Recently, the Supreme People’s Court issued the Civil Ruling ((2024) Supreme Court Civil Application No. 2152), ruling to dismiss Zhongjing’s application for retrial. With this, the nearly four-year-long dispute over the equity transfer of Huishang Bank worth tens of billions of yuan between Shanshan, represented by HongQiao ZhengHan, and Zhongjing has finally come to an end after trials at three levels of courts—the Shanghai Financial Court, the Shanghai High People’s Court, and the Supreme People’s Court. All of Zhongjing’s sky-high claims of over 6 billion yuan against Shanshan were dismissed by the courts.
Case Review
In August 2019, Shanshan, representing all buyers, and Zhongjing, representing all sellers, jointly signed a Framework Agreement, stipulating that Shanshan would acquire approximately 14% of Huishang Bank’s equity held by Zhongjing at a price of about 12.1 billion yuan, including approximately 2% of domestic shares directly held by Zhongjing, approximately 2% of domestic shares held by Zhongjing’s affiliated entities, and approximately 10% of H-shares held by Zhongjing’s overseas entities.
Stipulations in the Framework Agreement
1) The buyer and seller shall separately sign share/equity transfer agreements for the aforementioned assets respectively, and the main terms shall be consistent with this Agreement; otherwise, this Agreement shall prevail;
2) The buyer shall pay the deposit before the specified deadline;
3) After receiving the deposit, the seller shall submit the materials required for approval to the buyer, who shall file an application for share transfer with Huishang Bank, and upon approval by Huishang Bank and the regulatory authorities, the parties shall go through the procedures for the transfer of domestic shares;
4) The buyer shall pay the remaining transaction price before the settlement date.
Performance Status
1) After the signing of the Framework Agreement, Zhongjing and Shanshan signed an Equity Transfer Agreement for one of the equity transfers and completed the industrial and commercial change registration;
2) Shanshan paid the deposit in full in accordance with the agreement;
3) After the parties submitted the transaction approval procedures to Huishang Bank, before Huishang Bank was scheduled to hold a board meeting to deliberate on the “Proposal on the Investment in Huishang Bank by Shanshan Holdings Co., Ltd. and Other 4 Enterprises”, Zhongjing called Huishang Bank, stating that Shanshan had clearly indicated to it that it could not pay the remaining price as agreed, and the equity transfer proposal was not suitable for submission to the meeting, so Huishang Bank withdrew the aforementioned proposal.
4) Before the settlement date, Shanshan did not pay the remaining transaction price to Zhongjing.
Litigation Status
Zhongjing filed a lawsuit on the ground that Shanshan’s failure to perform the payment obligation on time constituted a breach of contract, claiming that Shanshan should compensate it for various losses of over 6 billion yuan.
Judgment Result
The contract was rescinded and the status quo ante was restored, the parties mutually returned the equity and equity transfer payment, and the parties’ claims for compensation for losses were dismissed.
Core Adjudication Opinions
The subject matter of this case involved a huge amount and complex legal relationships. Before HongQiao ZhengHan was entrusted, the case had been heard multiple times, and Shanshan was in an unfavorable situation where it might be found in breach of contract and ordered to pay huge compensation. After accepting the agency, HongQiao ZhengHan put forward a subversive claim that “the contract was not approved and thus not effective, Shanshan had no obligation to pay the equity transfer payment and shall not be liable for breach of contract compensation”, which was finally supported by the court, avoiding huge compensation for Shanshan.
This case went through first instance at the Shanghai Financial Court, second instance at the Shanghai High People’s Court (affirmed), and retrial review at the Supreme People’s Court. Except for the finding that both parties were at fault in terms of fault liability, the agency opinions put forward by HongQiao ZhengHan on the following controversial issues were basically adopted by the court, fundamentally reversing Shanshan’s previous unfavorable situation. The details are as follows:
I. Is the Framework Agreement a preliminary contract or a formal contract?
Agency Opinion of HongQiao ZhengHan:
The content of a preliminary contract is generally brief and does not directly point to specific changes in rights and obligations, while the terms of a formal contract are relatively complete. The “Framework Agreement” in this case is a typical formal contract, not a preliminary contract.
