Viewpoint... A brief analysis of the nature and validity of the letter of intent, the appointment contract and the contract in the equity transfer.

Civil Code

Article 495, paragraph 1, provides that a subscription, order, reservation, etc., in which the parties agree to conclude a contract within a certain period of time in the future, constitutes an appointment contract.

The second paragraph of Article 495 stipulates that if one of the parties fails to perform the obligation to conclude the contract under the appointment contract, the other party may request it to bear the liability for breach of the appointment contract.

Article 500 stipulates that if a party has any of the following circumstances in the course of concluding a contract, causing the other party's loss, it shall be liable for compensation:

(I) negotiate in bad faith under the guise of concluding a contract;

(II) intentionally conceals important facts relating to the conclusion of the contract or provides false information;

(III) other violations of the principle of good faith.

In the process of equity transfer, there are usually three stages for the parties to conclude a contract, namely, the negotiation stage before the offer commitment, the formal contract stage scheduled to be concluded at a certain time in the future in the offer commitment and the final signing of the contract stage after the offer commitment. Intentional agreement is the pre-contract state that appears with the complexity of the transaction process, but according to the substance of the contract, the letter of intent may also be identified as a different contract nature, this affects the application of the law and the determination of the relationship between the rights and obligations of the parties to the contract. Since both the letter of intent and the appointment contract, which do not constitute an appointment, express the willingness of the parties to enter into a formal contract in the future, it is not easy to distinguish between the two in practice, and in general, the letter of intent, the appointment contract and the contract can be identified from the following two aspects:

First, the purpose of the contract.The purpose of the contract is the soul of the whole contract, and the determination of the purpose of the contract is of vital value and significance to the signing and performance of the contract, which is the natural requirement of freedom of contract. The letter of intent expresses the willingness to trade and hopes to continue the negotiation in good faith. Generally, there will be clauses such as "this letter of intent shall be regarded as concluded for the purpose of negotiation only". The purpose of the reservation contract is to ensure that the contract subject enters into this contract. For the formal contract to be concluded at a certain time in the future, the main content of the contract is to conclude this contract within a certain period of time in the future. Generally, the purpose of time, however, this purpose will be expressed through the terms of the contract, such as "pending the signing of a formal equity transfer agreement between the parties"; the purpose of this contract is to establish a specific legal relationship, I .e., for the transferee to enjoy the assets of the subject company or some special property right carried by the equity, and for the transferor to obtain the corresponding consideration.

Second, the certainty and completeness of the content of the contract.Generally speaking, the transaction content of the letter of intent is not certain, it is only a record of the negotiation process between the two parties, which is part of the contracting process and provides reference for further negotiation. In order for the letter of intent to constitute an appointment, its binding force must be expressed or implied in the terms of the contract, one of the differences between the reservation contract and the letter of intent is that the substantive terms of the reservation contract must meet the explicit or implicit binding force, while the procedural terms must meet sufficient certainty; the transaction object, content, duration and other contents of this contract are determined and complete. Generally, under the condition that the reservation content is relatively complete, there is a theoretical view of "this contract", for example, there is a specific arrangement for the delivery of the subject matter, if the main terms of the equity transfer are in place and the subject of the contract no longer signs a separate written contract, but performs it directly, it may be deemed to constitute this contract. However, the fundamental difference between the appointment and the contract still lies in the agreement on the rights and obligations of the parties in the contract. If the contract clearly states that the purpose of the contract is to conclude the contract in the future, the appointment cannot be characterized as the contract because the content has been determined or partially performed. Instead, the contract content, negotiation behavior and performance facts should be comprehensively considered to determine whether the contract is established.

In short, the core criterion for distinguishing between a letter of intent, an appointment contract and a contract contract is the intention of the parties, and the certainty and completeness of the content of the contract is only a necessary, not sufficient, condition for the appointment.

