relevant regulations of relevant regulatory authorities or industry organizations (such as the State-owned Assets Supervision and Administration Commission, the China Securities Regulatory Commission, and the China Foundation Association), and their applicable entities should also comply with relevant requirements. Introduction to Zhongcheng Qingtai Jinan Institute Fund Business Center In order to do excellent, refined, specialized fund business and better provide legal services, Zhongcheng Qingtai Jinan Institute integrates the resources of the whole institute and establishes a fund business center, which brings together excellent lawyers of relevant specialties in the institute. Currently, it is composed of more than 30 senior lawyers who are proficient in and familiar with the field of fund legal business. The team lawyers all graduated from well-known law colleges in China, more than 80% of lawyers have a master's degree or above, a diploma with a double degree, and a collection of multi-compound lawyers in criminal, corporate, securities, real estate and other fields. At present, it provides fund legal services for more than 30 provincial and municipal state-owned enterprise fund companies and high-quality private fund companies, including Shandong guidance Fund, Shandong Finance Group, Shandong Development Investment Group, Lushang Group, Shandong Expressway Group, Shandong Ocean Group, Jinan guidance Fund, Weihai guidance Fund, Jinan first Investment Company, etc. And has been committed to the professional development of fund business, to provide customers with the whole process of fund legal services, to provide accurate program design, to minimize legal risks for customers.

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