Firstly, from the perspective of expression of intent, the “Framework Agreement” directly states the final rights and obligations of the transaction parties, including clear and specific stipulations on the subject assets, transaction price, payment, liability for breach of contract, etc., and explicitly provides that the rights and obligations of the ancillary agreements to be signed separately for each equity transfer shall be subject to the Framework Agreement, rather than signing a “new contract” separately to determine the rights and obligations between the parties.
Secondly, from the perspective of content, the content of the “Framework Agreement” directly points to specific changes in rights and obligations, and there is no expression such as “this Framework Agreement shall terminate upon the signing of a formal contract separately”.
Thirdly, from the perspective of performance standards, the completed transaction acts of the parties are all performances of the “Framework Agreement”. The paid equity transfer payments and the delivered equity are all performed in accordance with the “Framework Agreement”.
Finally, from the perspective of liability for breach of contract, the breach clause of the “Framework Agreement” directly targets the failure to perform the obligations under the “Framework Agreement”, rather than the liability for breach of contract to be borne when the ancillary equity transfer documents are not signed separately.
Adjudication Opinion of the Supreme People’s Court:
Firstly, from the specific content of the Framework Agreement, it clarifies the formation of an equity transfer relationship between Shanshan and its designated domestic and overseas entities and Zhongjing, and makes clear and specific stipulations on the subject assets, transaction method, transaction consideration, payment and equity transfer method, liability for breach of contract, etc., which include the main terms of a contract.
Secondly, the Framework Agreement stipulates that the share/equity transfer agreements and other ancillary agreements to be signed separately shall have main terms consistent with the Framework Agreement, and in case of inconsistency, the Framework Agreement shall prevail; for matters not stipulated in the share/equity transfer agreements and other ancillary agreements, the Framework Agreement shall prevail. The Equity Transfer Agreement for the first delivery stipulates that the equity transfer is an integral part of the transaction matters agreed in the Framework Agreement, and the Framework Agreement and the Equity Transfer Agreement have the same legal effect. It can be seen that the Framework Agreement, as the core document for equity transfer, the subsequent agreements signed and performance acts of the parties are all implemented around the specific stipulations of the Framework Agreement, and inconsistent terms and unstipulated matters shall be subject to the Framework Agreement.
In summary, combining the factors that the content stipulated in the Framework Agreement is specific and clear and includes the main terms of the contract, the stipulated liability for breach of contract is clear, the Framework Agreement is governing, and its relevance to other agreements involved in the case, it is found that the Framework Agreement and related contracts are indivisible, and the Framework Agreement is a formal contract.
II. Does the Framework Agreement need to be submitted for approval together, and is it effective?
Agency Opinion of HongQiao ZhengHan:
The Commercial Banking Law and the Nine-Minute Meeting Minutes stipulate that the purchase of more than 5% of the total shares of a commercial bank shall be subject to the prior approval of the CBIRC, and a contract without approval is not effective due to the lack of the special effective conditions stipulated by law. The disputed transaction is a package transfer of 14% of Huishang Bank’s shares, and the equity transfer contracts for the disputed transaction include the Framework Agreement and ancillary agreements. The Framework Agreement can only take effect after being submitted to the CBIRC for approval together with the ancillary agreements, and there is no possibility of independent effectiveness.
The Framework Agreement explicitly stipulates that the rights and obligations of the equity transfer in this case shall be subject to the Framework Agreement, and the ancillary agreements shall be consistent with the Framework Agreement; in case of inconsistency, the Framework Agreement shall prevail; for matters not stipulated in the ancillary agreements, the Framework Agreement shall prevail. Therefore, the Framework Agreement can more objectively reflect the actual situation of the equity transfer transaction than the ancillary agreements. If the Framework Agreement is not submitted for approval together, the regulatory authorities cannot judge the true intent of the parties, which does not meet the requirements of “penetrating” supervision.
Adjudication Opinion of the Supreme People’s Court:
Combining the factors that the content stipulated in the Framework Agreement is specific and clear and includes the main terms of the contract, the stipulated liability for breach of contract is clear, the Framework Agreement is governing, and its relevance to other agreements involved in the case, it is found that the Framework Agreement and related contracts are indivisible, and the Framework Agreement is a formal contract. As a contract agreed by both parties through consultation, the equity transfer share stipulated in the Framework Agreement has exceeded 5% of the total shares of Huishang Bank, which falls under the circumstance stipulated in Article 28 of the Commercial Banking Law that shall be subject to the prior approval of the banking regulatory authority of the State Council. At present, the Framework Agreement has not gone through the approval procedures, and the original court’s finding that the Framework Agreement is not effective is not improper.
