Perspective | A Case Study on the Issue of Contract Termination in the Absence of Payment for Equity Transfer

In addition to the general statute of limitations, the right to terminate a contract, as a right of formation, will inevitably be subject to the limitation of a time bar. Therefore, when discussing whether the equity transferor can terminate the contract in the case where the transferee has not paid the equity transfer price, attention should first be paid to the issues of the statute of limitations and the time bar. Furthermore, the equity transactions of limited liability companies involve many aspects, and in cases where the registration of shareholder changes has been completed and the company has been operating for many years, terminating the equity transfer contract will adversely affect the stability of internal management and external transactions of the company. Therefore, the exercise of the right to terminate the equity transfer contract should be stricter.

Through the study of judicial precedents, it is found that if the transferor does not exercise the right to terminate the contract for a long time, exceeding the reasonable period for exercising the right to terminate, the court will determine that the transferor has no real intention to terminate the contract, thus rejecting the transferor's request to terminate the equity transfer contract. This requires that the transferor should actively exercise the right to terminate the contract within a reasonable period.

In this case, Xiao Mouhua, as the transferor, requested to terminate the equity transfer contract signed with the transferee SL Company, who had not paid the equity transfer price. After hearing the case, the court found that it did not meet the legal termination conditions for the following reasons:
 

First, the equity transfer agreement signed by both parties did not stipulate the payment deadline for the equity transfer price, and Xiao Mouhua also failed to provide evidence of urging SL Company to pay the equity transfer price, indicating that in this case, the performance deadline did not fundamentally affect the realization of the purpose of the equity transfer contract. If SL Company delays performance, it does not necessarily cause Xiao Mouhua's contractual purpose to fail.

Second, the exercise period of the right to terminate the contract is a time bar; if the right is not exercised within this period, the right is extinguished. In this case, the parties did not stipulate the exercise period of the right to terminate in the equity transfer contract. According to Article 15, Paragraph 2 of the "Interpretation of Several Issues Concerning the Application of Law in the Trial of Disputes over Commodity Housing Sale Contracts" by the Supreme People's Court, if the right holder does not exercise the right within one year from the date they know or should know the grounds for termination, the right to terminate is extinguished.Xiao Mouhua has not exercised the right to terminate the contract for 4 years since the signing of the equity transfer contract, indicating that he has no real intention to terminate the contract, and it has long exceeded the one-year time bar stipulated by law. Therefore, Xiao Mouhua's right to terminate the equity transfer contract has been extinguished.

Third, if Xiao Mouhua believes that SL Company has not paid the equity transfer price as agreed after signing the equity transfer contract, he should promptly notify SL Company to perform the debt, specifying the deadline for SL Company to pay the equity transfer price. If SL Company still does not perform within a reasonable period after being urged, Xiao Mouhua has the right to terminate the contract.The reasonable period here refers to the time bar. Based on the specific circumstances of both parties' performance of the contract, combined with the nature of the contract and the purpose of the transaction, this reasonable period should be one year from the signing of the equity transfer contract. Given that Xiao Mouhua only began to exercise the right to terminate the contract against SL Company through litigation in June 2020, nearly 3 years after the signing of the equity transfer contract in September 2017, it far exceeds the reasonable period for exercising the right, thus Xiao Mouhua has no right to terminate the equity transfer contract in question.

In summary, Xiao Mouhua's request to terminate the equity transfer contract in question does not meet the legal termination conditions, so the court does not support his appeal for SL Company to return the equity and property.

In this case, the litigation request of JY Partnership is to terminate the "Equity Transfer Agreement" signed with Zang Mou, requiring Zang Mou to return 5% equity of the target company and complete the equity change procedures within 10 days.
 

Comprehensive analysis of the evidence and facts of this case shows that, first, the "Equity Transfer Agreement" submitted by JY Partnership clearly stipulates the equity transfer price, the method and deadline for payment, and the contribution amount, and both parties completed the equity change registration on the day the agreement was signed. The target company also confirmed the equity transfer matter through a resolution of the shareholders' meeting on the same day and amended the company's articles of association. Therefore, it can be determined that both parties had fully negotiated and reached a consensus on the transaction matters when trading the equity and completed the equity transfer immediately.Secondly, JY Partnership claims that although the payment deadline in the "Equity Transfer Agreement" is before May 17, 2017, Zang Mou has not paid the equity transfer price. However, the parties did not clearly stipulate the payment deadline at that time, and the equity change registration was carried out without a specific payment deadline, and JY Partnership did not provide a reasonable explanation.Furthermore, on June 16, 2017, Zang Mou transferred part of the equity to a third party, Jiang Mou, and completed the equity change registration. JY Partnership, as a shareholder of the target company, should have been aware of this, and it was not until 2022 that they sued the court claiming that Zang Mou had not paid the equity transfer price, which is obviously inconsistent with common sense.

