(By Bai Lituan)Securities repurchase is a financial activity of raising funds by selling securities and meanwhile signing an agreement with the buyer to repurchase the same securities at the agreed price and time. There are not many securities repurchase cases because it is not long ago that people in our country began to raise funds in this way. The first case decided by the Shanghai Finance Court is Oriental Securities v Honggao Zhongtai Securities Repurchase case.
Securities repurchase contract related laws mainly include the Securities Law, the Company Law, the minutes of meetings of the Supreme People’s Court on securities repurchase cases and the Notice on Restating Several Issues Connected with Further Standardizing Securities Repurchase Activities published by the Central Bank, the Ministry of Finance and the China Securities Regulatory Commission. All securities repurchase cases courts are dealing with come from the main, small and medium sized business and startup boards. My search result shows no securities repurchase cases relating to the new OTC board (the national share transfer system for small and medium sized businesses).
I handled the Ma v Yang Anhui JSJ securities repurchase case in March this year. As JSJ is a public company listed on the new OTC board, a stock market with special qualities, a dispute arose from choice of law.
Brief description of the case
The plaintiff Ma purchased upon request of the defendant Ma 2,050,000 shares held by JSJ Shanghai in JSJ Anhui at the price of RMB 8 per share on 13 February 2017. The defendant promised to repurchase the 2,050,000 shares held by the plaintiff in JSJ Anhui at the price of RMB 10 per share on 12 June 2017 and pay compensation for delay of the repurchase at 0.5‰ per day.
The defendant failed to repurchase the shares due to financial problems when the repurchase period lapsed. After being pushed by the plaintiff, the defendant paid the plaintiff the repurchase price by nineteen installments, totaling RMB 11,510,000 from 18 September 2017 to 3 August 2018, with the balance of RMB 11,792,130 for the repurchase and compensation for delay of the repurchase owed by the defendant to the plaintiff as of the date when the action was brought. Then the plaintiff sued to the People’s Court of Minhang District, Shanghai.
In the case the plaintiff Ma bought shares in JSJ at the price of RMB 8 per share on 13 February 2017 and the defendant promised to repurchase the shares at the price of RMB 10 per share before 12 June 2017 with annualized returns at 75%. Is the agreed rate of interests too high? Should it be changed to 24%?
In our opinion, the share repurchase transaction between the two parties was not only intended to raise funds. At that time, the plaintiff expected JSJ shares to depreciate and the defendant expected them to appreciate. As the new OTC board was not a completely available capital market, through the transaction, the plaintiff could avoid risks and the defendant could obtain profits. In this case JSJ shares were not a mortgage on a loan but were a tool for the two parties to avoid risks. This could not happen in the main board market where stocks are traded freely. The case is special because the stocks in the transaction were on the new OTC board, not the main board. Therefore, the agreed estimated interest rate for the repurchase transaction which was due four months later appeared to be 25% but the plaintiff would suffer a loss if JSJ shares appreciated. Afterwards the JSJ stocks did not actually appreciate and the defendant refused to repurchase the shares on the account of more than 24% annual interests by violating the good-faith principle.
It was reasonably agreed that the defendant should pay compensation for delayed repurchase at 0.5‰ per day equal to the annual interest rate of 18% if the defendant failed to repurchase the shares on time.
The case ended in settlement after two hearings. To make a compromise the defendant paid RMB 11,000,000 to repurchase the rest shares held by the plaintiff. Therefore, the court did not make an effective decision on the disputed matters.
In the Oriental Securities Company Limited by Shares v Jia Yuemin securities repurchase contract case ( H.02 M.C.No.505), the court found that the stock pledged repurchase was essentially stock pledged borrowings so that as the borrower failed to fulfill its prior repurchase or repayment obligation the fund provider’s claim for damages mainly including interest in excess of 24% annual interest rate accrued during the period of use of the raised funds should be supported.
The first case described in this article is basically different from other cases. First, the first case is not a share pledged repurchase case. Second, the repurchased shares were restricted shares on the new OTC board, not freely traded shares on the main, startup and small and medium sized business boards. Despite current increase in the number of repurchase cases, laws and rules governing this type of deals are not as many and rank low in the legal system. Available cases decided do not cover legal issues connected with this type of deals. Share repurchases on the new OTC board and other regional share transaction markets are still to be clarified by legal authorities.