Protecting private enterprises in mixed ownership acquisitions

Coal Company originally had individual shareholders A and B. On 10 October 2009, A and B executed an equity transfer contract with state-owned enterprise (SOE) C, specifying that A and B were to transfer their 60% equity interest in Coal Company to C for a total price of RMB480 million (US$78 million). Given that Coal Company would then become a joint stock limited company jointly organised by natural persons A and B and the enterprise C, in which C held a 60% controlling interest, the equity transfer contract set forth the following special terms:

“Within three months after A and B submit a written application to transfer the [remaining] 40% equity interest held by them, C must agree to acquire such equity interest, and A and B shall assist in duly handling the procedures for the equity change and paying the price in full. If A and B propose to transfer the [remaining] equity interest within two years after completion of the contemplated [60%] equity transfer, the transfer price shall be based on the calculation basis of RMB320 million for the 40% equity interest and increased at a rate of 15% per year; if they propose the transfer more than two years after completion of the contemplated equity transfer, the transfer price shall be determined by the parties through consultations based on the principle of value preservation/increase and the evaluated net asset value of Coal Company at the actual time of the equity transfer.”

On the day of executing the equity transfer contract, A, B and C amended the company’s articles of association, specifying that when the shareholders’ meeting resolves to increase or reduce the company’s registered capital, divide, merge, dissolve or change the corporate form of the company, or amend the company’s articles of association, the votes of shareholders representing two-thirds of the voting rights were required for adoption, and other matters required the votes of shareholders representing more than one-half of the voting rights for adoption.

Moon Yan is a partner at Concord & Partners