Foreign enterprise equity transfers: a case study

In the previous issue we discussed the legal restrictions on transfers of equity of foreign investment enterprises (FIEs). In this article we examine the issue in the particular context of joint ventures, by looking closely at a specific case.

Details of the case

Songjiang is a Sino-foreign cooperative joint venture. Its legal representative is Mr Wang, the chairman of the board appointed by the foreign shareholder. In 2007, Wang executed an equity transfer agreement with the Chinese shareholder (the transferee) to transfer of all of the foreign party’s equity to the Chinese shareholder. It specified that the transferee would carry out the approval and business registration procedures required for the change in shareholders. However, the transferee failed to do this.

In 2009, a van belonging to Songjiang was involved in a traffic accident, resulting in the death of the injured party. A court found Songjiang and the driver jointly and severally liable, ordering them to compensate the family of the deceased in an amount exceeding RMB390,000. In October 2010, the court issued an order requiring Songjiang to perform the judgment. Thereafter, pursuant to another application, the court took measures to prevent Wang leaving the country. (As the equity transfer had not been carried out, Wang remained the legal representative of Songjiang).