CHINA: An Introduction to Corporate/Commercial: Guangdong: Contentious (PRC Firms)

The Impact of Target Company Liquidation Clauses on Investors’ Buyback Withdrawal  

目标公司发生清算事由对投资人回购退出的影响 

In recent years, numerous enterprises have been poorly managed, leading to the simultaneous triggering of liquidation clauses and buyback situations agreed under investments agreement signed by the investor and the target company. However, when an investor actually requires liquidation or buyback, it faces many obstacles. This article analyses the relevant risks of the investor’s withdrawal at this time based upon the current judicial practice for reference by all parties.

近年来，大量企业经营不善，导致投资人和目标公司所签署投资协议项下约定的清算事由和回购情形同时触发，然投资人实际要求清算或回购时，却面临诸多障碍。本文结合现行司法实践，就此时投资人退出的相关风险进行分析，供各方借鉴参考。

If there is no special agreement, the liquidation of the target company does not necessarily lead to the loss of the investor’s buyback right  

如无特别约定，目标公司清算并不必然导致投资人丧失回购权 

If the liquidation clause is triggered and the investor exercises the buyback right at the same time, the target company or the founding shareholders often argue that the company is dissolved and liquidated, and refuse to fulfil the buyback obligation. In practice, buyback obligors are usually divided into two categories: the target company (in practice, a domestic target company’s buyback is relatively difficult, thus, this article does not conduct too much analysis of this) and the founding shareholders. If the founding shareholders’ buyback is agreed, the liquidation of the target company itself does not necessarily affect the investor’s buyback.

如发生清算事由，投资人同时行使回购权的，目标公司或创始股东常以公司解散清算为由进行抗辩，拒绝履行回购义务。实践中回购义务人通常分为两类：目标公司（实践中境内目标公司回购本身难度较大，本文不做过多分析）、创始股东。如约定有创始股东回购，则目标公司进行清算本身并不必然影响投资人回购。

The law does not prohibit a transfer of equity of a company in liquidation  

法律并未禁止在清算中公司的股权转让 

Article 186 of the Company Law stipulates that during the liquidation period, the company survives, but shall not carry out business activities unrelated to the liquidation. In practice, there are companies or founding shareholders who argue that the transfer of equity is unrelated to the liquidation, so the investor has no right to demand buyback. In the (2020) Guangdong Minshen 11917 case, the court held that “the manager’s co-operation in assisting in handling the equity repurchase matters also belongs to the settlement and settlement of the related affairs of Ruijing Company, and should not be considered as engaging in activities unrelated to liquidation, and the Bankruptcy Law does not prohibit shareholders from transferring the equity of the bankruptcy liquidation enterprise”. In the (2023) Guangdong 06 Minzhong 4350 case, the court also held this view. Therefore, that a target company has entered into the liquidation process is not a legitimate reason to refuse the repurchase.

《公司法》第一百八十六条规定，清算期间，公司存续，但不得开展与清算无关的经营活动。实践中，存在公司或创始股东抗辩股权转让与清算无关，因此投资人无权要求回购。在(2020)粤民申11917号案件中，法院认为“管理人配合协助办理股权回购事宜亦属于结清、解决瑞晶公司有关事务的事项,不应认定属于从事与清算无关的活动，且《破产法》并未禁止股东转让破产清算企业的股权”。在(2023)粤06民终4350号中，法院亦持该种观点。因此，目标公司已进入清算程序并非拒绝回购的合法理由。

The target company’s manager has no right to rescind the shareholders’ agreement on equity repurchase 

目标公司管理人无权解除股东之间关于股权回购的约定 

Although the Bankruptcy Law stipulates that the manager has the right to decide to rescind a contract established before the acceptance of the bankruptcy application where the debtor and the other party have not fulfilled the contract, if the agreed shareholders are the repurchase obligor rather than the target company, the manager has no right to rescind the contract. The (2020) Guangdong Minshen 11917 case also confirmed this view.

虽然《破产法》规定，管理人对破产申请受理前成立而债务人和对方当事人均未履行完毕的合同有权决定解除，但如约定股东为回购义务人而非目标公司，则管理人无解除权，(2020)粤民申11917号案亦确认了该观点。

After the target company completes the cancellation, the investor’s repurchase request is deemed as non-performance  

在目标公司完成注销后，投资人再行要求回购视为履行不能 

In the (2022) Zhejiang 04 Minzhong 1193 case, the court believed that the target company has been cancelled, and the investor’s repurchase request was objectively non-performance, and did not support the investor’s repurchase appeal. Therefore, the liquidation of the target company does not necessarily prevent the investor from exercising the repurchase right, but when the repurchase conditions are triggered, the investor should exercise the right as soon as possible, so as to avoid the de facto non-performance of the repurchase right caused by the cancellation of the target company.

