Partners at King&Capital,lawyers SU Peng and JIANG Ning recently won a favorable award at arbitration,representing a partnership enterprise in an equity buyback dispute with the actual controller of a company delisted from the National Equities Exchange and Quotations(NEEQ),and recovering more than 120 million RMB in losses for the client.
In this case,the partnership enterprise client(hereinafter‘Partnership Enterprise H’)is part of a renowned Chinese asset management group.On behalf of investors,the partnership enterprise invested many hundreds of millions in target Company C.Because Company C planned to undertake its IPO on the A-share market,it decided to delist from the NEEQ system.As the objecting shareholder,Partnership Enterprise H entered into an Equity Buyback Agreement with the six actual controllers of Company C,none of whom actually performed the equity buyback obligations pursuant thereto.Following many unfruitful attempts at communication,Partnership Enterprise H engaged King&Capital to represent it in the case.
Upon official engagement,and following comprehensive analysis,the lawyers agreed upon the following three key points of this case:first,as Company C was planning an IPO application,it had an intense desire to maintain the target company’s image.That was why the Equity Buyback Agreement listed initiation of arbitration against the company as one of the situations that is detrimental to the company’s image,under which the obligors of the buyback are entitled to unilaterally terminate the agreement without liability.Second,the dispute arose during a full-blown pandemic outbreak.In order to prevent the target company from sliding into financial crisis and consequentially lowering the actual controllers’ability to pay,it was necessary to promptly commence and complete property preservation procedures.Third,although the Agreement contained clauses on such key elements of the equity buyback as time limit and price,the provisions only set forth the respective range for these factors.There remained the risk of ambiguity as to the agreement.
Immediately upon development of a detailed advocacy plan focused on the key points of the case,the lawyers set about preparing materials for filing the arbitration,while also sending a notice of rectification to the six actual controllers in order to disprove intent to harm the company’s image.Along with the property preservation application,the lawyers also filed to the arbitral tribunal for postponed service,thereby securing the successful preservation property consistent with the amount at dispute.Upon repeated communication with the arbitral tribunal and hearings,and with two written submissions containing a total of 14-pages,the two lawyers made detailed arguments on such pivotal points as the Agreement’s nature and effectiveness,determination of the buyback price,and claims for liquidated damages and interest.
Ultimately,the arbitral tribunal adopted our arguments,and granted substantially all of our claims in its award.A classic dispute brought on by investors unable to smoothly pull out,the case is hugely instructive for institutional investors in the design of investment clauses and exit mechanisms.