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Zhenghan Law Firm Secures Reversal in Foreign-Related Contract Dispute Appeal, Selected as a 2025 Typical Case by the Shanghai International Commercial Court

Zhenghan Law Firm worked closely with Quinn Emanuel, a world-leading dispute resolution firm, to represent a Shanghai-based Wholly Foreign-Owned Enterprise (WFOE). After a first-instance defeat left the client facing potential claims worth hundreds of millions of yuan, Zhenghan achieved a complete reversal through meticulous technical deconstruction and clarification of legal boundaries. This case was selected as one of the Top Ten Typical Cases of 2025 by the Shanghai International Commercial Court, fully demonstrating Zhenghan Law Firm’s mature capabilities in cross-border teamwork and case representation.

Keywords: Second-instance reversal, foreign-related commercial matters, typical case

Case Background

Micro-X is a wholly foreign-owned enterprise registered in Shanghai. The plaintiff, Mr. Wang, was formerly the company’s legal counsel and supervisor. After resigning, he filed a lawsuit claiming that both parties had signed a “Supplementary Agreement.” Micro-X did not recognize the actual signing of the “Supplementary Agreement.” The court of first instance held that although Mr. Wang could not provide the original “Supplementary Agreement,” the notarized WeChat chat records and other evidence he provided were sufficient to prove the existence of the agreement, and subsequently ruled against Micro-X. Dissatisfied with the judgment, Micro-X followed Quinn Emanuel’s recommendation and retained Zhenghan Law Firm to file an appeal.

Key Points and Difficulties

While the nominal value of this case was only 1.5 million yuan, it involved equity interests worth nearly 100 million USD, and the core evidence relied heavily on electronic data. First, the original “Supplementary Agreement” was lost due to “improper storage” after the opposing party applied for authentication, making judicial appraisal of signatures, seals, and the time of formation impossible. Second, the WeChat chat records used to support the signing process were confirmed by appraisal to be from a “non-original carrier,” making their authenticity difficult to verify given the technical reality that electronic data can be tampered with and traces can be hidden after migration. Third, the first-instance court converted the “impossible to appraise” result into an adverse allocation of the burden of proof for the company. The key to victory lay in blocking the improper transfer of the burden of proof and dismantling the authenticity of the agreement using commercial logic and formal requirements.

Case Highlights

Faced with the unfavorable situation of the first-instance loss, Quinn Emanuel and Zhenghan Law Firm engaged in close and deep cooperation, forming a cross-border legal team to handle the second instance. Leveraging Zhenghan Law Firm’s local advantage in China’s foreign-related judicial practice combined with Quinn Emanuel’s global experience in cross-border dispute resolution, the two sides broke through conventional thinking to construct a second-instance strategy from the dual dimensions of technical principles and legal boundaries.

Key Points of the Judgment

The second-instance court adopted the counsel’s opinion and ruled that the admissibility of electronic evidence should not ignore its susceptibility to tampering; when there is a high possibility of tampering and no original carrier for verification, the burden of proof cannot be easily transferred. The “Supplementary Agreement” lacked formal requirements and substantive evidentiary support; its content conflicted with existing agreements and lacked reasonable commercial logic. As the probative value did not meet the standard of high degree of probability in civil litigation, it could not be recognized as the true expression of intent by both parties. Accordingly, the first-instance judgment was revoked, all litigation claims of the employee were dismissed, and the litigation and appraisal fees for both instances were ordered to be borne by the employee.

Case Insights

1. This case involved a powerful alliance between domestic and international dispute resolution firms. The close and deep collaboration between Zhenghan Law Firm and Quinn Emanuel demonstrated a strong synergy for “collaborative breakthroughs,” providing a replicable model for the efficient resolution of complex foreign-related commercial disputes.

2. The case further exemplifies the professional standards and international perspective of the Shanghai International Commercial Court in handling new and complex foreign-related commercial disputes. The court accurately determined the validity of foreign-related electronic evidence and clarified the boundaries of evidence examination in a digital context.

3. The judgment is not only a safeguard for justice in an individual case but also a vivid practice of equally protecting the legitimate rights and interests of Chinese and foreign investors. It sends a positive signal to international commercial entities that the Chinese judiciary respects rules and maintains professional rigor, which is significant for creating a stable, fair, and transparent rule-of-law business environment.

