Analysis of legal issues related to fixed income limited partnerships - discussing the practical distinction between real debts of famous shares, transfer guarantees and equity investments
original Xu Zeyang Oriental legal person
Summary: Investors invest in fixed income projects by subscribing to limited partnership LP shares, usually embed transaction arrangements such as share repurchase and difference compensation, and appoint personnel to participate in the decision-making of major matters of the partnership. In such transactions, investors enjoy both the right to have the right to have the nature of "debtor rights" such as fixed income, and the right to have the right to have the nature of "equity" such as decision-making and disposal of shares. So, what is the legal nature of fixed income limited partnerships? What risks are there for such transaction arrangements? How to prevent risks? This issue of "Analysis of legal issues related to fixed income limited partnerships - discussing the practical distinction between real debts of famous stocks, transfer guarantees and equity investments " , answering the above questions.
When investors invest in fixed income projects through limited partnerships, they usually embed transaction arrangements such as share repurchase, difference compensation, and betting terms to ensure the safe exit of funds. For example, the investor and the investee subscribe to the LP shares of the limited partnership separately, and the investee (or its designated third party) shall bear the repurchase obligations for the investor's LP shares based on the required rate of return of the investor. During this period, investors have the right to appoint personnel to participate in the decision-making of major matters of the partnership. If the investment project expires or the investor defaults, the investor has the right to require the investor (or its designated third party) to fulfill its repurchase obligations or directly dispose of the partnership share.
shows that investors enjoy the right to obtain fixed income and safe withdrawal of funds, and the right to appoint personnel to participate in major decisions and dispose of partnership shares and other similar "equity". Therefore, how to determine the legal nature of these fixed income limited partnerships and prevent their legal risks in practice is a common concern for investors.
1. The concept and practical distinction between real bonds in famous stocks
(I) The concept of real bonds in famous stocks
The definition of real bonds in famous stocks
The definition of "real bonds in famous stocks" mainly comes from various regulations of the China Banking Regulatory Commission [1], China Securities Association [2], and the Ministry of Finance [3]. For example, the China Securities Association "Document No. 4" stipulates that "the famous stock real bonds referred to in this specification refer to an investment return that is not linked to the operating performance of the invested enterprise, and is not distributed based on the investment income or losses of the enterprise, but rather provides investors with a promise of guaranteed principal and guaranteed income, and regularly pays fixed income to investors according to the agreement, and redeems the equity or repays principal and interest by the invested enterprise after meeting specific conditions. Common forms include repurchase, third-party acquisition, betting, regular dividends, etc.."
In short, famous stock real bonds refer to a transaction structure in which investment funds are invested in the name of equity and through rigid redemption terms, it can then achieve the withdrawal of capital and guaranteed income from investment funds. At the judicial level of
, the "Minutes of the Judges' Meeting of the Second Civil Trial Court of the Supreme People's Court" (hereinafter referred to as "Minutes of the Second Civil Court Meeting of the Civil Court") interprets "famous stocks and real debts" as follows: "Once it is determined that the investor's true meaning is to obtain fixed income rather than becoming a real shareholder, there is often a problem that the transfer of equity (or capital increase and expansion of shares) is actually borrowing, which constitutes a hidden act in the false expression of intention. That is, there are two behaviors at this time. The nominal equity transfer (or capital increase and expansion of shares) in is a false expression of intention , according to the "General Principles of the Civil Law of " Section 1 Article 46, Paragraph 1, stipulates that " civil legal acts performed by the perpetrator and the counterparty with false intentions are invalid", This behavior is invalid . As for hidden behavior, , paragraph 2 of this article stipulates: "The validity of hidden civil legal acts expressed by false intentions shall be handled in accordance with relevant laws and regulations. ' According to this, shall determine its effectiveness in accordance with the general validity requirements of civil legal acts."[4]
can be seen. The "famous stock real debt" mentioned above in Supreme Court is a broad sense of nominal stock real debt. The nominal equity transfer (or capital increase and expansion) is a false expression of intention and is invalid, but its effectiveness should be determined by the constituent elements of hidden acts. Hidden acts may only have a loan relationship (referred to as "(narrow sense) real debt"), or it may be a combination of the loan relationship and transfer and guarantee (described in detail below) or other legal relationship (referred to as "(broad sense) real debt").
(II) Analysis of real debts and equity investments in famous shares
31. (Narrowly) Practical Distinguishing Standards for the Real Debt of Non-Stock Stocks and Equity Investment
Usually, "Name Stocks and Real Debts" refer to (Narrowly) Nature Stocks and Real Debts, that is, hidden behaviors only have a borrowing relationship. How to distinguish (Narrowly) Nature Stocks and Equity Investment in practice? Although both have an equity appearance, the former is a borrowing relationship, while the latter is an investment relationship.
(2016) Supreme Court Civil Final No. 325 [5] Judgment, distinguishes the two natures of investment and lending: "Generally speaking, investment means that investors share returns and share risks. The shared income is specifically manifested in that investors enjoy investment returns and share investment losses in accordance with the agreed method; the higher the return, the higher the investor's return; the more losses, the more losses the investors share the losses, that is, the return on investment and the amount of losses are uncertain, and the return time is also unfixed. The characteristic of lending is that no matter whether the borrower uses the lender to borrow money, and the size of the income, the borrower should repay the principal and interest at the agreed time. The lender's interest return here is determined and fixed. As for losses, they do not need to bear them together with the borrower. In summary, investment means "sharing returns and sharing risks"; while borrowing is "fixed returns, no risks" . "
is a coincidence. (2018) Supreme Court Civil Resignation No. 154 [6] also has similar statements. "From the nature of the investment funds, once an investor invests the funds into the company's business activities, he will inevitably bear the corresponding investment risks and cannot only enjoy fixed income without being responsible for the company's profits and losses. In this case, the two parties agreed to invest 15 million yuan in debt, and agreed that Hengfeng Company only enjoys fixed investment returns and is not responsible for the project profit and loss. This income model of capital investment obviously does not conform to the nature of the investment, but is the nature of the loan. Therefore, the 15 million yuan should be considered as an investment, but is actually a loan. "
can be seen that in practice, the standard for distinguishing between real bonds in real stocks and equity investments in (narrow sense) is mainly whether investors bear the corresponding investment risks. If the investor only collects fixed income but does not bear risks, it does not belong to equity investment, but to a borrowing relationship.
