Keywords: Equity transaction; exploration rights; shareholder status

Handling Attorney: Wu Xing

Basic Facts of the Case:

Attorney Wu Xing acts as the agent for Mr. Li. In this case, Jilin Province某 Group Co., Ltd. is claiming that Mr. Li should return the purchase price of 25 million yuan. The specific facts of the case are as follows: The “Equity Transfer Agreement” involved in this case, signed on June 21, 2008, between Jilin Province某 Group Co., Ltd. (hereinafter referred to as “Jilin Province某 Group”) and Lanzhou某 Trading Co., Ltd. (hereinafter referred to as “Lanzhou某 Company”), stipulates that the plaintiff (Party A), Jilin Province某 Group, and the defendant (Party B), Lanzhou某 Company, agreed that Party A would acquire eight prospecting rights owned by Party B, Lanzhou某 Company, and all shares of these eight prospecting rights would be transferred to Party A at a total amount of RMB 25 million. Should taxes arise in the future, each party would bear 50% of the tax liability. Furthermore, Party A must ensure that each of the eight prospecting rights remains in good condition and undergoes annual inspections and license renewals by completing the required annual work volume. Now, the parties have reached the following agreement regarding the transfer, which shall be jointly executed by both sides. The agreement sets forth detailed provisions on specific matters. At the signature section, on the side of Party A, Jilin Province某 Group, the company’s official seal was affixed and signed by the company’s legal representative, Mr. Ma; whereas on the side of Party B, Lanzhou某 Company, no official seal of Lanzhou某 Company was affixed, and only the signature of the company’s legal representative, Mr. Li, was present.

The plaintiff, a certain group from Jilin Province, claims that on February 24, 2009, the two defendants delivered to the plaintiff the eight prospecting rights certificates specified in the agreement. However, due to multiple equity dispute lawsuits involving the defendant company, the plaintiff, a certain group from Jilin Province, only conducted annual inspections of the prospecting rights certificates without actually engaging in any operational activities. Moreover, the validity period of these prospecting rights certificates was set to expire on December 27, 2014; thereafter, the relevant authorities did not renew them. The plaintiff further asserts that the prospecting rights in question are located within the redline boundary of a national nature reserve and thus cannot be transferred. Yet, the defendant Li failed to inform the plaintiff of this fact.