Article 26 of the "Interpretation of the Supreme People's Court on the Application of Law in the Trial of Disputes over Sales Contracts" states that if the buyer has paid more than 75% of the total price of the subject matter, the seller's claim to retrieve the subject matter will not be supported by the people's court. Additionally, Article 634 of the "Civil Code of the People's Republic of China" states that if the buyer of an installment sale has not paid an amount due that reaches one-fifth of the total price, and after being urged still fails to pay within a reasonable period, the seller may request the buyer to pay the full price or terminate the contract.

It can be seen that in a sales contract, the buyer's failure to pay the consideration alone does not grant the seller the right to terminate the contract. The seller's right to terminate the contract needs to be judged based on specific factors such as the performance of the contract. The equity transfer contract, as a type of sales contract, is also subject to the above rules. If the transferee has paid part of the equity transfer price and is willing to continue performing, it does not constitute a fundamental breach, and the purpose of the transferor in signing the equity transfer contract is to obtain the equity transfer price. The transferee's ability and willingness to continue performing the contract will not frustrate the transferor's contractual purpose. Therefore, the transferor does not have the statutory right to terminate the equity transfer contract at this time, but the transferor can require the transferee to continue performing contractual obligations and bear liability for breach of contract.

In this case, the court believes that Fang Mouyan, as the equity transferee, has certain breach behaviors, but they are not sufficient to terminate the legal relationship of the equity transfer involved in the case.

The timing of Fang Mouyan's payment of the equity transfer price and the amount of the remaining payment are indeed unclear, which has led to some disputes. However, when Fang Mouyan's claim for the right of first refusal is supported and the equity has been forcibly transferred to her name, she should at least pay the undisputed remaining equity transfer price but has not done so, which should be recognized as a breach. However, the equity transfer contract and supplementary agreement only stipulate that the transferee should pay a penalty for not paying the equity transfer price as agreed, and do not stipulate that the transferor Zhu Mou and Si Mou can terminate the agreement based on this. Therefore, when Fang Mouyan fails to pay the remaining equity transfer price, Zhu Mou and Si Mou do not have the agreed right to terminate. The information publicized by the Supreme People's Court regarding dishonest persons shows that Fang Lijing, as a dishonest executor, has the specific behavior of "having the ability to perform but refusing to fulfill the obligations determined by the effective legal documents," which is not sufficient to prove that Fang Mouyan and Fang Lijing lack the ability to perform. Moreover, Fang Mouyan's equity has been pledged to secure the payment of the equity price, and both Fang Mouyan and Fang Lijing have consistently expressed their willingness to continue fulfilling the payment obligations of the equity transfer.The part of the equity that has been transferred but not performed is only the payment of the remaining equity price. Fang Mouyan and Fang Lijing have the willingness to perform and have provided performance guarantees through equity pledges. In the case where there is some dispute over the performance of the agreement, Fang Mouyan's failure to timely pay the remaining price does not constitute a fundamental breach and does not justify the termination of the equity transfer relationship.

In this case, the equity transferor Zhang Mouxiao claimed to terminate the four contracts signed with Wang Moujun on the grounds that Wang Moujun only paid him 3 million yuan of the equity transfer price and did not pay the remaining majority of the equity transfer price within the time limit agreed in the contract, which made it impossible for him to achieve the purpose of obtaining the consideration from the equity transfer.

After hearing the case, the court found that both parties had registered the change of 100% equity of the target company to Wang Moujun's name in two installments, and the legal representative of the target company had also been changed to Wang Moujun, who took over the company. Therefore, Zhang Mouxiao's main obligation in the equity transfer has been fulfilled. At this time, the relationship between Zhang Mouxiao and Wang Moujun is a creditor-debtor relationship formed based on the equity transfer. Although Wang Moujun's claim that the total amount he paid to Zhang Mouxiao has exceeded the amount he should pay for the equity transfer price has not been finally confirmed,it can be shown that Wang Moujun is willing to perform the contract and has not explicitly stated or indicated through his actions that he will not perform the main debt. Moreover, Wang Moujun has also provided payment guarantees for the amounts involved in the equity transfer contract. The fact that Wang Moujun failed to pay the full equity transfer price within the time limit agreed in the contract does not automatically justify the termination of the contract. The evidence provided by Zhang Mouxiao is insufficient to determine that his purpose of obtaining benefits from the equity transfer will inevitably fail, so there is no statutory ground for terminating the contract in this case.In summary, the court ruled to dismiss Zhang Mouxiao's request to terminate the equity transfer contract. Zhang Mouxiao may assert the outstanding equity transfer price and other rights against Wang Moujun according to the relevant agreements signed by both parties.