2. How to determine the right to participate in decision-making and dispose of equity in real stocks and real bonds in real stocks and real bonds in real stocks and real bonds
Since the real bonds in real stocks and real bonds in real stocks and real bonds are essentially a borrowing relationship, as a creditor, the investor should only enjoy the right to recover principal and fixed income. If the investor is agreed to It has the right to appoint personnel to participate in major decisions of the holding company, and has the right to dispose of equity when the invested party breaches the contract. How do these transaction arrangements be characterized? Does it affect the lending relationship?
(2019) Supreme Court Civil Final No. 1532 Judgment [7] (referred to as "Guotong Company Case") gave the answer. Guotong Company (Investor) signed a "Capital Increase Agreement" with Binggoucheng Company (Investor), increasing capital of Binggoucheng Company by approximately 110 million yuan. The two parties agreed that Guotong Company has the right to collect fixed returns on the capital increase funds, and has the right to dispatch personnel to participate in the board of directors and supervisory board of Binggoucheng Company, and has the right to transfer the equity it holds, apply for capital reduction, and dispose of projects involved in the case of Binggoucheng Company's breach of contract.
Regarding the above-mentioned rights similar to "equity", the Hubei High Court, in combination with the content of the agreement and the performance method, believes that " Guotong Company does not participate in the daily operation and management of Bingoucheng Company. The purpose of dispatching directors is mainly to supervise major matters of the company. Guotong Company does not actually bear the operating risks of Bingoucheng Company, but only obtains fixed returns, rather than participating in or controlling the business management of the target company. . ... Guotong Company is not a shareholder who actually controls the operation of Bingoucheng Company. ... Guotong Company cannot control the external opinion of Bingoucheng Company. The essence of the capital increase transaction is that Guotong Company only regularly collects fixed income and recovers the principal when maturity is done. ... Therefore, the investment in the capital increase fund in this case is actually a debt investment."
recognized during the retrial of the Supreme Court. The Supreme Court approved the The above conclusion: "The purpose of Guotong Company to sign the above agreement is to collect relatively fixed capital returns by raising funds from Bingoucheng Company, which is different from the capital increase and shareholding behavior implemented in the general sense to obtain the contingent long-term equity income of . ... Although Guotong Company has been registered as a shareholder of Bingoucheng Company after industrial and commercial changes, Bingoucheng Company has not provided evidence to prove that Guotong Company actually participated in the subsequent operation and management of Bingoucheng Company." It can be seen that even if it is agreed to participate in decision-making and dispose of equity and other similar "equity" rights, as long as the investor does not actually participate in the company's daily operation and management and does not assume investment risks, it should still be recognized as "famous stocks and real debts". The rights such as participating in decision-making and disposal of equity are actually a way to protect the debt rights and do not affect the recognition of the lending relationship.
3. The recognition standard for "named partnership is actually lending" in partnership
At the partnership level, "named shares and real debt" should be interpreted as "named partnership is actually lending", so are the above judgment standards still applicable?
(2018) Supreme Court Minsheng Judgment No. 2450 [8] believes that the " Partnership Agreement " is an agreement reached by partners on joint investment, joint operation and shared risks in accordance with the law. Partnership is a common behavior of both parties. Although it is not necessary to take joint management as a requirement, sharing profits, sharing profits and losses, and sharing risks are the main characteristics of partnership. The characteristic of a loan is that no matter whether the borrower uses the lender's loan to make profits, the borrower should repay the principal and interest at the time of maturity. As for the losses, it does not need to bear it together with the borrower. It can be seen that the partnership level still applies the recognition standard of "investment means 'sharing of returns and sharing of risks'; while loans are 'fixed returns, no risks'".
In summary, in equity investment relationships/partnerships, as a company shareholder or partnership partner, the investor, in addition to enjoying the benefits generated by the company during the operation, should usually bear the risks of the company during the operation with other shareholders/partners. In the legal relationship of "famous stocks and real debts" or "namely partnerships and real loans", investors obtain fixed income by providing financing to the target company, only nominally hold the equity or partnership share of the target company, and do not participate in the actual operation of the company and bear the losses of the company's operations. Therefore, whether the investor bears the business risks of the enterprise is a judging whether the relationship between the investor and the investee is an equity investment relationship/partnership relationship or a main factor in the lending relationship. Even if the "famous stocks and real debts" stipulate similar "equity" rights, as long as the investor does not actually participate in the daily business management of the enterprise, it will not affect the determination of the lending relationship.
