Corporate Litigation Study... Practical points of company merger disputes.

Introduction

Company merger is an important means to optimize the industrial structure of countries in the world, and it is also an effective way for companies to expand and grow. With the in-depth development of China's economy and the acceleration of the pace of reform and opening up, the company's legal system and its lawyer practice are facing new challenges and many new problems. This paper combs and refines the legal provisions, litigation overview, dispute issues and the main points of the judgment of such cases, and helps the company and shareholders to avoid the legal risks of the merger stage of the company to the greatest extent and provide a path to resolve such disputes.

1. related regulations

the People's Republic of China Companies Act

Article 43 The methods of discussion and voting procedures of the shareholders' meeting shall be prescribed by the articles of association of the company, unless otherwise provided for in this Law.

Resolutions made at the shareholders' meeting to amend the articles of association of the company, increase or decrease the registered capital, as well as resolutions on the merger, division, dissolution or change of corporate form of the company must be passed by shareholders representing 2/3 or more voting rights.

Article 172 The merger of a company may take the form of a merger by absorption or a merger by new establishment.

The absorption of other companies by one company is a merger by absorption and the absorbed company is dissolved. The merger of two or more companies to establish a new company is a new merger, and the parties to the merger are dissolved.

Article 173 In the case of a merger of a company, the parties to the merger shall sign a merger agreement and prepare a balance sheet and an inventory of property. The company shall notify its creditors within ten days from the date of making the merger resolution, and make a public announcement in a newspaper within 30 days. 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, the creditor may require the company to pay off its debts or provide corresponding guarantees.

Article 174 In the event of a merger of companies, the claims and debts of the parties to the merger shall be inherited by the surviving company or the newly established company after the merger.

Article 179 Where a company merges or splits and the registered items are changed, it shall register the change with the company registration authority in accordance with the law; where the company is dissolved, it shall register the cancellation of the company in accordance with the law; where a new company is established, it shall register the establishment of the company in accordance with the law.

If a company increases or decreases its registered capital, it shall register the change with the company registration authority in accordance with the law.

Article 180 The company is dissolved for the following reasons:

The (III) needs to be dissolved due to the merger or division of the company;

the People's Republic of China Contract Law

Article 44 A lawfully established contract shall take effect upon its formation. Where laws and administrative regulations stipulate that formalities such as approval and registration shall be gone through shall take effect, such provisions shall be followed.

Overview of 2. Litigation

(I) after the cancellation of the merged party, the merging enterprise requires the continued performance of the merger agreement.

Plaintiff: Merger Enterprise

Defendant: Investor of the merged enterprise (or member of the liquidation group, etc.)

Litigation request: request according to law 1. order the defendant to continue to perform the * * * * stipulated in the merger agreement; 2. the property located in * * * * is owned by the plaintiff, the plaintiff enjoys the right to use the land, and the defendant assists the plaintiff in handling the transfer formalities. 3. The costs of the proceedings shall be borne by the defendant.

Jurisdiction: if there is no agreement in the agreement, the people's court in the place where the defendant has his domicile or the place where the contract is performed shall follow the agreement if there is an agreement on jurisdiction. (Basis: Articles 34 and 23 of the the People's Republic of China Civil Procedure Law)

The (II) interested party filed an action to confirm the invalidity of the Merger Agreement on the grounds that the value of the equity in the business combination had shrunk.

Plaintiff: Shareholders of the merged enterprise or the merged enterprise.

Defendant: merging enterprise, merged enterprise

Litigation request: 1. Request to confirm that the Merger Agreement signed by the merging enterprise and the merged enterprise is invalid according to law; 2. Request the defendant to restore the shareholders' equity to the status before the merger, that is, the plaintiff holds the * * * *% equity of the company; 3. The litigation costs shall be borne by the defendant.

Jurisdiction: in essence, the reason for confirming the invalidity of the merger agreement is that the resolution of the shareholders' meeting seriously damages the interests of shareholders. As the power organ of the company, the company should be the defendant in disputes over the resolution of the shareholders' meeting. Therefore, the domicile of the company whose resolution seriously damages the interests of shareholders can be taken as the first defendant, and the competent court can be determined as the people's court of the company's domicile.

(III) seeks termination of merger agreement action.

Plaintiff: Party to the Merger Agreement

Defendant: counterparty to the merger agreement

Claims: 1. Order the dissolution of the Merger Agreement signed by the parties to the Merger Agreement on the date of **; 2. Order the parties to the Merger Agreement to bear liability for breach of contract or damage in accordance with the agreement; 3. The litigation costs in this case shall be borne by the other party to the merger agreement.

Jurisdiction: if there is no agreement in the agreement, the people's court in the place where the defendant has his domicile or the place where the contract is performed shall follow the agreement if there is an agreement on jurisdiction. (Basis: Articles 34 and 23 of the the People's Republic of China Civil Procedure Law)

3. Disputes and Judgment Rules

One of the focuses of (I) controversy: the subject qualification of the defendant.

