Viewpoint. The legal nature and effect of the transfer and repurchase business model of stock income rights.

In recent years, the use of stock income rights transfer and repurchase as a capital financing model of the case shows an increasing trend, the business model application scenario is usually the financier due to stock restrictions or other reasons, it is not appropriate or can not directly transfer the stock, and instead to the underlying stock corresponding to the stock income rights as the subject, signing agreements on the transfer and repurchase of stock proceeds with funders (usually financial institutions or financial institutions such as trust companies, securities companies, asset management companies), supplemented by security measures such as stock pledges, to achieve the purpose of financing by assuming the obligation to repurchase the underlying stock proceeds at the agreed amount at the agreed time or when the agreed conditions are triggered.

At present, China's laws and regulations for the business model has no clear provisions to be stipulated, the lack of a unified standard of identification, there are different views in practice, the author through the search of recent typical cases, a probe into the legal nature and effectiveness of the business model, for the reader's reference.

The basic structure of the stock yield transfer and repurchase business model can be considered to include two stages:

1. Investment stage: the investment direction to the financier to pay the transfer price of the stock income right, the financing direction to the investor to transfer the stock income right;

2. Investment recovery stage: The financing direction buys back the right of return to the investor and pays the repurchase to the investor.

According to existing cases, in the stock income right transfer and repurchase business, in addition to the basic elements such as transfer price, repurchase price, investment period, etc., there are usually several other relevant elements, such:

1. Credit enhancement measures: usually a pledge of the underlying stock, as well as joint and several liability guarantees provided by the owner of the stock and its concerted action or related parties, and may also include other forms of security such as real estate mortgages.

2. Liquidated damages: usually based on the total amount of the transfer or overdue payments, multiplied by a fixed daily or annual interest rate.

It is worth noting that there are different agreement methods for the amount of repurchase payable by the financier. In simple terms, it can be divided into fixed mode (based on the transfer price, floating according to the fixed repurchase premium rate, and determining the amount of repurchase) and floating mode (including but not limited to: the higher of the fixed premium rate and the average price of the 20 trading days before the repurchase date, or in addition to the fixed repurchase price, the total proceeds of the stock during the transfer of the stock income right shall be owned by the investor, etc.).

Due to the stock income right transfer and repurchase business is in the ascendant, and the current laws and regulations lack of clear provisions, the number of relevant judicial precedents is relatively limited. Through the author's search and analysis, the dispute over the validity of the contract under the business model is relatively small, and the court's views are basically the same, that is, unless there is a violation of relevant laws and administrative regulations (usually in the field of securities capital market), as long as the contract is the true intention of both parties, that is, a positive attitude towards the validity of the contract. However, the court's views on the determination of the legal nature of the contract are different, and the determination of the legal nature has a direct impact on the realization of the purpose of the transaction, such as whether the repurchase premium and liquidated damages are subject to the restrictions on the upper limit of private lending interest rates in the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases.

1.(2017) Supreme Law Minzong No. 907 (Civil Judgment of Second Instance on Contract Disputes between Beijing Tianyue Investment Development Co., Ltd. and Anxin Trust Co., Ltd.)

Transaction Structure:On September 18, 2013, Tianyue Company and Anxin Company signed the Agreement on Transfer and Repurchase of Equity Income Rights, agreeing that Anxin Company shall use its entrusted trust property to transfer the equity income rights corresponding to 100% equity of Tianyue Company held by Tianyue Company at a transfer price of 0.3 billion yuan. The transfer period is from September 18, 2013 to September 17, 2015. Upon the expiration of the transfer period, Tianyue Company shall return all the transfer money and pay the repurchase premium. Premium = base price x 13.5 per cent/year x transfer term start date to transfer expiry date/360. Credit enhancement measures: 1. Wang Junying and Huang Beihai provide joint and several guarantee liability for all debts under the equity income transfer contract; 2. Tianyue Company provides mortgage guarantee for all debts under the above equity income transfer contract with the land use right and construction in progress of Tianyu New Town Building, a farm located in the eastern suburb of Beijing, and has gone through mortgage registration.