2. The concept of equity transfer guarantee and practical distinction between
(I) The concept of transfer guarantee
is similar to real debts in famous stocks. "Assignment guarantee" does not have clear provisions in my country's laws and regulations, but it has been widely adopted in practice. The Supreme Court recognized its legal effect in many previous judgments, and in Article 71 of the 2019 "National Court Civil and Commercial Trial Work Conference Issuing Minutes" (hereinafter referred to as "Nine Civil Minutes") gave a clearer definition of "Assignment guarantee". "The debtor or third party concluded a contract with the creditor, and agreed to make the money If the property is transferred in form to the name of the creditor, the debtor repays the debt upon maturity, and the creditor returns the property to the debtor or a third party, and the debtor fails to repay the debt upon maturity, and the creditor can auction, sell, or repay the debt at a discount, the people's court shall determine that the contract is valid. "
(II) Analysis of equity transfer guarantee and equity investment
1. Practical distinction criteria for equity transfer guarantee and equity investment
Equity transfer guarantee and equity investment have similarities with (narrow sense) name-based real debt. Both have the appearance of equity transfer, and the main purpose of both parties to the transaction is not the equity transfer itself. So, how to distinguish between equity transfer guarantees and equity investment in practice?
In the Supreme People's Court's Minsheng Judgment No. 4165 [9] (referred to as the "Wugang Trust Case"), Wumin Company (investor) signed a series of contracts such as the "Cooperation Agreement" and "Equity Transfer Contract" with Rongteng Company and related parties (investors). Among them, the "Cooperation Agreement" stipulates that Wumin Company will initiate the establishment of a collective trust plan as a trustee, with an estimated scale of 400 million yuan, to acquire the specific asset income rights held by Rongteng Company and the total 60% of the equity of Rongteng Company held by Rongteng Company held by the original shareholders of Rongteng Company; the "Equity Transfer Contract" stipulates that the original shareholders of Rongteng Company transfer the total 60% of the equity of Rongteng Company held by him to Wumin Company.
The Supreme Court believes that the so-called transfer guarantee refers to the atypical guarantee in which the debtor or a third party is to secure the debtor, transferring the ownership of the subject matter and other rights to the security holder to the security holder, so that the security holder shall return the subject matter to the debtor or the third party after the debt is paid within the scope of the purpose of the guarantee. When the debt is not performed, the security holder shall be given priority in repayment for the subject matter. The purpose of the contract of Wumin Company is not to obtain the equity involved in the case itself. is to recover 400 million yuan of principal and obtain the agreed fixed income. Wumin Company and do not actually bear any risks under the equity involved in the case. ... The equity transfer involved in the case does not meet the basic characteristics of the debt transfer contract and equity transfer contract, but meets the purpose of achieving the purpose of debt guarantee by transferring the rights of the subject matter. It includes the two basic elements of assignment and guarantee, which is a right transfer and transformation guarantee.
It can be seen that in the determination of equity transfer guarantees, the Supreme Court first examines the main purpose of both parties to the transaction. If the investor's purpose is to obtain equity and be willing to bear the risk of equity investment, it is an equity investment, otherwise it is not the case; secondly, equity transfer guarantees must meet the two basic elements of assignment and guarantee. "Transfer" requires the appearance of the right to transfer, while "guarantee" requires the existence of the main contract, and the two parties to the transaction have the consent of guarantee.
2. How to determine the right to participate in decision-making and dispose of equity in equity transfer and guarantee
is similar to the (narrow sense) real bonds in the equity transfer and guarantee. Equity transfer and guarantee is essentially a guarantee relationship. If the investor (the security right holder) agrees with the investor that the investor has the right to appoint personnel to participate in the major decisions of the target enterprise in which he holds shares and has the right to dispose of the equity when the investee breaches the contract, how to characterize such transaction arrangements?
In the above-mentioned "Wugang Trust Case", the two parties to the transaction agreed in the "Cooperation Agreement" that if the Wugang Company (investor) fails to receive any principal and interest on time or the investor defaults, the Wugang Company has the right to dispose of the target equity on its own, and the investor has the obligation to pay the funds for the supplementary payment.In addition, the investor claimed that Wumin Company had attended shareholder meetings many times and actively exercised shareholder rights, so the relationship between the two parties belonged to an equity investment relationship.
However, the Supreme Court believes that the right to dispose of equity is a transaction arrangement made by investors to recover principal and fixed income, and does not affect the determination of transfer and guarantee. Wumin Co., Ltd.'s actual participation in the shareholders' meeting is the nominal shareholder of , and the substantial security holder, to supervise and control the funds involved in the case. cannot determine the nature of the legal relationship between the two parties based on this. can be seen that the legal relationship between the two parties cannot be determined based on the "equity" rights of the investor to appoint personnel to participate in decision-making, and these agreements do not affect the determination of "equity transfer guarantee".
It is worth mentioning that compared with real debts in famous stocks, equity transfer guarantees also need to pay attention to the issue of how to realize the guarantee rights. According to Article 71 of the "Nine Civil Minutes", in the transfer guarantee contract, if it is agreed that the debtor fails to repay the debt when due and the property belongs to the creditor, the agreement shall be invalid. Therefore, the "equity transfer guarantee" stipulates that the investor has the right to dispose of the equity, and such disposal does not include directly owned by the investor, otherwise it may be invalid due to the constituting of " liquid clause ".
However, according to Article 44 of the "Nine Civil Minutes" [10], the agreement to pay off debts through property after the expiration of the performance period is valid. Therefore, if the debtor fails to perform the debt after the expiration of the debt performance period, the equity transfer guarantee can be realized by using property to offset the debt. At this time, the way for the investor to dispose of the equity can include direct acquisition.