It was further ascertained that the defendant Li and the third party Zhang were fellow villagers. Zhang possessed certain prospecting expertise and had been engaged in mining exploration activities for many years. Subsequently, Li and Zhang discussed establishing a company with both parties contributing capital. On April 2, 2004, the Lanzhou Administration for Industry and Commerce approved the establishment and registration of a certain Lanzhou company, with Li and Zhang as shareholders and Li serving as the legal representative. On June 29, 2007, at the request of Li, the legal representative of the Lanzhou company, the company underwent a change of registration, altering its shareholders from Li and Zhang to Li, Zhang, and Gong, and increasing the registered capital to 3 million yuan. On February 16, 2009, the Lanzhou company underwent a second change of registration, with shareholders changing from Li, Zhang, and Gong to Li and Gong. On February 20, 2009, Li and Gong signed a share transfer agreement with Liu and Ma, under which Li transferred his entire equity interest of 1.95 million yuan in the Lanzhou company to Liu, and shareholder Gong transferred her equity interest of 1.05 million yuan in the Lanzhou company to Ma. On February 24 of the same year, the Lanzhou company underwent a third change of registration, with shareholders changing from Li and Gong to Liu and Ma. Following a report by Zhang, the Lanzhou Administration for Industry and Commerce conducted an investigation and issued on September 22, 2009, Administrative Decision No. (2009)1, “Decision on Revoking the Change of Registration of Lanzhou Chengzhan Materials Trading Co., Ltd.,” revoking the changes of registration made by the Lanzhou company on June 29, 2007, February 16, 2009, and February 14, 2009. As a result, the Lanzhou company reverted to its original state at the time of its establishment and registration in 2004, with Li and Zhang as its shareholders. Upon a report by Li, on July 7, 2010, the Lanzhou Administration for Industry and Commerce issued Administrative Penalty Decision No. (2010)38, ordering the Lanzhou company to correct the false signatures of its shareholders at the time of registration. On August 27, 2010, after reviewing the application materials submitted by the Lanzhou company, the Lanzhou Administration for Industry and Commerce registered Li and Huang as shareholders of the company, with a registered capital of 1 million yuan—Li contributing 800,000 yuan and Huang contributing 200,000 yuan—and Li serving as the legal representative. On August 30, 2010, Li and Huang again signed a share transfer agreement with Liu and Ma, transferring their shares to Liu and Ma. On August 31, 2010, the Lanzhou company applied to the Lanzhou Administration for Industry and Commerce for a change of registration, altering its shareholders from Li and Huang to Ma and Liu. In June 2012, Zhang filed an administrative lawsuit against the Lanzhou Administration for Industry and Commerce regarding the company’s registration. On November 20, 2012, the People’s Court of Chengguan District, Lanzhou, issued Administrative Judgment No. (2012) Cheng Xing Chu Zi No. 73, holding that the specific administrative act of the Lanzhou Administration for Industry and Commerce concerning the registration of the Lanzhou company did not comply with the procedural requirements for registration nor those for change of registration, and thus the specific administrative act should be revoked. However, the Lanzhou Administration for Industry and Commerce subsequently approved another change of registration for the Lanzhou company, changing its shareholders to Ma and Liu. Therefore, the administrative act in question no longer had any content that could be revoked. Accordingly, the court ruled: The registration act carried out by the Lanzhou Administration for Industry and Commerce on August 27, 2010, concerning the Lanzhou company, is unlawful. This judgment has now become final. On June 14, 2017, Zhang filed a dispute over share transfer with the People’s Court of Chengguan District, Lanzhou, naming the Lanzhou company, Li, Huang, Ma, and Liu as defendants. On October 15, 2018, the People’s Court of Chengguan District, Lanzhou, issued Civil Judgment No. (2017) Gan 0102 Min Chu 4013, ruling as follows: First, the share transfer agreements signed between the defendants Li and Huang and the defendants Liu and Ma are declared invalid. Second, the plaintiff Zhang’s status as a shareholder holding 45% of the initial registered equity in the defendant Lanzhou company is confirmed. Third, all other claims of the plaintiff Zhang are dismissed. Zhang and Li appealed against this judgment. On March 6, 2019, the Intermediate People’s Court of Lanzhou, Gansu Province, issued Judgment No. (2019) Gan 01 Min Zhong 179, dismissing the appeal and upholding the original judgment. Li, dissatisfied with this judgment, applied to the Higher People’s Court of Gansu Province for a retrial. On December 6, 2019, the Higher People’s Court of Gansu Province issued Civil Ruling No. (2019) Gan Min Shen 1666, rejecting Li’s application for retrial.

The trial court held that, in accordance with the relevant provisions of China's Civil Procedure Law, parties have the right to appear in court and present evidence for cross-examination. In this case, the defendant, a certain company from Lanzhou, was duly summoned by the trial court but failed to appear in court without justifiable reasons, thereby being deemed to have waived its right to cross-examination. Consequently, the trial court made findings on the facts of the case based on the evidence submitted by the other parties.

Article 1, Paragraph 3 of the “Several Provisions of the Supreme People’s Court on the Temporal Effect of the Civil Code of the People’s Republic of China” provides: “Where a legal fact that occurred before the entry into force of the Civil Code continues after its entry into force, civil disputes arising from such legal fact shall be governed by the provisions of the Civil Code, unless otherwise provided by law or judicial interpretations.” In this case, the Equity Transfer Agreement involved was signed on June 21, 2008, which was prior to the entry into force of the Civil Code. However, the legal facts covered by this agreement continued beyond the entry into force of the Civil Code; therefore, the provisions of the Civil Code of the People’s Republic of China shall apply to this case.