Validity of Contract:1. Tianyue Company financed the funds by signing the "Equity Income Right Transfer and Repurchase Agreement" with Anxin Company. The purpose of the contract is legal and does not belong to the contract invalid situation of "covering up illegal purposes in a legal form" stipulated in Item 3 of Article 52 of the Contract Law. 2. Tianyue Company's proof is not enough to prove that the "Equity Income Right Transfer and Repurchase Agreement" involved in the case involves malicious collusion, arbitrage of funds of financial institutions and usury, there is no violation of the provisions of Article 43 of the Commercial Banking Law on banks not to engage in trust investment; 3. It cannot be proved that the business under the "Equity Income Right Transfer and Repurchase Agreement" in this case was established by Shengjing Bank Beijing Branch with the property that is not allowed to establish a trust, thus violating the relevant provisions of the Trust Law; 4. There is also no evidence to prove that the Agreement on the Transfer of Equity Income Rights and Repurchase is invalid in the case of "violation of the mandatory provisions of laws and administrative regulations" as stipulated in Article 52, paragraph 5, of the Contract Law. In summary, the agreements involved in the case are the true intentions of the parties, and they are established in accordance with the law and have legal effect.

Nature of Contract:When the people's court determines the nature of a civil contract, it shall make a comprehensive judgment on the basis of the true intention of the parties reflected in the terms of the contract, taking into account such factors as the true purpose of the contract and the actual performance of the contract. The "Equity Income Right Transfer and Repurchase Agreement" formally conforms to the "buy-and-sell" model stipulated in the "Measures for the Administration of Trust Companies", but according to the specific terms and the actual performance of the agreement, Anxin Company has no real intention to buy the equity income right involved in the case and bear the corresponding risks. First, Anxin only indirectly obtains the underlying equity income and does not participate in the management of the underlying equity. Second, although the agreement stipulates that Anxin has the right to obtain the equity income of Tianbiao, the agreement also stipulates that Tianyue shall not distribute profits in any form during the performance period, and the fact that the underlying equity is pledged to Anxin also limits the possibility of realizing the income of the underlying equity. Third, there is no proof that the transfer consideration of the underlying equity income right agreed in the agreement is in line with the market value, and the consideration of the return of the underlying equity income right is directly increased by a fixed proportion of the premium on the basis of the purchase consideration paid by it, and Anxin does not bear the risk during the period of buying the underlying equity income right. In summary, the Equity Income Rights Transfer and Repurchase Agreement is not, in essence, a "buy-back" contract as stipulated in the Measures for the Administration of Trust Companies. According to the specific stipulations of the Agreement on Transfer and Repurchase of Equity Income Rights and the fact that Tianyu Company, Wang Junying and Huang Beihai provided guarantee for Tianyue Company to perform the agreement, the main contract purpose of Tianyue Company is to finance the capital from Anxin Company, and the main contract purpose of Anxin Company is to collect relatively fixed capital income from Tianyue Company, the court held that the real purpose of the transaction between the parties was to finance the money in the name of the price by selling and then buying back. Since the "Agreement on Transfer of Equity Income Rights and Repurchase" involved in the case was not a famous contract stipulated in the Contract Law, the first instance judgment was handled according to the nature of the agreement with reference to the relevant provisions of the most similar loan contract in the sub-rules of the Contract Law.

2.(2019) Shaanxi Minzong No. 699 (Zeng Huijing, Cai Sixia, Shaanxi International Trust Co., Ltd. and Zhuang Min, Yu Cuifeng Business Trust Dispute Second Instance Civil Judgment)

Transaction Structure:On March 6, 2017, Shaanxi Guotou and Cai Sixia signed the "Stock Income Right Transfer Contract", agreeing that Shaanxi Guotou will transfer the income right of 1.5 million restricted shares of Baoqianli Company held by Cai Sixia with trust funds, and Cai Sixia will pay the income right of the shares as agreed, with an interest rate of 8%/year. Credit enhancement measures: stock pledge, joint and several liability guarantee.