在(2022)浙04民终1193号案件中，法院认为目标公司已注销，投资人要求回购客观上履行不能，未支持投资人回购的诉求。因此，目标公司清算并不必然阻碍投资人行使回购权，但在回购条件触发时，投资人应尽快行权，以免目标公司注销导致回购权事实上履行不能。

Strictly check the wording of liquidation clauses to avoid the loss of the investor’s right to repurchase 

严格把关清算条款表述，避免投资人丧失回购权 

In a case we once handled, the repurchase condition agreed in the investment agreement was “the fair value of the company is less than 200 million yuan”, and the liquidation clause was “this agreement shall terminate in advance and the company shall be liquidated and dissolved in the event of any of the following: a) the company suffers significant losses in any fiscal year due to reasons other than force majeure events, “significant losses” refers to the total loss of the fiscal year reaching or exceeding 50% of the company’s net assets in the previous fiscal year or 50% of the company’s registered capital...”

在我们曾经办理过的一个案件中，投资协议约定的回购条件为“公司的公允价值低于2亿元人民币”，清算条款为 “在发生以下任一事由时，本协议提前终止，且公司清算并解散：a)公司在任何会计年度内因不可抗力事件以外的原因遭受重大亏损，“重大亏损”指在该会计年度亏损额总计达到或超过公司上一会计年度净资产的50%或公司注册资本的50%……”

Due to the poor operation of the target company, the repurchase condition agreed in the agreement and the liquidation clause were triggered. The investor initiated arbitration to require the founding shareholders to repurchase equity, and the founding shareholders believed that according to the liquidation clause, the investment agreement had been terminated, so there was no need to fulfil the repurchase obligation. The case was ultimately settled, but the risks of the relevant provisions of the investment agreement for the investor are obvious. It is suggested that when drafting the terms of the investment agreement, the following aspects are considered.

因目标公司经营不善，协议约定的回购条件以及清算事由均触发。后投资人提起仲裁要求创始股东回购股权，而创始股东认为根据清算条款，投资协议已经终止，因此无需履行回购义务。该案最终和解结案，但投资协议的相关约定对投资人的风险显而易见。建议起草投资协议条款时，考虑以下几点：

Clearly require liquidation as the right of the investor  

明确要求清算为投资人的权利 

In the investment agreement, when a specific liquidation event occurs, the investor “has the right” to require the company to liquidate, rather than the company “being obliged” to liquidate, the requirement for the company to liquidate is the right of the investor rather than the obligation to co-operate, so as to avoid the direct liquidation of the company once the liquidation event occurs, resulting in an uncontrollable situation.

在投资协议中约定具体的清算事件发生时，投资人“有权”要求公司清算，而非公司“应当”进行清算，将要求公司清算约定为投资人的权利而非必须配合的义务，避免一旦发生清算事件公司就应直接清算，造成不可控制的局面。

Pay attention to the compatibility of liquidation clauses and buyback clauses  

注意清算条款与回购条款的相容性 

When a specific liquidation event is agreed in the investment agreement, such as the significant loss of the target company, it is suggested to pay attention to whether it overlaps with the buyback conditions – ie, whether the same event leads to the triggering of the buyback conditions and liquidation conditions simultaneously. If there is such a possibility, it is suggested that the requirements for buyback and liquidation are agreed as the right of the investor – ie, the investor has the right to choose what right to exercise. At the same time, it is advisable to avoid wording to the effect that the investment agreement will be terminated if the liquidation event occurs, so as not to affect the exercise of the investor’s buyback right.

在投资协议中约定具体的清算事件时，如目标公司重大亏损等，建议注意与回购条件是否重合，也即该同一事件是否导致回购条件以及清算条件同时触发。如存在该种可能，建议将要求回购以及清算均约定为投资人的权利，即投资人有权选择行使何种权利。同时尽量避免出现如发生清算事件则投资协议终止的表述，以免影响投资人回购权的行使。 

In summary, in equity investment, the relevant parties usually focus on the buyback clause, but the dissolution and liquidation clause of the target company is actually also a very important clause under the investment agreement. It is suggested that the investor, on the premise of respecting the basis of the business negotiations of all parties, strictly control the wording of the relevant clauses, minimise the relevant risks to the greatest extent, and realise the smooth exit of the project.

综上，股权投资中，相关各方通常都会对回购条款进行重点关注，但目标公司解散清算条款其实也是投资协议项下非常重要的条款，建议投资人在尊重各方商业谈判基础的前提下，严格把控相关条款表述，最大程度减小相关风险，实现项目顺利退出。