(2018) Supreme Court Civil Final No. 119 [11] Judgment (referred to as "Xushui County Investment Company Case") believes that "generatively speaking, the transfer guarantee has two implementation methods: attributable to liquidation type and disposal liquidation type . The former refers to the transfer security holder fairly valuing the subject matter. If the valuation of the subject matter exceeds the amount of the secured debt, the excess price should be returned to the transfer security setter. The ownership of the subject matter is obtained by the transfer security holder; the latter means that the transfer security holder auctions and sells the subject matter and repays the debt at the selling price. If there is a balance, it will be returned to the debtor. The specific implementation method can be chosen by the parties according to their intention. "
The Equity Transfer Agreement signed by the parties in the "Xushui County Investment Company Case" stipulates matters such as transfer of the subject matter, transfer price, change registration, etc. Jiangxi Jutong and Xiushui Jutong both made shareholders' meeting resolutions on the equity transfer matters, and the equity involved in the case also completed the registration procedures for change, which has the external manifestation of equity transfer. The "Share Transfer to the Agreement" also stipulates the attribution liquidation clause, which does not violate the prohibition provisions of liquidation clauses.
3. Can capital increase and share expansion be recognized as "assignment" guarantee
As mentioned earlier, the Supreme Court believes that the two basic elements of assignment and guarantee are the basic characteristics of assignment and guarantee. In practice, investors’ ways of obtaining equity are not always through the acquisition of equity, but also through capital increase and share expansion. Do these situations fall into “transfer”? If the target company that increases capital and expands shares is a third party designated by the investor, is the debtor investor or the target company at this time?
In the (2018) Supreme Court Civil Final No. 856 [12] Judgment (referred to as "Yusen Real Estate Company Case"), Chen Shiming (credential) signed an "Agreement" with Yusen Real Estate Company (debtor) and provided a loan of 150 million yuan. On the same day, Yusen Real Estate Company and Taiyu Investment Center (the security right holder, designated entity of the creditor) signed a "Capital Increase and Share Expansion Agreement", which stipulated that Taiyu Investment Center would increase its capital by 150 million yuan to Dajingjiang Construction Company (the target company) and handle the transfer registration. After the Supreme Court heard the trial, the "Taiwan-Yu Investment Center and Dajingjiang Construction Company signed the "Capital Increase and Share Expansion Agreement" to ensure the safety of Chen Shiming's loan of funds, rather than the Taiwan-Yu Investment Center investing funds to obtain 49.5% of the equity of Dajingjiang Construction Company. Therefore, although the "Capital Increase and Share Expansion Agreement" has the appearance of capital increase and share expansion, 49.5% of the equity of Dajingjiang Construction Company has also been changed and registered under the name of Taiyu Investment Center. However, the capital increase and share expansion and equity change are aimed at the realization of guaranteed debt. The relevant rights and obligations and actual performance are more in line with the basic structure of transfer and guarantee, and its nature should be recognized as equity transfer and guarantee. ”
It can be seen that the "transfer" in the equity transfer guarantee can be either an equity transfer or a capital increase or increase or increase of shares. In addition, in the equity transfer guarantee, the debtor should determine based on the relationship between the main debt, and the target company for capital increase and increase of shares (or equity transfer) and the debtor may not be the same subject.
In addition, according to Article 89, Paragraph 2 of the "Nine Civil Minutes" "If the parties agree in the relevant contract that the trust company shall also adopt the method of increasing the capital of the target company, and the corresponding equity guarantee guarantee to achieve the debt, it shall be determined that a legal relationship between the parties shall be established. The specific rights and obligations between the parties shall be determined in accordance with Article 71 of this minutes. ” This also confirms that capital increase and share expansion can be recognized as a "transfer" guarantee.
III. Analysis of the legal nature of fixed income limited partnership
(I) Distinguishing and combining the real debt of a stock and the transfer guarantee of equity
In the "Minutes of the Second Civil Court Meeting", the Supreme Court believes that the difference between equity transfer guarantee and real debt of a stock is as follows: "From the perspective of the number of contracts, equity transfer guarantee is concluded as a contract to guarantee the debt under the main contract. Therefore, there are often two contracts for equity transfer guarantee. The real debt of a famous stock is only a contract. If the investor actually enjoys a debt right, the nominal equity transfer or capital increase and share expansion agreement can be interpreted as a loan contract that provides guarantees through the transfer of equity. At this time, a formal contract contains two substantial contracts. ”
In short, the implicit behavior in the real debt of a name stock (narrow sense) is only a loan relationship, so it is essentially a contract. Equity transfer guarantee is a subsidiary contract with a guarantee nature, so there is usually another main contract, and the same is true for most cases in practice. For example, in the Wugang Trust Case, the main contract is the Cooperation Agreement with an agreed loan of 400 million yuan, the subsidiary contract is the "Equity Transfer Agreement"; in the Yusen Real Estate Company Case, the main contract is the "Agreement" with an agreed loan of 150 million yuan, the subsidiary contract is the "Agreement" with an agreed loan of 150 million yuan, the subsidiary contract is the "Capital Increase" Stock Expansion Agreement. However, there is a special situation - the main contract and the slave contract are formally a contract, that is, the (broad) real bond of the nominal stocks includes two main contractual relationships: the loan contract and equity transfer and guarantee.
(II) Determination of fixed income limited partnership and (broad) real bond of the nominal stocks
Based on the above analysis, the fixed income limited partnership transaction structure described in the beginning is likely to belong to the "loan settlement" in the (broad) real bond of the nominal stocks It is a special type of + equity transfer guarantee".
First, in this transaction structure, the main purpose of investors is to obtain fixed income, rather than long-term equity investment, nor to bear equity investment risks. Therefore, the identification standard of "fixed return, no risk" in real bonds (or real loans for partnerships) is met.
