BFIPC case selected for inclusion in people's courts database

Dispute between Qu and Chen over equity transfer

In foreign-related equity transfer disputes, the applicable law shall be determined separately for issues concerning the contract itself and those concerning shareholder qualification, among other matters.

Company L is a stock corporation incorporated in the US state of California. In September 2017, Jin (transferee) and Chen (transferor) entered into an equity transfer agreement, under which Chen agreed to transfer 2 percent of his 40 percent lawful holding in Company L to Jin for 75,000 yuan (around $11,032). The agreement further provided that within 60 days of receipt of the subscription payment, Chen shall file an application for change with the company's registration authority and complete the equity change registration procedures within 90 days.

The parties also agreed that the formation, effectiveness, interpretation, performance and dispute resolution of the agreement shall be governed by the Contract Law of the People's Republic of China, the Company Law of the People's Republic of China and other applicable laws of the People's Republic of China, and that any term conflicting with mandatory law shall yield to such law.

In the course of the proceedings, both parties acknowledged that Qu was the actual transferee and that Jin signed the agreement as Qu's nominee. Qu paid the 75,000 yuan transfer price in two installments of 25,000 yuan and 50,000 yuan. On Sept 25, 2017, Company L issued to Qu Share Certificate No 12, stating that Qu held 9 percent of the company's fully paid-up and non-assessable shares (including a 7-percent stake transferred and gifted to Qu by Ding in a separate matter).

Qu subsequently sued Chen, alleging that after his payment of the equity transfer price, Chen had failed to complete the share change formalities and was therefore in breach of contract. Qu sought rescission of the equity transfer agreement and an order requiring Chen to refund the 75,000 yuan purchase price, together with interest.

On Sept 25, 2020, the Beijing Fourth Intermediate People's Court rendered civil judgment dismissing all of Qu's claims. Qu appealed. On March 31, 2021, the Beijing High People's Court rendered civil judgment, dismissing the appeal and affirming the original judgment.

Adjudication summary:

In disputes arising from equity transfers of overseas companies, where different legal relationships are involved, such as those concerning the equity transfer contract itself and the acquisition of shareholder qualification, the applicable law shall be determined separately.

With respect to the equity transfer contract itself, the parties may choose the governing law by agreement; in the absence of such a choice, the law of the habitual residence of the party whose performance of obligations best reflects the characteristics of the contract, or the law of another jurisdiction most closely connected to the contract, shall apply. With respect to whether shareholder qualification has been acquired, the law of the place of incorporation of the company shall apply; if the principal place of business differs from the place of incorporation, the law of the principal place of business may apply.