Case: Guan Chun 'an County People's Court (2012) Hang Chun Shang Chu Zi No. 1

The question of whether the defendant in this case is qualified. Because the company is an enterprise legal person, the shareholders' meeting is the internal decision-making body of the company, the legal effect of the resolution of the shareholders' meeting involves not only the shareholders within the company, but also the creditors and other stakeholders outside the company. It can be seen that the resolution of the shareholders' meeting is an act of the company. The defendant in the action of invalid resolution of the shareholders' meeting should be a long-term company, and the shareholders are not the responsible bearers of the resolution of the shareholders' meeting and should not be listed as the defendant in the action. Interested parties other than the parties to the merger agreement should be the parties to the agreement, namely, the long-term company and the first company. Prior to the signing of the merger agreement, Jiu Da Company had already transferred all the shares of the shareholders of the first company, and the first company was actually a one-person limited liability company of Jiu Da Company. After the first company is deregistered, the company's assets and its external rights and obligations are borne by the shareholder Jiuda Company, so the defendant in the merger agreement invalidation action should also be Jiuda Company. Liu Feiyang and Sun Yingdan signed the relevant documents when handling the legal procedures for the merger of the company, which only played an assisting role and could not be qualified defendants in the case of invalid agreement disputes. The reason why the merger was invalid in this case was that the merger agreement was invalid, so that the resolution of the shareholders' meeting confirming the merger agreement was defective. Therefore, the plaintiff brought the company to absorb the merger of the appropriate defendant is the company.

The second focus of the (II) dispute: the entry into force of the merger agreement.

Case: Nanyang Intermediate People's Court of Henan Province (2018) Yu 13 Min Zhong No. 7424

Whether the merger agreement between the two parties is effective. Article 44 of the the People's Republic of China Contract Law stipulates that a contract established in accordance with the law shall take effect from the time of its establishment. Where laws and administrative regulations stipulate that formalities such as approval and registration shall be gone through shall take effect, such provisions shall be followed. The merger agreement in this case stipulates that it will take effect after being signed by both parties. Laws and administrative regulations do not stipulate that such contracts shall take effect after approval or registration. Articles 173 and 179 of the the People's Republic of China Company Law applicable in the original trial also do not stipulate that the company merger agreement shall take effect after approval or registration. Therefore, the original judgment found that the company merger agreement signed by both parties has no legal effect, has no legal basis, and is improperly handled, The court shall correct.

The third focus of the (III) dispute: the conditions for the termination of the merger agreement.

Case: Beijing No.1 Intermediate People's Court (2019) Jing 01 Min Zhong No. 6946

(I) whether the agreement has been fulfilled. In accordance with the provisions of the second paragraph of Article 172 of the Company Law, a company's merger by absorption means that the company accepts other companies to join the company, the accepting party continues to exist, and the absorbed party is dissolved. In addition, according to the arrangement of the tripartite agreement, the absorption and merger of the enterprises involved in the case includes the following steps according to the completion time node sequence: 1. New company (completed before December 12, 2016);2. Equity transfer (completed before December 27, 2016);3. Contract transfer (completed before February 28, 2017);4. Asset merger (completed before June 30, 2017);5. Company cancellation (completed before June 30, 2017);6. Equity transfer of newly established companies (completed before July 31, 2017). Therefore, whether from the provisions of the company law or the agreement of the three parties, the merger of enterprises should be dissolved and canceled as a necessary element. After investigation, Shishengda Company and Por Company have not completed the dissolution of the enterprise and the relevant shareholders have not completed the equity transfer of the newly established enterprise, so the agreement involved in the case has not been fulfilled.

(II) whether the agreement is eligible for continued performance.

1. Whether the three parties have the subjective will to perform. After questioning by the court, Huayuan Yibo Company and Por Company believed that the parties no longer had the subjective will to promote the continued performance of the agreement involved in the case, and requested the termination of the contract. Although Shishengda Company agreed to continue to perform in court, (2017) in the civil case No. 20264 of Beijing 0107 Minchu, it claimed as the plaintiff that the fraud of Huayuan Yibo Company had caused it to make a wrong intention and requested to cancel the agreement involved in the case accordingly. At the same time, the three shareholders have been unable to hold a normal shareholders' meeting. Based on the above circumstances, the three parties have major differences on the continued implementation of the agreement, and they no longer have the subjective will to continue to perform.