Secondly, in this transaction structure, it is usually agreed that if the profit is not obtained as agreed or the investor defaults, The investor has the right to dispose of the shares of the partnership, and the investor assumes the obligation to make up the difference. The main purpose of these transaction arrangements is to ensure the realization of the principal and fixed income of the debt, and to have the guarantee attributes.
Once again, although the investor obtains equity in the partnership through subscription, capital increase and share expansion is also one of the ways of equity transfer guarantee; in addition, even if the investor appoints representatives to participate in major decisions of the partnership during the investment period, as long as the conditions for not participating in daily business activities are met, the investors will not affect the investors' enjoyment of the security right.
Finally, in this transaction structure, both parties to the transaction usually agree on the amount of funds and the guarantee method in a contract at the same time. According to the attitude of the Supreme Court, the loan contract and the equity transfer guarantee contract may be formally the same contract. The discussion in the Supreme Court Civil Resignation No. 161 [13] Judgment (referred to as "The Trust Company Case") also confirms the above view. In this case, Poly Natural Company (invested) and Trust Company (invested) signed a "Cooperation Agreement", which stipulated that Poly Natural Company would transfer part of its equity in Natural Real Estate (the target company) to Trust Company with a transfer consideration of 40 million yuan. The two parties cooperated to develop the X plot through the target company. Trust Company does not need to invest other funds into the benchmark company except to pay the equity transfer price. Trust Company can choose one of the following methods as return on investment: (1) After the development of the plot X, the project profit will be shared as return on investment according to its shareholding ratio. (2) When the 18-month period expires from the date on which Zhixin Company pays the equity transfer price, Poly Natural Company repurchases the target equity for RMB 58 million.
After trial, the Supreme People's Court believed that "the first investment return method agreed in the "Cooperation Agreement" is a typical cooperative development. After the project development is completed, the project profit should be determined and then distributed. ... Although the agreed second investment return method is expressed as equity repurchase, it is essentially an equity transfer guarantee. Poly Natural Company first transferred its equity in Tianran Real Estate to Zhixin Company. The purpose is to guarantee the 40 million yuan equity transfer payment paid by Zhixin Company. The real purpose of Zhixin Company is not to purchase the equity of Poly Natural Company in Tianran Real Estate, but guaranteeing its own investment through this method. The security of the 40 million yuan of funds invested, and its returns are protected through equity repurchase, which is essentially the same as private lending, but this equity repurchase method provides equity guarantees for private lending . The statement is: 'When the 18-month period expires from the date of the 40 million yuan of cash that Party B should pay, Party A agrees to repurchase its natural real estate in Xinjiang for RMB 58 million 45% of the equity of the Development Co., Ltd. ’ From this agreement, it can be seen that the rate of return of the invested funds is 30% per year. ”
In summary, the fixed income limited partnership transaction structure can be recognized as a special type of "borrowing relationship + equity transfer guarantee" in (broad) real bonds of nominal stocks. Under these transaction structures, although there is only one contract in form, it actually contains two contracts from the master and slaves. It can be seen that the key to distinguish between (narrow sense) real bonds in nominal stocks (only loan relationship) and (broad sense) real bonds in nominal stocks (loan relationship + equity transfer guarantee) lies in whether the parties to the transaction have the intention to express the transfer guarantee and the requirements for establishment . If there is, no matter the number of contracts signed in form, it should be essentially determined that they include two master-slave contracts, loan contracts and equity transfers and guarantees.
4. Risk analysis and prevention suggestions for fixed income limited partnerships
In summary, it can be seen that the transaction structure of fixed income limited partnerships can be recognized as "borrowing relationship + equity transfer guarantee" when meeting certain conditions. Investors not only enjoy the rights of debt and guarantee, but also as nominal shareholders, they can exercise corresponding rights, send personnel to participate in major decisions of the company, and they can also dispose of equity (or partnership share) when the investor defaults, thereby protecting their own rights to the greatest extent. However, the following points should still be noted in practice:
(I) The fund recovery method does not completely avoid risks may be considered as equity investment
First of all, too low fixed income may be considered as equity investment. Although the fixed income limited partnership transaction structure can claim that its essence includes borrowing and lending relationships because it "does not assume investment risks", there are many ways to calculate returns in practice and cannot be generalized.For example, the Supreme People's Court Civil Final No. 355 [14] Judgment (referred to as the "Agricultural Development Company Case") believes that the Agricultural Development Company (investor) obtained a fixed income according to the agreement, but the fixed income was only 1.2% per year, far lower than the general loan interest, and obviously does not belong to the situation of obtaining interest income through loans. Its essence is still the investment behavior of Agriculture Company injecting funds into equity investment to help the company get out of trouble. Only in this way can Hanchuan Company and its shareholder Tonglian Company (invested) obtain huge amounts of funds at extremely low costs. is visible. Even if fixed income is agreed, if the fixed income is lower than the market average, it may still be considered an equity investment.
Secondly, the "priority clause" also has similar risks. In the Supreme People's Court's Minsheng Judgment No. 5639 [15], Jian'an Company and Liu Wensheng signed a "Cooperation Agreement", and both parties jointly invested in the construction of a project, each accounting for 50% of the shares of the project. The two parties agreed that regardless of the profit or loss of the project, priority will be given to Liu Wensheng recovering the investment principal and enjoying a net profit of 5.6 million yuan in the early stage. If the first batch of net profits of the project are higher than 10 million yuan, it will be distributed according to the shareholding ratio; when the project ends normally, both parties will be distributed according to the actual profit and shareholding ratio; if the project is terminated early due to poor management and other reasons, priority will be paid to Liu Wensheng's capital and interest, and the remaining part will be distributed according to the shareholding ratio. The Supreme Court believes that the Cooperation Agreement does not stipulate that Liu Wensheng simply enjoys fixed income, and the "priority payment" of should be considered as a mixed contract for profit distribution on the premise of ensuring Liu Wensheng's income. The two parties' intention to share profits is still clear and clear, and the risks of Liu Wensheng's party are not completely ruled out.