On March 6, 2019, the Intermediate People's Court of Lanzhou City, Gansu Province, issued Judgment No. (2019) Gan 01 Min Zhong 179, dismissing the appeal and upholding Civil Judgment No. (2017) Gan 0102 Min Chu 4013. This judgment confirmed that the plaintiff, Zhang, held a 45% equity stake in the defendant, a certain company in Lanzhou, at the time of initial registration. Thus, the shareholders of the defendant company remained Li and Zhang as they were at the time of initial registration, holding 55% and 45% of the shares respectively. According to the plaintiff’s claim, since this fact prevented the fulfillment of the purpose of the contract, the plaintiff should have filed a lawsuit with the People's Court within three years from the date of issuance of Judgment No. (2019) Gan 01 Min Zhong 179. However, the plaintiff filed the lawsuit on June 28, 2023, which is beyond the statutory limitation period. Therefore, the trial court accepted the defendant Li’s defense that the plaintiff’s lawsuit was filed beyond the limitation period. Furthermore, after the plaintiff, a certain group from Jilin Province, and the defendant Li signed the relevant Equity Transfer Agreement on June 21, 2008, the defendant company in Lanzhou underwent a change of registration on February 24, 2009, with the shareholders being changed to Liu and Ma, staff members designated by the plaintiff. Subsequently, this change of registration was revoked. On August 30, 2010, the then-shareholders of the defendant company—Li and Huang—as well as Liu and Ma—signed another Equity Transfer Agreement, transferring the equity to Liu and Ma. On August 31, 2010, the defendant company applied to the Lanzhou Administration for Industry and Commerce for a change of registration, altering the shareholders from Li and Huang to Liu and Ma. Although Judgment No. (2019) Gan 01 Min Zhong 179 ultimately confirmed that the Equity Transfer Agreement signed between Li, Huang, and the defendants Liu and Ma was invalid and reaffirmed that the plaintiff Zhang held a 45% equity stake in the defendant company at the time of initial registration, to date, the shareholders publicly disclosed by the defendant company remain Liu and Ma, designated by the plaintiff, a certain group from Jilin Province. The plaintiff acknowledges that, following the industrial and commercial change registration of the defendant company on February 24, 2009, the eight exploration rights certificates involved in the case were handed over to the plaintiff, and thereafter, the plaintiff has been conducting the regular annual inspections of these certificates. Moreover, the defendant company has been effectively controlled by the plaintiff. The plaintiff’s claim that the defendant failed to perform its contractual obligations is inconsistent with the facts. In light of the foregoing, the trial court cannot uphold the plaintiff’s claims.

In light of the foregoing, in accordance with Article 188 and Article 509 of the Civil Code of the People's Republic of China, Article 1 of the Supreme People's Court’s Provisions on the Temporal Effect of Applying the Civil Code of the People's Republic of China, Article 147 of the Civil Procedure Law of the People's Republic of China, and Article 90 of the Supreme People's Court’s Interpretation on the Application of the Civil Procedure Law of the People's Republic of China, the court rules as follows: The claim brought by the plaintiff, Jilin Chunwei Industrial and Trade Group Co., Ltd., is dismissed.

Case Highlights:

As a case arising from the equity exchange, this matter fully illustrates the complexity of inter-company transactions and the uncontrollability of various factors involved. In terms of the macro-level management of the case, how to strike a balance between the interests of new and existing shareholders, how to address the impact of policy factors on the factual circumstances of the case, and how to resolve contradictions among different judgments rendered for the same set of facts—these are all issues that have been thoroughly highlighted in this case. Through the strategic maneuvering of both sides’ lawyers, the agents’ precise grasp of the legal nuances, and the court’s comprehensive assessment, the legitimate rights and interests of the parties involved were ultimately safeguarded, thereby demonstrating the fairness and appeal of the rule of law.

Typical significance:

First, the trial court held that the statute of limitations for the lawsuit brought by a certain group in Jilin Province had expired, which is consistent with objective facts. The said group in Jilin Province had completed the equity transaction in question as early as 2008; thereafter, due to its own circumstances and policy changes, it did not engage in actual business operations. As time has passed and circumstances have changed, the group in Jilin Province is now attempting to recover its losses through an unreasonable lawsuit—a move that is clearly without legal basis and does not make sense.

Second, although several other cases related to this one have resulted in multiple judgments, regardless of the outcome of those judgments, the shareholders publicly disclosed by the Lanzhou company to date remain Liu and Ma, appointed by the plaintiff, a certain group from Jilin Province. The plaintiff acknowledges that, since the industrial and commercial registration change of the Lanzhou company on February 24, 2009, the eight exploration rights certificates involved in the case have been handed over to the plaintiff, and thereafter the plaintiff has been conducting the routine annual inspections of these certificates. Moreover, the Lanzhou company has been under the plaintiff’s actual control. The plaintiff’s claim that the defendant has failed to perform its contractual obligations is inconsistent with the facts.

In summary, this case is a commercial dispute fabricated by a certain group in Jilin Province based on unreasonable claims. The core legal relationship at issue—the equity transaction that took place in 2008—was already completed long ago, and Li had fully performed his contractual obligations. After 15 years, the Jilin Province-based group, facing its own poor business performance, has now filed a counterclaim against Li, demanding the return of funds. Such a claim is entirely without legal basis. During the representation of this case, the attorney keenly identified the key issues at stake and thoroughly explained them to the court. Ultimately, the court accepted Li’s position, upheld Li’s claims, and safeguarded Li’s legitimate rights and interests. This case demonstrates the government and the courts’ active contributions to fostering a favorable business environment and holds significant exemplary value.