2. Whether the agreement involved in the case has the objective conditions for continued performance. As mentioned above, according to the tripartite agreement, there are six links in the absorption and merger of the enterprises involved in the case. At present, only the equity transfer and the newly established company have been completed, while the contract transfer, asset merger, company cancellation and equity transfer of the newly established company have not been finally completed. As for the performance of the remaining contractual matters, according to the opinions of both parties in this case and the minutes of the meeting of the board of directors of the three parties, shishengda company requires that the premise be the second audit evaluation and reconfirmation of their respective equity ratios. the specific agreement of the three parties in the agreement involved is that "the equity ratios of the three parties in the merged business subject company can be adjusted accordingly, and the specific adjustment ratio shall be determined by the joint agreement of the three parties". Therefore, according to the agreement involved in the case, the adjustment of the equity ratio must be based on the agreement of the three parties, but the solution in the event of a conflict between the three parties is not considered. As mentioned earlier, the three parties have now had major differences on this, and the three parties have been unable to hold a normal shareholders' meeting, so objectively there is no condition for consensus. The lack of legal basis for intervening in the autonomy of the parties through judicial means is not in line with the agreement involved in the case.

At the same time, if the implementation of the agreement continues to be promoted, Huayuan Yibo Company will face a deadlock or even dissolution when the internal powers and executive bodies of the company, such as the shareholders' meeting and the board of directors, cannot operate normally. This is obviously inconsistent with the purpose of continuing to perform the agreement, and is not conducive to protecting the rights and interests of shareholders and legal persons of all parties.

Based on the above factors, the court believes that the agreement involved in the case objectively does not have the conditions for continued performance, so it should be lifted. For the specific dissolution time section, the time when the relevant claims of Huayuan Yibo Company were delivered to the party that finally received the indictment, that is, Por Company, shall prevail, that is, May 14, 2018.

The fourth focus of the (IV) dispute: the merged enterprise has been deregistered and is required to continue to perform the merger agreement.

Case: Gaoyou Municipal People's Court Nanjing Breadth Construction Engineering Co., Ltd. and Xu Peng Company Merger Dispute First Instance Civil Judgment (2020) Su 1084 Minchu 2623

The "Absorption and Merger Agreement" signed by the plaintiff, Yunpeng Machinery Factory and Xu Peng is the true intention of the parties and does not violate relevant laws and regulations. It should be deemed legal and effective. Both parties should enjoy rights and perform obligations in accordance with the contract. According to the facts ascertained, after the plaintiff, Yunpeng Machinery Factory, and Xu Peng signed the contract, both parties have gone through the handover procedures for the land and plant involved in the case, and have been controlled and used by the plaintiff since then. However, because Yunpeng Machinery Factory canceled the enterprise before the two parties did not handle the land and plant transfer procedures, the two parties have been unable to handle the transfer procedures. According to the agreement, the land use right of Yunpeng Machinery Factory shall be enjoyed by the plaintiff, and the factory building shall be owned by the plaintiff, which is supported by the court. As an investor of Gaoyou Yunpeng Machinery Factory, Xu Peng should bear corresponding responsibilities after the cancellation of the enterprise and should assist the plaintiff in handling the relevant land and plant transfer procedures.

The fifth focus of the (V) dispute: the subject qualification of the plaintiff and the defendant

Case: Shandong Higher People's Court (2014) Lu Shang Zhong Zi No. 180 Jinan High-tech Industrial Development Zone Management Committee State-owned Assets Supervision and Administration Commission Office, Kexin Fengda Investment Guarantee Co., Ltd. and Jinan Shanshui Group Co., Ltd., Shandong Sente Hospital Holding Management Group Co., Ltd. and other companies merger disputes second-instance civil judgment.

Regarding focus 1, the original trial court held that in accordance with the provisions of Article 174 of the the People's Republic of China Company Law, the company merger is a civil legal act between the two companies participating in the merger, so the merger agreement involved in this case was signed by Fengda Company and Gaoxin SASAC in compliance with the law. However, since item 3 of paragraph (II) of article 10 of the agreement is an act of setting obligations for shareholders of Fengda company, the content of this clause goes beyond the scope of merger of ordinary companies. the shareholders of Fengda company, I .e. the consent party of each defendant in this case, shall have legal effect on each defendant. otherwise, both parties to the contract cannot create contractual obligations for the third party. Although the "Absorption Merger and Capital Increase Agreement" involved in this case was not signed in the name of each shareholder, each defendant authorized Fan Enjun to sign a merger agreement with the High-tech SASAC on behalf of Fengda Company and each defendant, and Fan Enjun also signed the agreement as the authorized person. At the same time, the four defendants in this case, as shareholders of Fengda Company, made a resolution of the shareholders' meeting on May 26, 2009, which unanimously agreed and approved the contents of the "Absorption and Merger and Capital Increase Agreement" signed by the representative of Fan Enjun. Although the resolution of the shareholders' meeting stated that the time was May 26, 2009, one day earlier than the signing time of the Agreement on Absorption and Merger and Capital Increase and Share Expansion, the defendant did not sign the contract on behalf of Fan Enjun on behalf of the defendants because paragraph 3 of Article 16 of the Agreement on Absorption and Merger and Capital Increase and Share Expansion, as shown in paragraph 3 of Article 16 of the Agreement on Absorption and Merger and Capital Increase, the defense that each defendant is not aware of the terms of liability, and that item 3 of paragraph (II) of article 10 of the merger and capital increase agreement is not binding on each defendant cannot be established. To sum up, item 3 of paragraph (II) of article 10 of the agreement on absorption and merger, capital increase and share expansion was signed on the basis of the authorization of the four defendants, and all the defendants expressed their intention to approve the contents of the agreement on absorption and merger, capital increase and share expansion signed by fan enjun's representative. therefore, the clause is binding on the four defendants, and the four defendants shall be liable for compensation according to the agreement.