Finally, regarding the contract method of fixed returns, there are both equity repurchase methods and differences compensation methods in practice. As long as investors are ensured that they do not bear the risk of equity investment, they are likely to not be considered equity investment. Similar transaction terms are more common in trust transactions.
Therefore, in the fixed income limited partnership transaction structure, it is necessary to pay attention to the income calculation method, especially the "fixed income + excess income" method, which should ensure that the fixed income part is higher than the market average; even if the project itself is unlikely to lose, the "priority clause" method should be avoided as much as possible.
(II) Excessive participation in the company's daily operations is a risk of being recognized as equity investment
Although most (narrow sense) real debts and equity transfer guarantees are agreed that investors will send someone to participate in the company's decision-making , which does not affect the recognition of the legal relationship between the two parties, but is generally limited to the decision-making of major matters , such as the company's major investment, investment, and disposal behavior. If the investor is excessively involved in the company's daily operations, the investee may also claim that both parties are equity investments. In the above-mentioned "Agricultural Development Company Case", Tonglian Company claims that the Agricultural Development Company always dominates the 187 million yuan increase in capital in all aspects such as investment, capital contribution, payment, capital use, and post-investment management. The use of each fund must be approved by the Agricultural Development Company or its authorized Agricultural Development Bank Hanzhong Branch, and is subject to its supervision, which is the exercise of shareholder rights. Although the Supreme Court did not support the above claims after trial, it also confirmed that "participation in company decision-making" is not the main factor in judging the relationship between equity and debt, it still needs to attract investors' attention.
(III) Risks of nominal shareholders' external liability
Although the equity transfer (or capital increase and share expansion) in real debts and transfer guarantees of famous stocks is a false act, it does not mean that investors have the identity of "shareholder" and do not need to bear any risks. In the above-mentioned "famous stocks and real debts" case, the Supreme Court pointed out that "before Guotong Company has completed its equity withdrawal through legal procedures, internal agreements do not have external effect. If there is a bona fide third party based on the equity structure and industrial and commercial registration information disclosed to the public by the trust Bingoucheng Company, it can be resolved through a separate lawsuit." It can be seen that the identity of the investor is equivalent to a "nominal shareholder".There are similar risks in the case of "equity transfer guarantee"
. (2015) Minshen No. 3620 [16] Judgment holds that "the equity handling of Jinjian Company to Yin Zilan and Wang Shaowei is used as a guarantee of the creditor's rights, not a real equity transfer; although Yin Zilan and Wang Shaowei are recorded as shareholders of Jinjian Company in the industrial and commercial registration, is only a nominal shareholder, not an actual shareholder . This way of guaranteeing the debt by transferring the ownership of the subject matter is a transfer guarantee in atypical guarantees. Yin Zilan and Wang Shaowei can claim the security rights according to the agreement, but they have not Obtain equity."
According to the Minutes of the Second Civil Court Meeting, regarding the confrontational effect of equity transfer and guarantee, the Supreme Court believes that "the principle of internal and external differences should be adhered to. In terms of internal relations, that is, the relationship between the parties, the nature of the legal relationship should be determined based on the true intention of the parties, and the equity transfer and guarantee is a guarantee rather than an equity transfer. However, whether the parties' agreement on equity transfer and guarantee can counteract other shareholders, companies, creditors, etc. still needs specific analysis of specific issues." Therefore, as a nominal shareholder, if other shareholders, companies and creditors are bona fide third parties, they do not have confrontational effect and may also bear corresponding responsibilities.
Therefore, it is recommended that investors can, in accordance with Articles 24 and 26 of the "Judicial Interpretation of the Company Law (III)" [17], clarify in the relevant agreement that nominal shareholders have the right to claim compensation from the actual investor after they assume the relevant compensation liability, and agree on the specific method, amount, breach of contract liability, etc. of the recovery, thereby reducing the investment risk as nominal shareholders.
(IV) Publicity standards for equity transfer and guarantee and the ranking of re-pled rights
In practice, there are situations where the investor and the investee sign an equity transfer guarantee agreement but fail to handle the equity transfer in a timely manner, resulting in the failure to establish the guarantee rights.
The criterion for judging the effect of the equity transfer security to publicize the property rights, the Supreme People's Court made a clear statement in the 1st issue of 2020 (2019 Supreme People's Court Civil Final No. 133) [18]: "For whether the equity transfer security has the property rights, should be based on whether it has been publicized in accordance with the principle of publicizing the property rights as the core judgment . In equity pledge, the pledgee may be given priority for the equity that has been registered with the pledge. The equity that has been registered as the security owner's name has been registered with the equity owner's name. has registered the equity change as the guaranteed property to the equity under the name of the security owner. In the transfer guarantee, the security holder is already the holder of the equity of the guaranteed subject matter in form, and the priority right to be paid for the equity as a guarantee should be protected and in principle enjoys the property rights against third parties. "
In addition, regarding the right to re-pair the equity, the Supreme People's Court also clarified in the above-mentioned communiqué case that "after the equity is set to set a transfer guarantee and the change registration is handled, and the transfer security holder agrees to use the equity as a third party to pledge the debtor's debt and register the pledge, the third party should be better than the transfer security holder to receive compensation for the equity. "It can be seen that if the security holder of the equity transfer guarantee agrees to re-pair the equity, the right is inferior to the pledge of the third party.