In the letter of intent for equity transfer, the contract subject undertakes the obligation of good faith negotiation, which is generally not bound by law, and can only be relieved from the perspective of contractual negligence liability. Generally speaking, the principle of attribution of contractual negligence liability is the principle of fault liability, and the violation is the prior contractual obligation. The form of liability can only be compensation for losses, and the scope of compensation is the loss of trust interests, the purpose is to refund the various fees paid by the non-breaching party for the performance of the contract of reliance.

In the reservation contract, the contract subject shall sign a formal equity transfer agreement within a certain time, and its binding force shall be terminated after the conclusion of this contract. When one party violates the contract and fails to perform the obligation to conclude this contract, there are generally four views in the academic circle on the legal liability that it should bear: must negotiate, should conclude, distinguish and regard as this contract. The "must negotiate" holds that as long as negotiations are held for the conclusion of this contract at some point in the future, the contractual obligations will be fulfilled. The "should be concluded" holds that the appointment debtor has the obligation to conclude this contract, and the creditor can claim to perform it. The "distinction" holds that the specific situation is analyzed in detail; "deemed to be the contract" holds that the contract that already has the main points of this contract should be directly regarded as this contract. As to whether the appointment contract can be enforced, there are still great disputes in academic and practical circles. In judicial practice, most courts will not directly judge the parties to force the conclusion of a formal equity transfer agreement, mainly because the purpose of the appointment contract is to sign a formal contract in the future, and compulsory contracting may violate the principle of autonomy of will and the spirit of freedom of contract. According to the second paragraph of Article 495 of the Civil Code, the contract-keeping party may request the breaching party to bear the liability for breach of the appointment contract, and if the conditions for termination are met, it may also claim the termination of the appointment contract and compensate for the loss. In the transfer of shares, the loss arising from the breach of the appointment contract is usually expressed as the expenses paid by the party to enter into the appointment contract, the preparation of the contract, and the deposit, security deposit or similar payment and interest paid. However, in fact, many parties did not agree on liquidated damages in the appointment contract, and it is difficult for the right holder to prove the actual loss of their own party, and it is difficult to prove that the failure to complete the equity transfer between the two parties is caused by the other party's violation of the principle of good faith.

In violation of an effective equity transfer contract, the transferee shall have the right to demand delivery of the equity and compensation for the loss, and the transferor shall have the right to claim the price and compensation for the loss. In practice, due to the diversity of the forms of the appointment contract, it is also easy to be confused with this contract. For example, the name is "equity transfer agreement". Based on the principle that the substance is greater than the form, it may also be identified as a letter of intent, an appointment contract or this contract. If the appointment contract has the main terms of this contract, it may be converted into this contract, at this time, the breaching party may require the breaching party to continue to perform the contract and bear the liability for breach of contract in accordance with the contract.

Basic case:In October 2012, the company signed the letter of intent for equity transfer with Landing company, which agreed that the company would transfer its 51% equity of the company to Landing company, and complete the signing of the formal agreement on equity transfer within 45 days from the date of signing the letter of intent; on the same day, the two companies signed the memorandum of understanding 1, which agreed that the letter of intent was only the cooperation intention of both parties, and its final performance, the two sides will sign a formal equity transfer agreement as the basis. After that, Landing Company paid 0.1 billion yuan to the company.

In April 2013, Landing Company and Zahe Company signed the "Equity Transfer Agreement", which agreed: Zahe Company transferred 51% of the equity of Zahe Mining Company; two days later, the two parties signed the "Memorandum of Understanding II", which agreed that the previous two days Signed the "Equity Transfer Agreement" has no legal effect on both parties; since then, the two parties have not signed a formal equity transfer agreement, landing Company sued the court for the return of 0.1 billion yuan in advance payment and interest. Zaihe Company claimed that both parties still have a contractual relationship of equity transfer and demanded to continue to perform the contract.