Validity of Contract:The contract is valid. First of all, there is no invalidity of the contract that "covers up illegal purposes in a legal form"; secondly, Shaanxi International Investment's "Trust Contract" confirms that its funds are derived from the trust funds delivered by the Federal Reserve Securities Huixiang No. 1 Collective Asset Management Plan represented by the principal Federal Reserve Securities. There is no violation of Article 43 of the Commercial Banking Law that banks are not allowed to engage in trust investment.

Nature of Contract:The transaction is the trust company after the establishment of the fund trust, to raise the trust funds to transfer the right to the income of specific assets, belongs to the trust company after the funds are raised in accordance with the law, the resulting dispute should not be recognized as a business trust dispute. The transaction structure in this case is such that Shaanxi Guotou does not have to bear any risk of stock income rights, even if the income is zero, it can obtain a fixed income through repurchase. In summary, the main purpose of Cai Sixia's contract is to finance funds from Shaanxi Guotou, the main purpose of Shaanxi Guotou's contract is to collect relatively fixed capital income from Cai Sixia, the real purpose of the transaction between the two sides is to finance funds in the name of price by selling and then buying back. The Contract for the Transfer of Stock Income Rights in the Case is not a well-known contract under the Contract Law, and according to the nature of the agreement and the true intention of the parties, it should be handled in accordance with the relevant provisions of the loan contract in the sub-rules of the Contract Law.

1.(2016) Supreme Law Minzong No. 231 (Civil Judgment of Second Instance on Business Trust Dispute between Minmetals International Trust Co., Ltd. and Guangxi Nonferrous Metals Group Co., Ltd.)

Transaction Structure:In 2014, Minmetals Trust and Nonferrous Metals Company signed the Equity Income Rights Transfer and Repurchase Contract, stipulating that the Nonferrous Metals Company will transfer 87.37 of its equity income rights of the recycled metal company to the trust company. The trust company initiated the establishment of the trust company-Nonferrous Metals Company Equity Income Rights Investment Collective Fund Trust Plan to transfer the equity income rights, the transfer price is RMB 0.5 billion. After the trust company acquires the specific equity income right, the non-ferrous metal company repurchases all the specific equity income right and pays the repurchase price in accordance with the contractual period.

Validity of Contract:The contract is valid.

Nature of Contract:According to the trust company-non-ferrous metals company equity income right investment pooled fund trust plan, the trust company and the outside principal formed a trust legal relationship; according to the Repurchase Contract, the trust company and the non-ferrous metals company formed a legal relationship between the equity income right resale repurchase. According to the trust industry regulatory provisions such as the Measures for the Administration of Trust Companies and the Measures for the Administration of Collective Funds Trust Plans of Trust Companies, under specific trust plans, trust companies may adopt trust fund management models such as "buy-and-sell. The trust company manages the trust funds by means of equity income right transfer and repurchase, and issues the corresponding trust plan, which is different from the trust loan business. Article 2.1 of the Repurchase Contract states: "The right to the proceeds of a particular asset acquired by the Trust and all proceeds generated by it are attributed to the trust property." The agreement states that any income generated by a particular asset belongs to the trust company during the period in which the trust company acquires the right to income from a particular asset. Therefore, the trust's income is not fixed income and the repurchase price should be the minimum income. The business content of the contract is the normal business activities of the trust company. After the signing of the "repurchase contract" in this case, the trust company has fulfilled the filing procedures with its supervisory unit, the Qinghai Banking Regulatory Bureau, and the Qinghai Banking Regulatory Bureau has not put forward rectification opinions. The court of first instance found that the nature of the contract in this case was a business trust, which was not improper. The appellant's non-ferrous metals company's appeal that the contract in this case is a business trust is actually a loan cannot be established. In addition, neither the first nor the second instance of this case supported the defense and appeal request of the defendant non-ferrous metal company to adjust the liquidated damages (five ten thousandths of the overdue payment plus 10% of the transfer price).