Therefore, it is recommended that investors should promptly register the equity change in the transaction structure of equity transfer and guarantee, or agree that the main contract will be terminated. If the investor is unable to handle the equity change within the agreed period, the investor has the right to terminate the main contract; and, investors should carefully decide on the re-polization of the target equity to avoid the loss of their own rights and interests.
(V) Distinguish between the main contract and the slave contract and the debtor's recognition
Although the fixed income limited partnership transaction structure can be recognized as having a "borrowing relationship + equity transfer guarantee", because it is a contract in form, there are two disadvantages: First, compared with the transaction structure clearly distinguished by the main contract, investors need to prove two layers of legal relationship at the same time. Therefore, the integration of the two may increase the burden of proof of the investor; second, the integration of the two may also increase the difficulty of the debtor's recognition.
Due to the fixed income limited partnership transaction structure, the problem of "who has a real debt relationship with". One is the real debt relationship between the investor and the target company, and the other is the real debt relationship between the investor and the target company's shareholders; correspondingly, there are generally two sources of equity. The former is usually the company that increases capital and expands shares (i.e., issues new shares), absorbs investors' funds for financing, while the equity for capital increase and expands shares is granted to investors. After a certain period of time, the company or the company's shareholders and actual controllers acquire (i.e., repurchase) the investor's equity at a fixed price (financing cost). The latter is that the shareholder or the actual controller of the company raises funds, and adopts the method of transferring the equity of the target company and repurchasing it at a fixed price after a certain period of time. However, the above standards are not necessarily absolute. For example, in the "Yusen Real Estate Company Case", investors increase capital against the target company, but the debtor is the shareholder of the target company. In particular, in the case mentioned in the beginning, the investor and the investee form a limited partnership. If the debtor is recognized as a partnership, it will undoubtedly be very unfavorable to the investor's rights protection.
In view of the fixed income limited partnership transaction structure, investors and investors will usually sign a conditionally effective repurchase agreement in advance, and the investor (or its designated entity) will fulfill the repurchase obligations under specific circumstances. In practice, repurchase entity is usually recognized as the debtor (or co-debtor) under such transaction structure. For example, in the "Trust Company Case" and the "Wugang Trust Case", the Supreme Court recognized the equity repurchase entity as the debtor (the latter was identified as a joint debtor). Therefore, it is recommended that investors clarify the debtor and guarantor in the relevant agreements as much as possible to avoid difficulties in identifying legal relationships and objects when disputes arise; or to use strong and high reputation as the repurchase obligation party as possible, thereby increasing the protection of investors' rights and interests.
5. Conclusion
To sum up, in equity investment relations/partnership relations, in addition to enjoying the operating income of the enterprise, investors should usually bear the operating losses of the enterprise with other shareholders/partners. In the legal relationship of "famous stocks and real debts" or "namely partnerships and real loans", investors obtain fixed income by providing financing to the target company, and only nominally holds the equity or partnership share of the target company, and do not participate in the actual operation of the company and bear the losses of the company's operations. In the equity transfer and guarantee relationship, it is necessary to have the master-slave contract, as well as the two basic elements of "assignment" and "guarantee".
, and the fixed income limited partnership transaction structure, as long as the specific conditions are met, it can be recognized as a special type of "borrowing relationship + equity transfer guarantee" in (broad) real bonds. Under these transaction structures, although there is only one contract in form, it actually contains two contracts from the master and slaves. Even if the investor has the right to appoint personnel to participate in major decisions and dispose of equity, it is likely not to affect the determination of its legal relationship.
In addition, this article analyzes the common risks of fixed income limited partnership transaction structure, First, in terms of capital recovery methods, if the risk cannot be completely avoided, it may be considered as equity investment, especially the terms of "fixed income + excess income" or "priority repayment"; second, in terms of corporate governance, investors can participate in major decisions of the company, but they should avoid excessive participation in the company's daily operations to avoid being recognized as equity investment by the investor when he claims that the investor exercises the shareholder's rights when he is litigated; third, regarding the nominal shareholders' responsibility to the outside world The risk of the risk, whether it is a real debt or a equity transfer guarantee, may exist, and investors may reduce such risks through the recovery method agreed with the actual shareholder; Fourth, regarding equity transfer guarantee, the corresponding public notice standards must be met before the effective establishment of the security right can be ensured. In the ranking of the security right, it should be noted that re-pled is better than the investor's security right, and prudent decisions are required; finally, regarding the recognition of the main and slave contracts between the main and slave contracts and the debtor, in the fixed income limited partnership transaction structure, the unity of the main and slave contracts may increase the burden of proof by the investor, and may also increase the difficulty of the debtor's identification. Since the repurchase entity is often recognized as the debtor in practice, it is recommended to choose the repurchase entity carefully.
Note:
[1] According to the "Monthly Statistical Table of Financial Management Business" (G60) updated by the China Banking Regulatory Commission in 2017, "Before investing funds investing funds in the form of equity investment, the investor signs an equity repurchase agreement with the fund demander. The two parties agree that within the specified time, the user of the fund promises to fully repurchase all the equity held by the equity investors at a certain premium ratio."
