[Keywords] Civil Law / Equity Transfer Disputes / Transfer of Mineral Rights / Good Faith Acquisition of Equity / Shareholder Qualification / Basis for Claims / Intersection of Civil and Criminal Law

【Key Points of the Ruling】Article 25 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III)” provides: “If a nominal shareholder transfers, pledges, or otherwise disposes of equity registered in his/her name, and the actual investor, claiming that he/she enjoys actual rights over the equity, requests the people’s court to declare such disposition invalid, the people’s court may handle the case by referring to the provisions of Article 106 of the Property Law. If the nominal shareholder’s disposition of the equity causes losses to the actual investor, and the actual investor requests the nominal shareholder to assume liability for compensation, the people’s court shall support such request.” In this case, one of the claims brought by the No. X Geological Exploration Team for Nonferrous Metals is that Gao was ordered to transfer the 30% equity interest in a certain mining company in Dongning City to a certain holding group company, which constitutes an unauthorized disposition, and that the holding group company did not acquire the 30% equity interest in good faith. Whether this claim can succeed hinges on whether the No. X Geological Exploration Team for Nonferrous Metals is indeed the actual investor of the 30% equity interest in the said mining company in Dongning City. It is necessary to ascertain whether the factual basis underlying the No. X Geological Exploration Team’s claim is established and whether the claim itself has a legal basis.

[Basic Facts of the Case] In 2005, a certain team specializing in nonferrous metal geological exploration obtained a “Mineral Resource Exploration License” from the Provincial Department of Land and Resources to conduct a preliminary survey around a copper mine in Dongning County. In 2006, a mining company named Zunhua City [Company Name] was established, with Gao holding a 70% equity stake and serving as its legal representative. The company’s registered capital was 1 million yuan.

In 2006, a certain team specializing in nonferrous metal geological exploration signed a 2006 cooperation agreement with a mining company in Zunhua City. The two parties agreed that the cooperation would be structured as a joint-stock system: the mining company in Zunhua City would make an investment in cash, while the nonferrous metal geological exploration team would contribute its mineral exploration rights. The nonferrous metal geological exploration team would hold a 30% equity stake, and the mining company in Zunhua City would hold a 70% equity stake. If the expected targets are not met, the project can be packaged and transferred, with the resulting profits distributed according to the respective equity shares.

In 2007, a certain team specializing in geological exploration of non-ferrous metals submitted a “Request for Transfer of Prospecting Rights” to the Provincial Department of Land and Resources. Part of the prospecting rights was transferred to a cooperative company, covering an area of 1.25 square kilometers. Also in the same year, a mining company named Dongning City Mining Co., Ltd. was established—a sole proprietorship owned by Mr. Gao—with a registered capital of 100,000 yuan.

In September 2007, the Department of Land and Resources replied: Before proceeding with the transfer of this project, a mineral exploration rights assessment must be conducted in accordance with the law. Only after paying the consideration to the Department of Land and Resources based on the registered assessment results can the transfer and modification procedures be carried out. In April 2008, the assessed value of the mineral exploration rights was 7.8495 million yuan. The transfer was approved.

In April 2008, the Development and Management Division of the Provincial Department of Land and Resources (the transferor) signed a “Prospecting Rights Transfer Contract” with a mining company in Dongning City (the transferee), with the transfer price of 7.8495 million yuan to be paid in installments. The mining company in Dongning City made an initial payment of 2.4 million yuan, and the remaining balance of 5.4495 million yuan was paid in 2010. The mining company in Dongning City subsequently obtained the prospecting rights license.

In May 2008, a certain team specializing in nonferrous metal geological exploration signed another “2008 Cooperation Agreement” with a certain mining company in Zunhua City. The two parties agreed that the equity ratio would be adjusted to 20% for the nonferrous metal geological exploration team and 80% for the said mining company in Zunhua City. In addition, the mining company in Zunhua City would pay the nonferrous metal geological exploration team a compensation of 6 million yuan for its earlier geological exploration investments. The remaining terms remained consistent with those stipulated in the 2006 agreement.

In February 2012, a mining company in Dongning City obtained a mining license. In the same year, Gao submitted an application to a certain team specializing in non-ferrous metal geological exploration, stating: “I am willing to acquire the 20% equity stake I hold in this mining right at a fair price.” However, this application was not approved by the said team specializing in non-ferrous metal geological exploration.

In April 2012, a listed company in Hunan signed with Gao a “Contract for the Transfer of Equity in Dongning Company Subject to Certain Conditions.” In September 2012, the same listed company in Hunan issued a fundraising announcement for the purpose of acquiring 100% equity in Dongning Company and released a “Proposal for a Non-Public Issuance of A-Share Stocks,” stating that the preliminary valuation of a certain mining company in Dongning City was 3 billion yuan.

In January 2013, Gao signed an equity transfer agreement with a certain holding group company. The industrial and commercial change registration was completed on January 23. In March 2013, the board of directors of a listed company in Hunan decided to terminate the non-public issuance of shares.

In 2013, a certain team engaged in nonferrous metal geological exploration filed a lawsuit with the High People’s Court of a certain province, requesting that the equity transfer agreement signed between Gao and a certain Holding Group Co., Ltd. be declared invalid and that the parties be restored to their status prior to the transfer.

【Reasoning of the Ruling】The existing evidence fails to prove that Dongning City Mining Co., Ltd. was established pursuant to the 2006 Cooperation Agreement between the Nonferrous Metals Geological Exploration Team and Zunhua City Mining Co., Ltd. The parties to the Cooperation Agreement were Zunhua City Mining Co., Ltd. and the Nonferrous Metals Geological Exploration Team, not Dongning City Mining Co., Ltd. The relationship between Zunhua City Mining Co., Ltd. and Dongning City Mining Co., Ltd., as well as whether Dongning City Mining Co., Ltd. was indeed established based on the Cooperation Agreement signed by the two parties, directly affects the factual findings in this case.

