A Share Purchase Agreement, also known technically as a Share Purchase Contract or Equity Purchase Agreement in Chinese corporate law, is a contract between an assignor and assignee of shares to a company that defines the rights and obligations of each party.

Purchasing corporate shares is a complex practice involving numerous legal factors. Therefore, a contract between the assignor and assignee is necessary to ensure that the rights of the parties are well established. Market regulators in some jurisdictions may even require a notarized contract before processing the recordation of the assignment.

Risks

The Chinese Companies Act mandates numerous formalities to recognize the assignment of equity to another person. In a Chinese limited liability company, unanimous shareholder consent is required where a shareholder who made a capital contribution wishes to assign their equity to someone else. A shareholder’s dissent in such a case entitles them to a right of first refusal to purchase the shares in question. Shareholders who decide not to purchase the transferred capital contribution are deemed to have consented to the transfer of the capital contribution, provided all other shareholders have consented.Failure to exercise this right of first also refusal constitutes consent to the equity assignment for the underlying capital contribution. Therefore, the shareholders also retain first refusal rights to those shares, and any share purchase contract executed without following these procedures will be void.

Another major risk is the principle that the execution of a share purchase agreement establishes future obligations and rights between the assignor and assignee. The effectiveness of the assignment is therefore determined by the performance of the contract. Ideally, the parties would perform the contract at closing, wherein the assignee pays the purchase price and the assignor delivers the shares.

A common issue arises when the contract takes effect but is not fulfilled due to a breach by one of the parties. The assignee has the right to claim delivery of the equity and liquidated damages, while the assignor has the right to claim collection of the purchase price and liquidated damages. In such cases, the remedy available to the assignee is to sue for specific performance for delivery of the shares and consequential damages, whereas the assignor can sue for breach of contract damages to cover its expectation losses.

Translation Guide

See: 人民法院