The Court of First Instance (Anhui Higher People's Court) held that:The "Letter of Intent for Equity Transfer" is a document of intent signed by both parties and is not legally binding on both parties as a formal contract. The "Equity Transfer Agreement" is a formal agreement reached by both parties through consultation to implement the contents of the "Letter of Intent for Equity Transfer" related to equity transfer. agreement. Once the "Equity Transfer Agreement" is signed, it replaces the "Equity Transfer Letter of Intent" and becomes the basis for the relationship between the rights and obligations of the two parties in the equity transfer, and the "Equity Transfer Letter of Intent" is therefore invalid. Later, the two parties signed the "Memorandum of Understanding" to terminate the validity of the "Equity Transfer Agreement", so there is no valid equity transfer contract relationship between the two parties. On this basis, the company believes that there is still a valid equity transfer contract relationship between the two parties can not be established, and accordingly, Landing Company won the case.

The court of second instance (the Supreme People's Court) held that:The Letter of Intent for Equity Transfer stipulates that within 45 days from the date of signing the Letter of Intent, both parties shall complete the signing of the formal agreement for equity transfer in accordance with the terms of the Letter of Intent. Based on this, it can be judged that the Letter of Intent is an appointment, and it is a contract for the parties to conclude this contract in the future. Its legal binding force is mainly reflected in the fact that both parties shall negotiate and conclude this contract based on the principle of good faith, the judgment of the first instance that the Letter of Intent for Equity Transfer is only a document of intent signed by both parties, and the determination that the parties do not have the legal binding force of the formal contract is corrected; at the same time, the judgment of the first instance that Zahe Company should compensate Landing The determination of the loss of interest is maintained.

Basic case:Nord entered into a Project Acquisition Agreement with Tianlang in February 2014, transferring the HD49-1 and HD49-2 residential projects to Tianlang. In February 2016, the lawsuit sought the termination of the acquisition agreement. In June 2016, Nord Company and Evergrande Company signed the Equity Transfer Contract. The contract stipulates that within 3 months after the signing, Nord Company will be responsible for terminating the acquisition agreement, and will invest the HD49-1 and HD49-2 plots at the price to establish project company A and project company B respectively, and transfer 100 percent of the equity of the two companies to Evergrande Company. The contract clearly stipulates the relevant circumstances of the project company and the project plot, the specific operating procedures, the total amount and payment of the lump sum fee, the rights and obligations of both parties, and the liability for breach of contract. In December 2016, Nord Company sent a "Notice of Termination of Contract" to Evergrande Company. In May 2017, Evergrande Company sent a "Notice of Request to Perform the Contract as soon as possible" to Nord Company. Evergrande Company sued Nord Company for continuing to perform the "Equity Transfer Contract", compensating 50 million yuan for liquidated damages and 241.86 million yuan for losses.

The Court of First Instance (Zhejiang Higher People's Court) held that:According to the agreement in the Equity Transfer Contract, Nord Company agrees to invest the HD49-1 and HD49-2 plots at the price to establish Project Companies A and B after the cancellation of the acquisition agreement, which is the prerequisite for Evergrande Company to transfer the equity of the corresponding project company. At the same time, the contract also stipulates that Nord Company shall be responsible for the cancellation of the acquisition agreement within 3 months after the signing of this agreement, "Prerequisites" and "3 months" shall be the preconditions of the relevant equity transfer and the time limit for the termination of the relevant acquisition agreement, rather than the agreement of the parties on the effective conditions of the equity transfer contract involved in the case, so the contract shall be confirmed and valid according to law. The case concerning Nord's claim that the contract has been terminated because Evergrande requested a clear reply that did not agree to the termination and could not determine the cause of the termination, so the claim was not valid. According to this judgment, Nord Company shall pay Evergrande Company liquidated damages of 50 million yuan and compensate Evergrande Company for losses of 100 million yuan.

