Frequency of M&A disputes
Although there are no empirical studies or surveys as to the frequency of M&A disputes in mainland China, it is generally believed that at least 50 per cent of M&A transactions will have disputes of some form or other.
Form of dispute resolution
Based on a survey we conducted, among the 73 post-closing M&A disputes that we randomly pulled from our firm’s 2016–2017 dispute resolution database, 22 of them (30 per cent) included arbitration agreements.
It is, however, rather uncommon to see parties choose expert determination or other forms of ADR processes to settle M&A disputes in China.
Grounds for M&A arbitrations
Among the 73 post-closing M&A disputes that we looked at for this survey, 17 concerned the price of the transaction; 14 related to earn-out; 4 were re-purchase without earn-out disputes; 2 concerned breaches of misrepresentation and warranties; and 2 concerned failure to complete the transactions.
Generally speaking, we believe the relative frequency of grounds for M&A arbitrations in China is as follows:
|Failure to complete the transaction||Frequent|
|Price adjustment||Very frequent|
|Pre-contractual failure to disclose or fraud||Frequent|
|Misrepresentations and breaches of warranties||Frequent|
There is no special statutory regime that deals with M&A contracts in the People’s Republic of China. The Contract Law applies to contracts generally. Under the Contract Law, a contract shall be null and void if it is concluded through fraud or coercion, according to Article 52. When a contract is concluded by fraud, under Article 54, the injured party may request the people’s court or an arbitration institution to modify or cancel the contract. If the injured party requests modification, the people’s court or the arbitration institution may not cancel the contract.
According to Article 55 of the Contract Law, the right to cancel a contract shall be lost if:
- a party having the right to cancel the contract fails to exercise the right within one year from the day that it knows or ought to know the ground for cancellation; or
- a party either expressly or by conduct waives any right to cancel the contract after it knows the ground for cancellation.
Article 58 of the Contract Law provides that after a contract is found null and void or cancelled, the property acquired as a result of the contract shall be returned; where the property cannot be returned or restitution is unnecessary, compensation is due at its estimated price. The party at fault shall compensate the other party for resulting losses. If both parties are at fault, liability shall be apportioned.
In addition to the relevant provisions under the Contract Law, as outlined above, the General Provisions of the Civil Law also address fraud issues. In particular, Article 148 provides that where a civil act is performed by a party against his or her true intention as a result of fraud by the other party, the defrauded party may request a people’s court or an arbitral institution to cancel the civil act. Furthermore, Article 149 provides that where a civil act is performed by a party against his or her true intention as a result of fraud by a third party, the defrauded party may request a people’s court or an arbitral institution to cancel the act if the other party knows or should have known of the fraud.
Failure to disclose
It is arguable that parties are under a duty of good faith and fair dealing under the Contract Law to fulfil certain pre-contractual disclosure obligations in M&A transactions. It is, however, advisable that parties provide for such obligations explicitly in their contract to enhance certainty and predictability.
The principles of good faith and fair dealing are enshrined in the Contract Law. Article 5 provides that the parties shall adhere to the principle of fairness in exercising their rights and performing their obligations. Article 6 stipulates that the parties shall observe the principle of honesty and good faith in exercising their rights and performing their obligations.
Burden of proof
Civil Procedure Law (2017 Amendments)
Article 64 of the amended Civil Procedure Law provides that a party bears the burden to provide evidence for its claims. Therefore, the party alleging fraud must prove it.
Article 64 further provides that a people’s court must investigate and collect evidence that a party and its litigation representative are unable to collect for objective reasons, for example in the case of fraud, that the people’s court deems necessary for deciding the case. Article 64 also provides that a people’s court shall, under statutory procedures, verify evidence comprehensively and objectively.
Article 65 further provides that a party shall produce evidence for its claims in a timely manner; and that a people’s court shall, according to the claims of a party and the circumstances of the trial, determine the evidence to be provided by a party and the time limit for provision of evidence. According to Article 65, where it is difficult for a party to produce evidence within the time limit, the party may apply to the people’s court for an extension. Where a party provides any evidence beyond the time limit, the people’s court shall order the party to provide an explanation; and if the party refuses to explain or the party’s explanation is not acceptable, the people’s court may, according to the circumstances, deem the evidence inadmissible or adopt the evidence but reprimand or fine that party.
Standard of proof – Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law
Article 109 of this Interpretation provides that for proof of facts concerning fraud, where a people’s court is convinced that the possibility for the existence of fraud to be investigated is beyond reasonable doubt, it shall be deemed that fraud has been established.
We have found no statutory rules on pooling of knowledge of sellers with management or other representatives of the target.
All the remedies available under the Contract Law are available to a successful claimant in an M&A arbitration in China.
Article 107 of the Contract Law stipulates that if a party fails to perform its obligations under a contract, or its performance fails to satisfy the terms of the contract, it shall bear the liabilities for breach, including liability to specifically perform its obligations, to take remedial measures, and to compensate for loss.
Article 111 stipulates that where the quality of the performance is unsatisfactory, the parties shall be liable in accordance with the agreement. Where there is no clear agreement in the contract on the remedies available, and it cannot be determined in accordance with the provisions of Article 61 (which covers supplementary agreements for indeterminate terms), the aggrieved party may, in light of the nature of the subject matter and the degree of loss, reasonably choose to request the other party to repair, substitute, or re-do the work, return the goods, or reduce the price or remuneration.