III. Can the partial completion of equity delivery infer that the corresponding equity transfer agreement is effective?
Agency Opinion of HongQiao ZhengHan:
The disputed transaction of transferring 14% of Huishang Bank’s equity is integral and indivisible. Legally, the transfer of more than 5% of a commercial bank’s equity can only take effect after the equity transfer contract is approved by the regulatory authorities. In terms of regulatory requirements, the Framework Agreement and ancillary agreements can only take effect after being submitted to the regulator for approval together. Any phased delivery act that attempts to evade supervision or is based on a misunderstanding of the law is wrong and should be corrected, rather than presuming that the contract is effective without approval based on the wrong result (i.e., partial equity delivery).
Adjudication Opinion of the Shanghai High People’s Court:
When the transferring parties intend to transfer more than 5% of the total equity, even if the actual transfer acts are intentionally or unintentionally divided into multiple times, the approval obligation shall be performed before the first transfer. The practice and opinion of the parties in this case of adopting a batch transaction method, not submitting for approval when the previous transaction does not reach 5%, and preparing for approval only when the transaction amount is about to exceed 5% evade financial supervision and violate the legislative purpose of the Commercial Banking Law, constituting a circumvention act, which this Court does not recognize.
Although the subsequent equity contracts signed and performance acts of the relevant parties have a certain independence, their real purpose and expression of intent are all to perform the overall objectives and relevant terms agreed in the Framework Agreement. Evaluating these ancillary contracts and documents separately or determining the rights and obligations of the parties will violate the true expression of intent of the parties in signing the contracts. Therefore, in the case that the Framework Agreement is not effective, the relevant equity transfer agreements and contracts signed by the parties subsequently shall be found to be not effective.
Adjudication Opinion of the Supreme People’s Court:
In this case, both Zhongjing and Shanshan, while fully aware of the obligation to obtain prior approval, carried out the purchase and equity transfer acts without approval, which is obviously improper, and both parties are at fault. … This Court holds that Zhongjing, while fully aware that the equity transfer involved in the case has not been approved, still actually carried out the equity transfer and cooperated in going through the equity change registration, and objectively has improper performance acts and fault.
IV. Does Shanshan’s failure to pay the remaining equity transfer payment constitute a breach of contract?
Agency Opinion of HongQiao ZhengHan:
When the contract is not approved and effective, two types of obligations and corresponding liabilities for breach of contract in the contract have taken effect independently: first, the approval obligation to promote the effectiveness of the contract and its liability for breach of contract; second, the obligations that shall be performed first and their liability for breach of contract, which are explicitly agreed in the contract as a prerequisite for performing the approval obligation. In addition, other main rights and obligations of the contract, including Shanshan’s obligation to pay the remaining equity payment and Zhongjing’s obligation to deliver the equity, are not effective, and neither party may require the other party to perform before the transaction is approved. Therefore, when the contract is not effective, Shanshan has no payment obligation and cannot constitute a breach of contract.
Adjudication Opinion of the Supreme People’s Court:
In the case that the Framework Agreement is not effective, Zhongjing’s claim for liability for breach of contract against Shanshan for delayed payment cannot take effect independently. Therefore, its claim that the ineffectiveness of the Framework Agreement is caused by Shanshan’s fundamental act of failing to pay the price as agreed and that it is entitled to apply the deposit penalty cannot be established, and this Court does not support it.
V. Who is the subject of the approval obligation?
Agency Opinion of HongQiao ZhengHan:
From the perspective of the performing subject, in accordance with the principle of good faith, the approval (cooperation) obligation, as a “pre-contractual obligation” before the contract takes effect, is borne by both parties to the contract. From the perspective of the performance period of the obligation, the approval obligation of the parties to the contract runs through the entire process from the “signing of the contract” to the “effectiveness of the contract”.
Moreover, in accordance with the judicial interpretations on transactions that require approval to take effect, the approval obligation mainly lies with the transferor. For example, Article 8 of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Mining Right Dispute Cases” and Article 5 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Dispute Cases Involving Foreign-Invested Enterprises (I)” both explicitly stipulate that the transferor bears the approval obligation and shall be liable for compensation if it violates this obligation.