Turning Defeat into Victory: Revealing How Zhenghan Law Firm Reversed the Determination of “Equity in Name but Debt in Substance” in Private Equity Fund Investment (with Search Report Attached)

Last year, Zhenghan Law Firm released a brief news item — “The Firm Won a Second-Instance Reversal at a High People’s Court in a Private Equity Fund Exit Dispute”. The second-instance judgment of this case successfully reversed the determination of “equity in name but debt in substance”, holding that in private equity investments, which contain both equity investment elements and debt financing characteristics, the transaction is different from a typical loan contract or investment contract, and should not and does not need to be defined as a contract of a single legal nature.

On the same day, many readers hoped to learn about the reasoning details through colleagues in the firm or messages on the backend, which shows the great importance of the word “exit” for investment institutions at present. Today, we will expand on this

Case Review: An Extremely Common Fund Investment and

The fund company, through capital increase, jointly held shares in an investment platform with partner Company A. The investment funds were injected into the platform company in the form of registered capital and capital reserve, and finally invested in underlying projects.

The two parties agreed on a performance bet on the project company. The fund had the right to initiate a simulated liquidation when the investment period expired for 12 months, and require Company A (if the bet was successful) or Group A (if the bet was failed) to acquire the equity held by the fund at the consideration of the principal investment plus a relatively fixed investment return rate to realize exit.

After reading the case, I believe most readers will think this is an extremely common fund investment model with a clear and definite basis for claim rights. But at the same time, it is foreseeable that the most likely defense argument put forward by Company A and the core focus of the dispute are:Does the transaction in question constitute “equity in name but debt in substance

Regarding

First Instance Held: This Case Should Be Regulated by the Legal Relationship of Loan Contract

The main reasoning of the first-instance court was:
1. The essential difference between equity and debt investment lies in whether to bear the business risks of the enterprise, but the fund income in this case has nothing to do with the specific valuation of the project;
2. Going through industrial and commercial registration, enjoying shareholder voting rights, and participating in part of the actual operation and management may be measures taken by the investor to ensure capital safety, not the decisive factor affecting the determination of equity or debt;
3. The “Several Provisions on Strengthening the Supervision of Private Investment Funds” issued by the CSRC is a departmental normative document, and violating this provision is not sufficient to negate the validity of the loan contract.

Second Instance Held: It Should Not and Does Not Need to Be Defined as a Contract of a Single

The main reasoning of the second-instance court was:

1. The transaction in question is jointly composed of multiple agreements. The repurchase subject is different when the bet is successful or failed. In addition to the clauses agreeing on capital increase and share expansion and equity repurchase between shareholders, it also agrees on a large number of clauses involving corporate governance. These clauses are of great significance for all parties to sign and perform the contract. Especially for the fund, if such clauses are not binding, it is impossible for it to sign the transaction contracts involved;

2. After the signing of the contract, the fund acted as a shareholder and director in accordance with the agreement and essentially participated in the company’s operation and management. The purpose of the fund’s participation in the company’s internal governance is the same as that of other shareholders, which is to manage the company for the company’s interests, ensure the safety and profitability of the company’s assets, and then obtain investment returns;

3. In the case where the law does not prohibit parties from signing mixed contracts or atypical contracts, the agreements involved do not violate the prohibitive provisions of the law and there are no statutory invalid circumstances. Therefore, the court should still confirm its contract validity and respect the content of the contract clauses agreed by all parties based on autonomyOn the surface, the second instance only corrected the determination of the contract nature, which does not affect the amount of money payment, but practitioners in the private equity fund industry should deeply understand the importance of such a

1. It avoided the possible administrative penalties for the fund manager and key persons in charge;
2. It prevented fund investors from claiming that the fund company should fully refund the investment funds on the grounds of wrong investment direction and fundamental breach of contract (there have been such effective precedents);
3. The business of similar transaction models can continue to be carried out, and they dare to sue for exit.
Then, how did Zhenghan Law Firm lawyers achieve turning defeat

Case Highlights: Comprehensive Application1. Handle this case as a
Private equity fund investment exit disputes are of course financial disputes, but the issue of “equity in name but debt in substance” involved needs to draw on the rules and legal principles for determining shareholder qualifications in company law.

