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Case 1: The performance of an equity transfer agreement contract and the determination of shareholder qualifications are governed by Chinese law and the law of California, the United States of America, respectively
—A dispute over equity transfer between Qu and Chen

Updated: December 23, 2022

The effective ascertainment of foreign laws plays an important role in equally protecting the rights and interests of Chinese and foreign parties, promoting international civil and commercial exchanges, protecting the legitimate commercial interests of commercial subjects, and properly resolving international commercial disputes. In this case, the dispute was over an equity transfer, and the court determined the applicable laws according to the legal relationship.

On September 3, 2017, Qu and Chen signed an agreement on equity transfer in Chaoyang district, Beijing, agreeing that Chen would transfer to Qu his 2% equity in L Company registered in California, United States of America. Qu sued Chen, claiming that Chen's behavior constituted a serious breach of contract, causing Qu to suffer heavy losses. Qu demanded termination of the agreement, return of equity capital, and compensation for losses. The court held that as the two parties had signed an agreement on equity transfer in China, so that Chinese law was applicable to the contract, which complied with the provisions of Article 41 of the Law of the People's Republic of China on Choice of Law in Foreign-related Civil Relationships. According to Article 14 of that law, the relevant laws of California, the United States, where Company L is located, should be applied to the dispute. According to the California Corporation Laws ascertained by the court, the act of Ding, president of Company L, in issuing stock certificates to Qu complied with local laws and regulations. The issuance of stock certificates was the completion of the equity change procedures. It was determined that Qu had satisfied the shareholder qualification of L Company. Therefore, according to the Contract Law of the People's Republic of China and other Chinese laws, the contractual purpose of the agreement had been achieved by Qu, and Qu had no right to request termination of the contract. Qu's claim was rejected by the court.



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