2.(2020) E Min Zhong No. 524 (Civil Judgment of Second Instance on Disputes over Securities Repurchase Contracts of Tianfeng Securities Co., Ltd. and Foshan Zhongji Investment Co., Ltd.)

Transaction Structure:On May 15, 2017, Zhongji Company and Tianfeng Securities signed the Stock Income Rights Transfer Contract, stipulating that Tianfeng Securities will transfer the 17 million shares of Oupu Company (stock code: 002711) held by Zhongji Company with entrusted funds, and Zhongji Company will pay the realization amount of the stock income rights according to the agreed amount within the agreed time. The payment date of the realization amount of the underlying stock income rights is the date when Zhongji Company pays the purchase price of the underlying stock income rights for one year, that is, May 18, 2018; Zhongji Company agreed to pay the realization of the underlying stock income right at RMB 183000000 ×(1 + return on stock income right investment [6.2] × actual number of days during the term of the plan/360). Credit enhancement measures: stock pledge guarantee, joint and several liability guarantee.

Validity of Contract:The contract is valid.

Nature of Contract:According to the trust company-non-ferrous metals company equity income right investment pooled fund trust plan, the trust company and the outside principal formed a trust legal relationship; according to the Repurchase Contract, the trust company and the non-ferrous metals company formed a legal relationship between the equity income right resale repurchase. According to the trust industry regulatory provisions such as the Measures for the Administration of Trust Companies and the Measures for the Administration of Collective Funds Trust Plans of Trust Companies, under specific trust plans, trust companies may adopt trust fund management models such as "buy-and-sell. The trust company manages the trust funds by means of equity income right transfer and repurchase, and issues the corresponding trust plan, which is different from the trust loan business. Article 2.1 of the Repurchase Contract states: "The right to the proceeds of a particular asset acquired by the Trust and all proceeds generated by it are attributed to the trust property." The agreement states that any income generated by a particular asset belongs to the trust company during the period in which the trust company acquires the right to income from a particular asset. Therefore, the trust's income is not fixed income and the repurchase price should be the minimum income. The business content of the contract is the normal business activities of the trust company. After the signing of the "repurchase contract" in this case, the trust company has fulfilled the filing procedures with its supervisory unit, the Qinghai Banking Regulatory Bureau, and the Qinghai Banking Regulatory Bureau has not put forward rectification opinions. The court of first instance found that the nature of the contract in this case was a business trust, which was not improper. The appellant's non-ferrous metals company's appeal that the contract in this case is a business trust is actually a loan cannot be established. In addition, neither the first nor the second instance of this case supported the defense and appeal request of the defendant non-ferrous metal company to adjust the liquidated damages (five ten thousandths of the overdue payment plus 10% of the transfer price).

3.(2021) Jingmin Zhongzhong No. 367 (Civil Judgment of Second Instance on Contract Dispute between Shanghai Nuomu Investment Center (Limited Partnership) and Beijing Zhongrong Wenda Asset Management Co., Ltd.)

Transaction Structure:On April 17, 2017, Shanghai Nomu and Zhongrong Wenda signed the Stock Return Transfer and Repurchase Contract, stipulating that the stock return corresponding to the restricted sale period shares held by Party A (securities code: 300038) shall be transferred to Party B, and the repurchase price shall be the higher of the following:(1) transfer price ×(1+15%× actual number of days/365 days between the fund establishment date (inclusive) and the repurchase date (exclusive))). (2) Average price for the first 20 trading days of the repurchase date B Metano (300038). Credit enhancement measures: stock pledge, joint and several liability guarantee.

Validity of Contract:The contract is valid.

