Analysis of “de jure investment, de facto loan” disputes

“Dejure investment, de facto loan” is a common means whereby an investor provides financing to a real estate enterprise. In brief, the investor establishes a dedicated asset management plan, purchases equity of the project company held by the real estate enterprise (the financed party), specifies the investment term and fixed returns, and once specific conditions are satisfied, the financed party buys back from the investor the equity of the project company originally held by it. To complete such a transaction, the entities to the transaction execute a series of transaction documents, including an investment framework agreement, equity transfer agreement, claim transfer agreement, capital increase agreement, equity buy back agreement, etc. However, in judicial practice, whether the legal relationship created by the “de jure investment, de facto loan” transaction constituted by these transaction documents is an “actual equity transfer” or an “equity transfer in name but a claim-debt relationship arising from a loan in fact” is usually the main focus of the dispute.

Determining the equity transfer act. The different means of expression in the transaction documents will result in different determinations of the nature of the equity transfer: either the court recognizes the validity of the equity transfer act, finding it a normal means of financing by enterprises (e.g., the equity transfer dispute between Luen Tai Group Limited and Anhui Expressway Holding Group in 2013); or the court finds it to be a lending act (e.g., the contract dispute between New China Trust and Zhucheng Jiangfeng Real Estate Development in 2014).

In analyzing the nature of an equity transfer act, it is necessary to conduct the analysis by taking into account numerous factors, such as the percentage of equity transferred, control of the company, the arrangement on returns, the equity transfer price, whether there is a provision of security, the negotiations for the contract, etc. These are also major provisions to which lawyers need to pay attention when drawing up the transaction documents.

Yang Wenjun is a partner and Chen Xiaofeng is a paralegal at Boss & Young