一、Legal risk case
1. Brief Introduction of the Case
In April, 2010, investment company A in Beijing (hereafter “A”) entered into a equity transfer agreement with real estate company B in Shanghai (hereafter “B”). Under this equity transfer agreement, A would acquire B’s 100% equity in a real estate project company C in Weihai, Shandong Province (hereafter “C”) with RMB 1,570,000,000. It was also stated in the equity transfer agreement that C owned one five-star hotel, two 5A-class office blocks, and 11 residential buildings with a totoal construction area of 220,000 square meters.
On 10th July, 2010, A and B completed the 100% equity transfer procedures and A paid all the equity acquisition funds by three times(The last 20% of the funds was paid within 7 days after the completion of equity transfer). The five-star hotel, the two 5A-class office blocks as well as 11 residential buildings all successfully obtained the pre-sale permits in October, 2010 and part of the residential buildings were sold to the customers. In April, 2011, the two 5A-class office blocks were completed and passed examination.
On 9th May, 2011, C received a demand letter from a coal company D in Shanxi Province (hereafter “D”), requesting C to sign pre-sale real estate agreements with D regarding the five-star hotel and part of the residential buildings in accordance with the cooperative agreement which was attached in the demand letter and was entered into by C and D in 2009. It was also requested that the funds (RMB 310,000,000) D paid to C in August, 2009 under the above mentioned cooperative agreement, should be deemed as the payment of the relevant real estates. As the equity change occurred on C, C delayed the response to D. Later, D brought its suit to the court, in the mean time, banks required C to pay back the loans in advance, the relevant real estates as mentioned above were seized and C’s bank accounts were frozen, and ther real estate buyers also brought their suits to the courts.
Consiqently, A sued against B on the court. The court made the judgement that B shoulde pay the compensation to A for the loss of 1.8 billion yuan. But B was unable to pay.
2. Case analysis
（1）Features of the case:
1）The amount of money involved is huge,which is 1.57 billion;
2）The case normally involves large number of subjects and has adverse social effect. As far as this case concerned, it involves several financial institutions and dozens of real estate purchaser;
3）The investor has limited understanding of the projects, fails to find out the specific debt conditions, and suffers serious losses.
（2）Two basic ways of investment in real estate projects:Equity acquisition of the real estate company (as in this case) and asset acquisition (including projects under construction).
1)资产收购 ------ 资信、诚信记录不良的客户
2)增资扩股、股权融资 ------ 投资总额小于25%（不含土地出让金）
3）全资收购 ------- 投资总额大于25%（不含土地出让金）
二、Recommendations on Risk Prevention
In order to pre-control the real estate project investment risk, after the discussion of Group Security and Legal Department, Group Planning and Operation Department,and external law firms (Beijing Professional Business Law Office and Zhonglun W&D Law Firm), the suggestion of pre-control risks is as followed:
1.Proper ways of real estate projects investment can be chosen based on the actual situations:
1)asset acquisition ---- Clients with poor credit record
2)Increase investment、Equity financing --- the total investment is lower than 25%( excluding the land remise fund)
3）Wholly acquired --- the total investment is higher than 25%( excluding the land remise fund)
2. In regard with equity acquisition of real estate company, it is advisable that:
（1）After the memorandum of cooperation or cooperation framework agreement has been signed, specialists such as lawyers, certified public accountants and certified public valuer need to be engaged to carry out legal and financial due dilligence, in order to disclose and discover the relevant risks relating to the real estate projects, before entering into the equity transfer agreement with the real estate company.
（2）With regard to the payment of the consideration of the equity, it is advisable to include an article in the equity transfer agreement, that a certain ratio of the consideration (normally 20% or above) will be paid only when no relevant disputes are arisen within a certain period of time (for instance 2 years) after the completion of the equity transfer process.
（3）The equity transfer agrement needs to include articles regarding the transferor’s commitments and waranties as well as liabilities generated from breaching any of his commitments or waranties as prescribed in the equity transfer agreement.
（4）If the transferor is found to have breached the agreement(s) during the process of acquisition, the payment of the consideration of the equity shall be suspended instantly. Additionally, the transferor shall be requested to make corrections within a certain time limit and presertative meansures for property needs to be taken when necessary;
（5）If disputes related to equity transfer arises, the following steps can be taken:
①Notifying your legal department and consulting with your outside counsel timely and asking the transferor to provide guarantees to safeguarde the fullfilment of the relevant agreement(s);
②In the circumstance that no agreement can be reached with the transferor, legal measures such as property preservation before litigation can be taken by seizing or frozing the transferor’s property or bank accounts;
③Launch a lawsuit to the people’s court or an arbitration to the arbitration institutions as prescribed in the agreement(s).