The court of second instance (the Supreme People's Court) held that:In the second instance, Nord argued that the Equity Transfer Contract between Nord and Evergrande was an appointment contract with the main terms of this agreement. According to the basic principles of civil law and the consistent understanding in judicial practice, the standard of distinction between appointment and contract should be determined according to the meaning of the parties in the contract. First of all, from the content of the contract between the parties, the equity transfer contract involved in the case takes the equity of the project company as the subject of transfer. At the time of signing the contract, both project companies A and B have not been established, and both parties have no very certain certainty. Secondly, judging from the agreement on the transaction operation procedure in the contract, even if Nord has completed the prerequisites agreed in the agreement, there is uncertainty as to whether the transaction can be completed, rather, it depends on whether Evergrande confirms in writing its continued performance after the completion of due diligence. Third, although the "Equity Transfer Contract" involved in the case stipulates Evergrande's right to unilaterally decide whether to continue to perform, this unilateral decision can only be attributed to the agreement on the right to claim creditor's rights, and cannot set the right to form in the right to choose contract, and the contract price and other contents have not been determined. Even if Evergrande agrees to continue the transaction after due diligence is completed, there is still room for both parties to continue negotiation on the price. Accordingly, the nature of the contract should be recognized as an appointment contract, after the signing of the contract, both parties have the obligation to actively facilitate the completion of the transaction and the conclusion of this contract. In this case, Evergrande did not pay any money to Nord other than the fees paid for the conclusion of the appointment contract, nor did it make any input or other contributions to the project involved in the case, and in this case could not provide any evidence to prove that it had carried out financial, human and other preparatory activities for the acquisition of the project. Therefore, based on the fact that both parties were at fault, the court decided that Nord Company should pay Evergrande Company a liquidated damages of 30 million yuan.

Basic case:In June 2012, the Beijing medical team dominated by Wang Zhongzhong Company and Zhang Yuqi and the shareholders of the former New First Industry Company respectively made the "Resolution of the Shareholders' Meeting of Guangdong Tongjiang Hospital Co., Ltd.", "Equity Transfer Contract" and "Supplementary Agreement" on the cooperative operation of Tongjiang Hospital. Wang Zhongzhong Company and Zhang Yuqi requested to continue to perform the contract.

The Court of Second Instance (Guangdong Higher People's Court) held that:The content of the resolution is mainly "the current shareholders and Beijing core medical management team agree to redistribute the existing equity structure of Tongjiang Hospital" and agree on the distribution method, while there is a special agreement in the contract that "after the resolution is formed, the current shareholders should sign a formal equity transfer agreement with Beijing core medical management team within three days", which still needs to sign a formal equity transfer contract separately, therefore, the nature of the three contracts is an appointment contract. Although the provisions on the equity transfer of Tongjiang Hospital in the resolution of the shareholders' meeting are basically established, it is not appropriate to determine that the equity transfer contract has been established because the parties have specially agreed to conclude another equity transfer contract. Therefore, the claim of Wang Zhongcheng Company and Zhang Yuqi that the equity transfer contract is directly established cannot be established without legal basis.

Wang Zhongcheng Company and Zhang Yuqi also claimed that even if the contract involved in the case was an appointment contract, the contract had been established because it had fulfilled its main obligations and was accepted by Tongjiang Hospital and its shareholders. The court held that the appointment contract as an independent contract, the form of liability for breach of contract may include continued performance, but the legal basis for the people's court to force the conclusion of this contract should be very sufficient, otherwise it would violate the principle of autonomy of the meaning of the contract, and it would not conform to the basic principle that enforcement is limited to the payment of things or acts and does not include the payment of will. In this case, the plaintiff did not prove that the shareholders of Tongjiang Hospital fulfilled the procedures for equity change after the resolution of the shareholders' meeting was made, and the shareholders' meeting was held the next day to revoke the signed resolution, so there was no sufficient reason to enforce the performance.

The retrial court (the Supreme People's Court) held that:Rejected the retrial application of Wang Zhongcheng Company and Zhang Yuqi.