[2] According to the "Regulations on the Registration Management of Private Asset Management Plan for Securities and Futures Business Institutions, No. 4 - Private Asset Management Plan Investment in Real Estate Development Enterprises and Projects" (hereinafter referred to as "Document No. 4") issued by the China Securities Association in February 2017, "famous stocks and real debts refer to the return on investment is not linked to the operating performance of the invested enterprise, and is not distributed based on the investment income or losses of the enterprise, but provides investors with a guaranteed principal and guaranteed income commitment, and regularly pays fixed income to investors according to the agreement, and after meeting specific conditions, the Investment methods for invested enterprises to redeem equity or repay principal and interest, common forms include repurchase, third-party acquisition, betting, regular dividends, etc. "
[3] According to the Ministry of Finance's "Notice on Further Standardizing the Break-Banking and Financing Behavior of Local Governments" (Document No. 50), "Local governments shall not establish various investment funds by borrowing funds, and local governments shall strictly prohibit illegally and in disguise borrowing in disguise using PPP, various investment funds invested by governments, etc. Unless otherwise stipulated by the State Council, local governments and their affiliated departments shall When participating in PPP projects and establishing various investment funds funded by the government, it shall not promise to repurchase the investment principal of the social capital party in any way, shall not bear the investment principal loss of the social capital party in any way, shall not promise the social capital party in any way, shall not promise the minimum return to the social capital party in any way, shall not borrow additional clauses for any equity investment methods such as limited partnership funds. "
[4] Editor-in-chief He Xiaorong, "Minutes of the Judges Meeting of the Second Civil Trial Division of the Supreme People's Court", People's Court Press, December 2018 Edition 1, pages 68-69.
[5] "Civil Judgment of Second Instance for Private Loan Disputes between Zhang Wenbin and Wang Wei and Wang Weibo" [(2016) Supreme Court Civil Final No. 325]
[6] "Civil Judgment of Retrial of Project Transfer Contract Disputes in Hunan Jintiandi Real Estate Development Co., Ltd." [(2018) Supreme Court Civil Resign No. 154]
[7] "Civil Judgment of Second Instance for Loan Contract Disputes in Wuhan Bingoucheng Real Estate Co., Ltd. and Guotong Trust Co., Ltd." [(2019) Supreme Court Civil Final No. 1532]
[8] "Zhao Yusheng , Civil Ruling on Retrial Review and Trial Supervision of Private Lending Disputes in Yi Yaqing" [(2018) Supreme Court Civil Opinion No. 2450]
[9] "Civil Ruling on Retrial Review and Trial Supervision of Financial Loan Contract Disputes in Shanghai Rongteng Real Estate Co., Ltd. and Ma Jianjun" [(2018) Supreme Court Civil Opinion No. 4165] html l5
[10] "Nine Civil Minutes" 44. [Agreement of Debt with Property reached after the expiration of the performance period] If the parties reach a debt repayment agreement with property after the expiration of the debt performance period, and the debt repayment property has not been delivered to the creditor and the creditor requests the debtor to deliver it, the people's court shall focus on reviewing whether the property repayment agreement maliciously damages the legitimate rights and interests of a third party, etc., to avoid the occurrence of false litigation. After review, if there is no such situation and there is no other reason for invalidity, the people's court will support it in accordance with the law.
[11] "Civil Judgment for Second Instance Contract Disputes in Xiushui County Jutong Investment Holding Co., Ltd. and Fujian Rare Rare Earths (Group) Co., Ltd." [(2018) Supreme Court Civil Final No. 119]
[12] "Second Instance Civil Loan Disputes in Yusen Real Estate Group Co., Ltd. and Chen Shiming Civil Loan Disputes in Second Instance Civil Loan Disputes in Yusen Real Estate Group Co., Ltd. and Chen Shiming Judgment of the matter [(2018) Supreme Court Civil Final No. 856]
[13] "Civil Judgment of Joint Venture and Cooperative Development Real Estate Contract Dispute Retrial of Tianjin Zhixin Investment Development Co., Ltd., Xinjiang Poly Natural Investment Co., Ltd." [(2018) Supreme Court Civil Resign No. 161]
[ 14] "Civil Judgment on Second Instance of Equity Transfer Disputes between Tonglian Capital Management Co., Ltd. and China Agricultural Development Key Construction Fund Co., Ltd." [(2019) Supreme Court Civil Final No. 355]
[15] "Civil Ruling on Retrial Review and Trial Supervision of Private Lending Disputes between Liu Wensheng and Shenzhen Jian'an (Group) Co., Ltd." [(2018) Supreme Court Civil Expo No. 5639 ]
[16] "Civil Ruling on Application for Retrial of the Qualification Confirmation Dispute between Wang Shaowei, Zhao Bingheng, Zheng Wenchao and other shareholders" [(2015) Minshen No. 3620]
[17] "Provisions on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III)" Article 24 If the actual investor of a limited liability company enters into a contract with the nominal investor, which stipulates that the actual investor will contribute and enjoy investment rights and interests, and the nominal investor will be the shareholder in the name of the nominal investor. If the actual investor and the nominal shareholder have disputes over the validity of the contract, if there is no circumstances stipulated in Article 52 of the Contract Law, the people's court shall determine the contract to be valid.
Article 26 If a company creditor requests the shareholder registered in the company registration authority to bear supplementary compensation liability for the unpaid capital interest on the grounds that the shareholders registered in the company registration authority fail to fulfill their capital contribution obligations, and the people's court will not support it. If the nominal shareholders bear the liability for compensation in accordance with the provisions of the preceding paragraph and claim compensation from the actual investor, the people's court shall support it.
[18] "Private loan dispute case between Heilongjiang Mincheng Investment Group Co., Ltd. and Xilin Iron and Steel Group Co., Ltd. and third party Liu Zhiping" [(2019) Supreme Court Civil Final No. 133], published in the "Gazette of the Supreme People's Court" No. 1, 2020.