Measure of damages
Under the Contract Law, damages are awarded mainly on a compensatory basis.
Article 113 provides that where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and this causes loss to the other party, the amount of compensation shall be equal to that caused by the breach of contract, including the profits receivable upon satisfactory performance of the contract, provided it does not exceed the amount that was foreseen or ought to have been foreseen at the time of conclusion of the contract.
Article 114 provides that the parties may agree that if one party breaches the contract, it shall pay liquidated damages to the other party in light of the circumstances of the breach, and the parties may also agree on a calculation method for the amount. Where the liquidated damages are lower than the damage actually incurred, a party may apply to the People’s Court or an arbitration institution to make an increase adjustment; where the liquidated damages are significantly higher than the damage actually incurred, a party may apply to the People’s Court or an arbitration institution to make an appropriate reduction. Where the parties agree on liquidated damages for delay in performance, the party in breach shall still perform the obligations after paying the liquidated damages.
Article 115 stipulates that the parties may agree that a party pay a deposit to the other as a guaranty for its performance in accordance with the Guaranty Law. Upon the performance of the obligor’s duties, the deposit shall be offset against the price or refunded to the obligor. If the party paying the deposit fails to perform its obligations under the contract, that party has no right to demand the return of the deposit; where the party accepting the deposit fails to perform its obligations under the contract, such party shall refund twice the value of the deposit.
Article 116 provides that if the parties agree on both liquidated damages and a deposit, and one party is in breach, the other party may choose to apply the provisions either for liquidated damages or for the deposit.
Article 119 stipulates that where a party breached the contract, the other party shall take the appropriate measures to mitigate its losses; where the other party’s failure to take appropriate measures results in additional losses, these cannot be recovered. Any reasonable expense incurred by the mitigating party shall be borne by the breaching party.
Article 120 provides that if both parties breach the contract, each party shall bear its own respective liabilities under the contract.
Special substantive issues
There are many special substantive issues concerning employees, transfer of liabilities, and transfer of land, competition law issues, as well as relevant issues under the Company Law.
According to Article 173 of the Company Law, when companies merge, the parties shall enter into a merger agreement and prepare balance sheets and schedules of assets. From the date on which the merger resolution is passed, the companies shall notify their creditors within 10 days and make newspaper announcements of the merger within 30 days. Creditors may, within 30 days from the date of receipt of the written notification, or within 45 days from the date of the announcement if they have not received the written notification, claim full repayment or require the provision of a corresponding guarantee from the company concerned.
Article 174 provides that when companies merge, the surviving company or the newly established company shall succeed to the claims and debts of each party to the merger.
In addition to the Company Law, for transactions involving a listed company in the PRC, major rules include:
- Measures for the Administration of Takeovers of Listed Companies;
- Administrative Measures for Significant Asset Restructuring of Listed Companies;
- Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors;
- Listed Companies Corporate Governance Code;
- Guidelines of the Shenzhen Stock Exchange for the Standard Operation of Listed Companies on the Main Board (2015 Revision);
- Guidelines of the Shenzhen Stock Exchange for the Standard Operation of Listed Companies on the Small and Medium-sized Enterprise Board (2015 Revision);
- Guidelines of the Shenzhen Stock Exchange for the Standard Operation of Listed Companies on the ChiNext (2015 Revision);
- Rules Governing the Listing of Stocks on Shenzhen Stock Exchange (2014 Revision);
- Rules Governing the Listing of Stocks on the ChiNext of Shenzhen Stock Exchange (2014 Revision); and
- Rules Governing the Listing of Stocks on Shanghai Stock Exchange (2014 Revision).
Special procedural issues
Companies have a statutory obligation to give notice to creditors about their M&A transactions under the Company Law.
Article 204 provides that where any company fails to notify its creditors by notice or by public announcement in the process of merger, split, reducing its registered capital or liquidation, the company shall be ordered by the company registration authority to make a rectification, and may be fined not less than 10, 000 yuan but not more than 100, 000 yuan.
Although the Arbitration Law does not provide any specific power of arbitral institutions or tribunals for joinder or consolidation, some arbitration commissions’ rules may allow such procedures.
For example, Article 18 of the China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules (2015) deals with joinder and Article 19 deals with consolidation. Similarly, the Beijing Arbitration Commission’s Arbitration Rules (2008) deal with consolidation at Article 27.
There is evidence that the people’s courts tend to adopt a conservative approach to the extension of the arbitration clause to non-signatories.
 Ariel Ye and Huang Tao are partners, and Yang Fan is international dispute resolution manager, at King & Wood Mallesons. The co-authors would like to thank all of their KWM colleagues who have supported and contributed to the survey. Special thanks also go to KWM partners Wang Kaiding and Song Yanyan for their advice on relevant rules for listed companies.
 Issued on 23 October 2014 by Order No. 108 of the China Securities Regulatory Commission.
 Issued on 8 September 2016 by Order No. 127 of the China Securities Regulatory Commission.
 Issued on 31 December 2005 by Order No. 28  of the Ministry of Commerce, China Securities. Regulatory Commission, State Administration of Taxation, State Administration for Industry and Commerce, and State Administration of Foreign Exchange.
 Issued on 7 January 2002 by Zheng Jian Fa No. 1 .
 See e.g. Yang Fan, Foreign-related Arbitration in China: Commentary and Cases, Cambridge University Press, (2016), Section 3.8.