Nature of Contract:The Court's view:

First of all, according to the calculation and payment method of the repurchase price in the Stock Income Right Transfer and Repurchase Contract, it is agreed that "the repurchase price of the stock income right shall be the higher of the following:(1) the transfer price ×[1+15%× the actual number of days/365 days between the fund's establishment date (inclusive) and the repurchase date (exclusive)]. (2) The average price of the first twenty trading days of the repurchase day B Metano (300038)." It can be seen that the contract agreed in the company's income is not fixed income, 15%/year premium is only the minimum income, the above-mentioned agreement on income and private lending agreed fixed interest is different. Secondly, according to the provisions of the company law, the shareholders of the company enjoy the rights of asset income, participation in major decision-making and selection of managers in accordance with the law. Accordingly, the income from assets has the nature of property rights, which belongs to a property right enjoyed by the shareholders of the company in accordance with the law, and there are no prohibitions on the transfer of equity and its property rights in the existing laws and administrative regulations, so the right to equity income can be transferred independently. Third, according to Article 10 of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, the investment scope of private equity products is stipulated in the contract, and it can invest in debt assets, listed or listed stocks, and unlisted corporate equity (including Debt-to-equity swap) and the right to receive (receive) benefits, and other assets that comply with laws and regulations. The shares involved in the case are listed or listed for trading, and the investment equity income rights of Zhongrong Wenda Company under its management of Zhongrong Wenda Company-Wenda Yingying No. 6 Private Equity Fund meet the investment scope requirements of private equity funds. (Regarding the third article of the court, the author has reservations. After consulting the official website of the China Securities Investment Fund Association, the private equity fund of Zhongrong Wenda-Wenda Yingying No. 6 is an equity investment fund. According to the "Notice for the Filing of Private Investment Funds," The investment scope of private equity investment funds mainly includes the equity of unlisted companies, non-publicly issued or traded stocks of listed companies, convertible bonds, market-oriented and legalized debt-to-equity swaps, equity fund shares, and other approved by the China Securities Regulatory Commission "Assets" does not include the stocks of listed companies that have been issued and listed. Therefore, the court's argument that the investment equity income rights of Wenda Yingying No. 6 private equity fund are in line with the scope of private investment is questionable, but at the same time, the author also believes that since the "Instructions for the Filing of Private Investment Funds" does not belong to laws or administrative regulations, the contract cannot be considered invalid on the grounds of violating this provision.)

In summary, the court held that Shanghai Nomu believed that the nature of the contract involved in the case was a private loan, so the contract should be found to be invalid, and then it should not pay the equity income right to Zhongrong Wenda Company. There was no legal basis and it was not supported.

4.(2020) Yue 01 Min Chu No. 1315 (Civil Judgment of First Instance on Contract Disputes between Daye Trust Co., Ltd. and Shenzhen Qianhai Pengjie Investment Partnership, Beijing Shenzi and Equity Investment Partnership)

Transaction Structure:On May 19, 2016, Daye Trust signed the "Stock Income Rights Transfer and Repurchase Contract of Listed Companies" with Qianhai Pengjie Partnership, Shenzi and the partnership, agreeing that Qianhai Pengjie Partnership, Shenzi and the partnership will hold The stock income rights corresponding to a total of 80 million shares of the listed company Shanghai Dingli Technology Development (Group) Co., Ltd. (stock code: 600614) are transferred to Daye Trust Company, and Qianhai Pengjie Partnership, Shenzi and Partnership will buy back the above-mentioned stock income rights to Daye Trust Company in accordance with the agreement of this contract. Total repurchase base price = total transfer price paid by the transferee for the share proceeds, and the repurchase premium corresponding to the repurchase premium is a fixed annualized rate of return, with an annualized rate of return of 12.32 per cent per annum. Credit enhancement measures: stock pledge, joint guarantee guarantee.

Validity of Contract:The contract is valid.

Nature of Contract:The court held that this case is not a private lending dispute, and the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (2020 Amendment)" is not applicable, but the specific legal relationship is not clarified.