In cases where the equity transfer contract does not stipulate a right to terminate, whether the transferor can terminate the equity transfer contract when the equity transferee has committed a fundamental breach should be comprehensively judged based on the performance of the contract, the degree of fault of the breaching party, and whether the purpose of the contract can be achieved. The court generally believes that if the equity transferee has overdue payment behavior during the performance of the equity transfer agreement and refuses to continue fulfilling the contractual obligation to pay the remaining equity transfer consideration, resulting in the equity transferor's inability to achieve the contractual purpose of obtaining consideration through the transfer of equity, the equity transfer agreement has the statutory grounds for termination as stipulated in the Civil Code and should be terminated.

In this case, although the equity transferor Tian Mou and the transferee Chang Mou did not explicitly agree on the time for payment of the equity transfer price, they also did not explicitly agree on installment payments or deferred payments. After the equity transfer contract took effect, one party has actively fulfilled the obligation to transfer equity, and the party accepting the equity transfer should timely fulfill the payment obligation according to the contract after the contract takes effect.

However, Chang Mou did not pay the equity transfer price of 8.68 million yuan in one lump sum as agreed, which constitutes a fundamental breach, causing Tian Mou's contractual purpose to be unachievable, meeting the conditions for termination. Moreover, Tian Mou's written notice to Chang Mou to terminate the contract is a legal procedure for terminating the contract.The law clearly states the provisions on contract termination: "If one party claims to terminate the contract in accordance with the provisions of Article 93, paragraph 2, and Article 94 of this law, they shall notify the other party. The contract is terminated when the notice reaches the other party. If the other party has objections, they may request the people's court or arbitration institution to confirm the validity of the contract termination. If laws and administrative regulations require approval, registration, and other procedures for contract termination, they shall be handled in accordance with their provisions." Based on the above provisions, the court determined that Tian Mou enjoys the right to terminate the contract, and he has exercised the right to terminate the contract, so the equity transfer contract involved in the case has been terminated.

In 2016, the equity transferor Wang transferred 50% of the equity of the target company to the transferee Xu as agreed, but Xu did not pay the equity transfer price to Wang as agreed.

Xu claimed that this case was a free transfer of equity by bringing in business, so there was no need to pay the equity transfer price separately, but this defense is clearly contrary to the agreement of the equity transfer contract. Xu's claim that the equity transfer contract was specially agreed upon for the purpose of business registration, and that Wang cooperated in handling the business registration procedures, indicates that both parties reached another agreement that is considered as actual performance, which has no evidence to support it. Xu cannot prove his claim of a free transfer of equity by bringing in business. The first and second instance did not accept Xu's defense, which is not inappropriate.Wang and Xu signed an equity transfer contract, the purpose of which is to obtain the agreed equity transfer price. Xu's failure to pay the equity transfer price to Wang as agreed constitutes a fundamental breach of contract, and Wang has the right to exercise the statutory right of termination according to the law to terminate the equity transfer contract in question.

The equity transfer contract has particularity; its signing and performance not only directly affect the rights and obligations of the parties to the contract but also impact the interests of the target company, company creditors, and other relevant third parties. Especially when the equity has been registered and changed, the transferee has paid part of the amount, and has actually controlled the target company, the termination of the equity transfer contract should be comprehensively judged based on the performance of the contract, the degree of fault of the breaching party, and whether the purpose of the contract can be realized. If the transferee has not paid the remaining equity transfer price and has not expressed the intention to continue performance, it will lead to the transferor's contractual purpose being unachievable, at which point the transferor can terminate the equity transfer contract.

In this case, the court believes that the equity transfer contract has particularity and should be terminated with caution. As the equity transferors Zhou and Li, in the case where the contractual purpose cannot be realized, have the right to claim the termination of the equity transfer contract (referred to as the "Agreement"). As mentioned earlier, although Gao and Wu have overdue payment breaches, if they agree to continue performance, the "Agreement" may not be terminated. Based on this, during the trial, the first-instance court communicated multiple times with Gao and Wu to promote the continued performance of the "Agreement", but they clearly stated that the remaining payment should not be made. Gao and Wu also did not clearly express their intention to continue paying the equity transfer price in the second instance. Given that more than five years have passed since the signing of the "Agreement", and Gao and Wu have not clearly stated that they will pay the remaining amount, it has led to Zhou and Li's contractual purpose of obtaining the equity transfer price being unachievable. According to the law, "If one party delays the performance of the debt or has other breaches that prevent the realization of the contractual purpose, the party may terminate the contract," Zhou and Li's request to terminate the case-related "Agreement" should be supported.