After realizing this point, this case must not be simply discussed on the grounds that “the contract has clear repurchase agreements”. It is also necessary to fully present evidence around the company’s articles of association, shareholder register, industrial and commercial registration, financial statements, internal company decision-making and management processes, etc., and then explain the viewpoints in combination with company law theories such as the three capital principles and2. Exhaustive
In cases involving the issue of “equity in name but debt in substance”, there are considerable differences in the judgment standards of individual cases, which is also a difficulty in handling this case.

When submitting the search report to the court, we did not avoid precedents that determined it as debt, but conducted an exhaustive search of all cases involving this issue in domestic financial courts, high people’s courts and the Supreme People’s Court, then conducted in-depth analysis of the similarities and differences with this case one by one, and tried to summarize the core criteria for distinguishing equity and debt, namely: fixed income exit is only a prerequisite for discussing the distinction between equity and debt, not the judgment standard for distinguishing equity and debt; if there is no agreement on fixed income, there is no need to discuss the distinction between equity and debt at all; actual participation in the company’s operation and management is the core standard for distinguishing equity and3. Take trial concepts and principles as important entry points for reasoning
The first instance of this case broke through the superficial investment agreement and essentially determined the transaction involved as private lending, which can be described as a typical example of “penetrating trial thinking”. However, the boundary of penetrating trial thinking and how to balance it with the basic principle of autonomy of will of parties are actually worthy of in-depth discussion.

Based on the analysis of this issue by a large number of judges, experts and scholars, we believe that penetrating trial thinking should be applied in a modest manner, especially when it does not involve contract validity, does not involve external relations but only affects both parties to the transaction, and does not involve civil relations but belongs to commercial transactions, we should avoid “excessive penetration” and “random penetration”.

In fact, in addition to clarifying the legal review rules for private equity investments, the second-instance agency of this case also achieved two important results worthy of mention:

First of all, in addition to Company A being ordered to bear the payment liability, the wholly-owned shareholder of Company A was also ordered to bear joint and several liability. This benefit from the application and proof of the relevant provisions on disregard of corporate personality in company law.

Secondly, the agreement involved has a clause that “a breach of contract by Company A shall be deemed a breach of contract by Group A”. The first-instance court determined this as a debt accession by Group A, but since Group A is a listed company and did not announce and disclose the transaction involved, it did not bear any compensation liability.

The second-instance court held that according to the transaction arrangement: if Company A fails to perform, Group A is obligated to transfer the equity involved. Therefore, the legal relationship between Group A and the fund is bilateral and remunerative, not subsequent debt accession. In view of this, the liability that Group A is obligated to bear in accordance with the contract should not be determined as guarantee or debt accession, and naturally there is no need to consider whether it is announced or not. Finally, the judgment was reversed to support all the fund’s claims against Group A.

The above litigation results are of great significance for the fund to expand the scope of recovery and improve the possibility of compensation recovery, and also have reference significance in other cases involving disregard of corporate personality, guarantee or quasi-guarantee validity.

The realization of these results all involves the demonstration of independent legal issues, but due to space limitations, today we only clarify the issue of distinguishing equity and debt, and the others will be put aside for the time being.

Combining Legal and Technical Expertise to Overcome Numerous Difficulties and Reverse an Unfavorable Judgment: An Engineering Quality Dispute

After obtaining an unfavorable first-instance judgment, the client entrusted our firm. In the second instance, the agent attorneys selected two institutions from the dual dimensions of industry professionalism and appraisal authority, coordinated the issuance of two expert opinions, and prepared a case search report. Through multiple measures, they creatively negated the first-instance appraisal method and overturned the first-instance appraisal report.
Using detailed legal and case search reports as well as thorough reasoning, the agent persuaded the judge that the case had not met the conditions for contract termination of “failure to achieve the contract purpose”. They also used visual charts to illustrate that the substantive reason for the opposing party’s claim for termination was its reluctance to continue investing.
In the end, the second instance directly reversed the judgment and fully supported all our claims, exceeding the client’s expectations. The victory was also maintained in the retrial.