1.(2018) Beijing Minchu No. 142 (Civil Judgment of First Instance on Contract Disputes between Beijing Fuguo Tianqi Capital Management Co., Ltd. and Que Wenbin)

Transaction Structure:On December 13, 2016, Fuguo Tianqi Company and Sishan Partnership Company signed the "Transfer and Repurchase Contract". According to the contract, Fuguo Tianqi Company shall pay the transfer price with the funds actually raised by private equity products, and shall be subject to the income right of the underlying shares held by Sishan Partnership Company. Sishan Partnership Company shall be obliged to repurchase the underlying shares in accordance with the agreement. Repurchase price =[∑An(A1 A2 …… An)*(1 premium repurchase rate * N/365)]-the amount of income used by the Sishan Partnership to pay investors during the life of the fund product-the related expenses incurred by Fuguo Tianqi Company in issuing the fund product without fulfilling this contract. Credit enhancement measures: The Sishan Partnership provides a pledge guarantee with the underlying shares it holds, and Hengkang and Que Wenbin provide a joint and several liability guarantee.

Validity of Contract:The court held that the transfer and repurchase contract, the stock pledge contract, and the guarantee contract are all the true intentions of the parties, and the content does not violate the restrictive provisions of laws and administrative regulations, and should be deemed legal and effective.

Nature of Contract:The nature of the contract was not specified in the judgment, but a partially supportive attitude was adopted to the defendant's defense that the liquidated damages (3‰) were too high, and the standard was used to cap the interest rate on private lending (24%/year before 2020.8.19 and LPR 4 times after 2020.8.20).

2.(2020) Zhejiang 0103 Minchu No. 3956 (Civil Judgment of First Instance on Dispute over Guarantee Contract between Beijing Ruosen Investment Co., Ltd. and Zhu Jiman)

Transaction Structure:On December 22, 2017, all parties signed the "Stock Income Right Transfer and Repurchase Contract", which agreed to transfer the income right of the circulating shares of Yuheng Pharmaceutical (stock code: 002437) held by Party A to the trust established by Party B according to the consideration of 50 million yuan. Party A shall repurchase the stock income right at the expiration of the agreed period, and the repurchase price = repurchase principal + repurchase premium, repurchase premium = [transfer price x (13.5 per cent) ÷ 360]* total number of days between the date of transfer and the expiration of the repurchase period. Credit enhancement measures: Party A provides pledge guarantee with the underlying shares it holds, and Wanxiang provides joint and several liability guarantee to the company.

Validity of Contract:The contract is valid.

Nature of Contract:The nature of the contract was not specified in the judgment. As for the defendant's argument that the sum of premium (13.5 per cent/year) and liquidated damages (10.5 per cent/year) exceeded LPR by four times, the case was prosecuted on 2020.6.29, and it was determined that the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases on 2020.8.20 were not applicable.

3.(2018) Jing Min Chu No. 226 (Jiangyin Huazhong Investment Management Co., Ltd. and Zhang Yuhui and other securities repurchase contract disputes first instance civil judgment)

Transaction Structure:On May 14, 2018, Pengqi Group, Zhang Pengqi (Party A) and Jiangyin Huazhong Company (Party B) signed the Stock Return Transfer and Repurchase Contract, agreeing to transfer the stock return right of about 68 million shares of Pengqi Joint Stock Company (stock code: 600614). After the expiration of the term or the achievement of the conditions, Party A will repurchase the stock return right at the agreed price with a repurchase premium rate of 5%, repurchase price = ∑ each transfer price x (1+5% x the actual number of days/365 between the date of payment of the transfer price (inclusive) and the repurchase date (exclusive)). Credit enhancement measures: stock pledge, joint and several liability guarantee.

Validity of Contract:The contract is valid.

Nature of Contract:The judgment did not specify the nature of the contract, but held that: the repurchase contract has the nature of securities financing, so the calculation standard of liquidated damages of 8/10000 per day agreed in the contract is obviously too high, and all parties of the original defendant proposed that if the defendant should bear the corresponding liability for breach of contract, the calculation standard of liquidated damages of 8/10000 per day agreed in the contract has exceeded the upper limit standard of 24% of annual interest rate, which is too high, the opinion that the court should downgrade. In response, the court adjusted the standard for calculating liquidated damages to an annual interest rate of 24%.