Delayed closing of property rights transfer triggers unnecessary dispute

In wholly Chinese-owned company X, the original shareholders A and B, and individual shareholder C held 49%, 46% and 5% of the company’s equity, respectively. On 1 December 2009, shareholder A, by virtue of a listing and transaction on the Shanghai United Assets and Equity Exchange (SUAEE), executed a property rights transaction contract with Hong Kong company Y. The contract provided that A would transfer its 49% equity interest to Y for consideration of RMB690 million (US$110 million), and that Y would pay this in one lump sum into the SUAEE’s bank account within 10 days of execution of the contract, whereupon SUAEE would pay that amount to A. A was required to complete the closing of the property rights transfer within two months of the execution of the contract, and any gains or losses in asset value between the valuation reference date (30 September 2008) and the equity closing date would be vested in or borne by A in proportion to its shareholding percentage.

After execution of the contract, company Y remitted the money to the SUAEE in Hong Kong dollars, in an amount equivalent to the specified renminbi amount, on 7 December 2009. However, the closing of the property rights transfer was delayed. Shareholder B only co-operated with company Y in executing the contract and signing the articles of association of the Sino-foreign equity joint venture in October 2010. Approval of the Ministry of Commerce (MOFCOM) and amendment of business registration were completed on 20 March 2011.

Pursuant to existing foreign exchange control policy, A may only convert the foreign exchange it receives after completion of the amendment of business registration in connection with the equity transfer.