Therefore, for a contract that takes effect upon approval, in accordance with the contract stipulations, legal provisions, or the principle of good faith performance, both parties to the contract have the obligation to promote the effectiveness of the contract in good faith. As the transferor and major shareholder, Zhongjing obviously has the obligation to actively promote the completion of the approval, and in any case, it should not obstruct the board meeting that has been scheduled to be held, which necessarily constitutes a breach of the approval obligation.
Adjudication Opinion of the Shanghai Financial Court:
In accordance with the provisions of the second paragraph of Article 27 of the “Interim Measures for the Administration of Commercial Bank Equity”, the applicant for approval of the change of more than 5% of commercial bank equity is the commercial bank. The formal application for approval to the regulatory authorities shall be filed by Huishang Bank, and the Framework Agreement mainly stipulates the internal deliberation process of Huishang Bank. The “Share Transfer Contract” for the domestic share transaction of Huishang Bank signed by Zhongjing and Shanshan stipulates that: “After the signing of this Contract, both parties shall file an application for share transfer with Huishang Bank and the regulatory authorities in accordance with the provisions, and jointly go through the procedures for the transfer of the target shares to Shanshan at the registration and settlement institution.” The applicant subject stipulated in the above contract is inconsistent with the provisions of the second paragraph of Article 27 of the “Interim Measures for the Administration of Commercial Bank Equity”, and the parties did not explicitly stipulate the bearing of the legal consequences of the approval obligation in the contract, so both parties have the obligation to promote the approval in accordance with the principle of good faith.
VI. If the Framework Agreement is not effective, how to determine the fault liability?
Agency Opinion of HongQiao ZhengHan:
Before the contract is approved and effective, neither Shanshan’s payment obligation nor Zhongjing’s equity delivery obligation is effective, but the approval obligation has taken effect independently. Shanshan cannot be at fault for the payment obligation that has not yet arisen, and Zhongjing’s suspension of the board meeting to prevent approval is the only party at fault.
Adjudication Opinion of the Shanghai High People’s Court:
Regardless of the attribution of the approval liability subject, if the parties strictly abide by the provisions of this article of the Commercial Banking Law, and do not perform the ineffective Framework Agreement or actually carry out equity transfer before obtaining approval, there will be no equity changes and fund delivery, and no other secondary losses will be caused. All losses arising from the performance of the equity transfer agreement by the parties when the contract as a whole is not effective shall be borne by the parties who improperly perform the contract.
Adjudication Opinion of the Supreme People’s Court:
Both Zhongjing and Shanshan, while fully aware of the obligation to obtain prior approval, carried out the purchase and equity transfer acts without approval, which is obviously improper, and both parties are at fault. Therefore, both parties shall bear corresponding liabilities for the losses caused by the performance without approval.
Zhongjing is also at fault for the ineffectiveness of the Framework Agreement, and in the case that the Framework Agreement is not effective, the liability for breach of contract against Shanshan for delayed payment cannot take effect independently. Therefore, this Court does not support its claim that the ineffectiveness of the Framework Agreement is caused by Shanshan’s fundamental act of failing to pay the price as agreed.
In summary, the law stipulates that the purchase of more than 5% of the equity of financial institutions such as commercial banks and insurance companies shall be subject to the approval of the relevant competent authorities, and approval is a statutory effective condition of the contract. A contract without approval is not effective. Therefore, before the contract takes effect, the purchaser has no obligation to pay the equity payment and shall not be liable for breach of contract for failing to pay the equity payment.
In practice, many transaction parties have inertial cognition of the validity of the contract, and do not know that approval will affect the validity of the contract. After signing the contract and before completing the approval, they begin to perform the main rights and obligations of the contract such as paying the equity payment and delivering the equity, and even mistakenly believe that they should be liable for breach of contract for failing to pay as agreed. The courts hearing this case made a clear and accurate determination on the principle that a financial equity transfer contract for more than 5% equity is not effective without approval, and specially evaluated the parties’ practice of splitting transactions and attempting to evade the approval of the Framework Agreement content, explicitly pointing out that such practices and opinions evade financial supervision and violate the legislative purpose of relevant laws, constituting circumvention acts.
Against the background of increasing attention to financial security and financial order, many professional opinions of the courts hearing this case may provide useful guidance and reference for the transaction and dispute resolution of other financial equities.
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