With regard to focus 2, the court of first instance held that the Kexin Fengda Company involved in this case was established by the merger of the Kexin Guarantee Center and Fengda Company, that the plaintiff in this case, the High-tech SASAC, was the investor of the former Kexin Guarantee Center, and that the four defendants in this case were shareholders of Fengda Company. According to the provisions of Article 2, paragraph 3 of the Agreement on Absorption and Merger and Capital Increase signed by both parties, the original shareholders of Fengda Company, namely the four defendants in this case, were changed to shareholders of the newly established Kexin Fengda Company through equity replacement. And in accordance with the provisions of Article 3, Paragraph 2, Item 1 of the Agreement, the shares of the new company held by the four defendants after replacement are based on the total net capital of the original Fengda Company (49.98 million yuan) to determine the overall shareholding ratio (49%), and on this basis to determine their respective shareholding ratios. Therefore, the shareholding of the four defendants is determined by the total net capital of Fengda Company. As the fact that Fengda Company provided a guarantee for Center Hospital was not disclosed in the merger process, the debt was not included in the scope of the audit, resulting in a decrease in the total net capital of Fengda after Kexin Fengda Company assumed the debt of Fengda Company and actually paid to creditors. Under the condition that the shareholding ratio agreed in the "Absorption and Merger and Capital Increase and Share Expansion Agreement" remains unchanged, the reduction of the total net capital of Fengda Company obviously damages the interests of the High-tech SASAC. Item 3 of Article (II) of the "Absorption and Merger and Capital Increase and Share Expansion Agreement" is the relief means agreed by the parties to solve the above situation. Therefore, the High-tech SASAC belongs to the subject with an interest in this case, A plaintiff who is qualified in this case has the right to bring an action in this case in accordance with this provision.

With regard to focus three, the court of first instance held that since the merger of companies is a special form of company establishment, the shareholders of the new company should also fulfill the obligation of capital contribution, the difference is that its capital contribution to the new company is converted from its original capital contribution to the merged company. In this case, the equity of the four defendants to Kexin Fengda Company is based on the net assets of Fengda Company as determined by the audit report. Therefore, only when the net assets of Fengda Company as determined by the audit report are consistent with the actual net assets of Fengda Company, the four defendants have properly fulfilled their capital contribution obligations to Kexin Fengda Company. However, since the guarantee debt of the original Fengda Company to Sente Hospital was not included in the audit scope, after Kexin Fengda Company actually assumed the debt of the original Fengda Company, it is essentially equivalent to that the original shareholders (the four defendants) of Fengda Company did not fully fulfill their capital contribution obligations to Kexin Fengda Company. Therefore, refer to the provisions of Article 13, Paragraph 1 and Paragraph 3 of the (III) of the Supreme People's Court on the Application of Certain Issues Concerning the People's Republic of China Company Law, kexin Fengda Company also has the right to require the four defendants to perform their capital contribution obligations to Kexin Fengda Company, and may request the company's promoters and the defendant shareholders to bear joint and several liability, that is, joint and several compensation for the loss caused by its performance of the original Fengda Company's debts. As the four defendants to Kexin Fengda Company compensation for losses, in the nature of the company is equivalent to the company's request for shareholders to make up the capital contribution, so Kexin Fengda Company as the plaintiff to file a lawsuit is not improper, Sent Hospital's claim that the subject of the lawsuit of Kexin Fengda Company is not qualified can not be established. In this case, the high-tech SASAC and Kexin Fengda Company can claim their rights to the four defendants respectively based on different claims. However, since the high-tech SASAC does not require the four defendants to pay compensation to them, but claims that the four defendants should bear compensation liability to Kexin Fengda Company, there is no contradiction between the high-tech SASAC and Kexin Fengda Company as the co-plaintiffs in this case. Since the responsibility of the four defendants is the capital enrichment responsibility of the defective shareholders of the company, not the responsibility of guarantee, the four defendants do not enjoy the right of recovery to the company after compensation to the company, so the mountain water group company to enjoy the right of recovery to the plaintiff's defense can not be established.