In this case, the No. X Geological Exploration Team for Nonferrous Metals claims that, pursuant to the Cooperation Agreement, it has an investment relationship with a certain mining company in Dongning City and holds a 30% stake therein. Gao argues that the Cooperation Agreement does not stipulate that he would hold shares on behalf of the No. X Geological Exploration Team for Nonferrous Metals, and therefore the No. 702 Team cannot rely on the Agreement to assert ownership rights in the said mining company against Gao. The existing evidence does not demonstrate whether the No. X Geological Exploration Team for Nonferrous Metals enjoys shareholder rights under corporate law in the said mining company in Dongning City, nor whether it is entitled, pursuant to the Cooperation Agreement, to share in the company’s profits.

[Relevant Statutes] Article 106 of the Property Law; Article 25 of the Supreme People's Court’s Provisions on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III)

[Lawyer’s Perspective] The “2006 Cooperation Agreement” was signed between a certain team specializing in non-ferrous metal geological exploration and a certain mining company in Zunhua City. The parties agreed to jointly explore and develop a certain copper mine, but the agreement did not stipulate the establishment of a joint venture. Moreover, the (2013) Mu Shang Chu Zi No. 10 Civil Judgment—already in effect—held that “the purpose of the parties’ signing the ‘2006 Cooperation Agreement’ was to cooperate in the exploration and development of the copper mine, rather than to transfer the prospecting rights or establish a joint venture or a joint-stock company. Therefore, at the time of signing the agreement, the parties did not appraise the value of the prospecting rights as contributed capital, nor did they specify the amount of cash contribution made by the certain mining company in Zunhua City.” Consequently, the certain mining company in Dongning City was not established as a result of the performance of the “2006 Cooperation Agreement” between the certain mining company in Zunhua City and the aforementioned team specializing in non-ferrous metal geological exploration.

The geological exploration team specializing in non-ferrous metals failed to contribute its prospecting rights as capital into a mining company in Dongning City in accordance with the legally prescribed procedures. Article 46 of the “Interim Provisions on the Grant and Transfer of Mining Rights,” issued by the Ministry of Natural Resources and Land (Document No. [2000]309 of the Ministry of Natural Resources and Land), stipulates: “The parties involved in the transfer of mining rights must sign a mining rights transfer contract in compliance with the law. Depending on the specific transfer method, the transfer contract may be a sale-and-transfer contract, a joint-venture transfer contract, or a cooperative transfer contract.” Article 5 of the “Administrative Measures for the Transfer of Prospecting Rights and Mining Rights” further provides: “To transfer prospecting rights, the following conditions must be met: … (4) The prospecting right usage fee and the prospecting right purchase price must have been paid in accordance with relevant state regulations…” In this case, the geological exploration team specializing in non-ferrous metals neither signed a relevant mining rights transfer contract with the mining company in Dongning City nor completed the required approval and registration procedures for the transfer of mining rights. Moreover, the team did not pay the prospecting right purchase price. The prospecting rights obtained by the mining company in Dongning City were acquired through a prospecting rights grant contract signed between the company and the Mineral Development Management Division of the Provincial Department of Natural Resources and Land, and the company had paid a prospecting right purchase price of 78.495 million yuan. Therefore, the prospecting rights held by the mining company in Dongning City were not contributed to it by the geological exploration team specializing in non-ferrous metals.

Article 27, Paragraph 2 of the Company Law stipulates: “Non-monetary property contributed as capital shall be appraised and valued, and the property shall be verified. Overvaluation or undervaluation is prohibited. Where laws and administrative regulations provide otherwise regarding appraisal and valuation, such provisions shall prevail.” The Certain Nonferrous Metals Geological Exploration Team neither completed the approval procedures for the transfer of mining rights nor carried out the registration or filing procedures for such transfer; moreover, it failed to appraise and value the exploration rights involved in the case. Thus, the team failed to comply with the mandatory requirements of the Company Law concerning the contribution of non-monetary assets. As a result, it is impossible to determine the value of the assets contributed by the Certain Nonferrous Metals Geological Exploration Team, and even more impossible to ascertain the investment ratio. Since the establishment of a certain mining company in Dongning City in 2007, its registered capital has been increased from RMB 100,000 to RMB 260 million. During this period, the Certain Nonferrous Metals Geological Exploration Team made no contribution whatsoever, and similarly, a certain mining company in Zunhua City also made no contribution. All the funds were provided solely by Gao Mou. Given the dispute among the three parties as to whether the Certain Nonferrous Metals Geological Exploration Team holds a 30% equity stake in the certain mining company in Dongning City, the Certain Nonferrous Metals Geological Exploration Team’s claim lacks both factual basis and legal grounds.

This case spanned a long period, involved complex facts, and concerned a substantial amount of money. The first-instance proceedings were fraught with twists and turns, lasting four years before finally concluding with a first-instance judgment against our client. Drawing on the client’s claims and grounded in the factual circumstances of the case, our legal team carefully examined whether the client’s claims had a solid legal basis. We painstakingly dissected the case’s intricate details, simplifying what initially seemed complicated, and ultimately identified the underlying right of claim as the key breakthrough in the case. The Supreme People’s Court fully adopted all of our counsel’s arguments. This ruling provides clarification on the conditions for applying Article 25 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III),” offering valuable guidance for the handling of similar cases in the future.