Subject: the dispute of capital contributions between investors in Joint Venture existed in the entire operating period of such joint venture company for 15 years, and ultimately resulted in the litigation filed by Taiwan businessman against the joint venture company to People’s Court and the application for arbitration to foreign-related arbitration institution by Chinese side, which placed such joint venture company into the severe risk of liquidation. Through the conciliation of Mediation Center, both sides in such joint venture company reached an reconciliation agreement, and solved such dispute with happy endings on both sides.

Cause of action: dispute of capital contribution
Applicant: Certain Printing Equipment Trade Company in Taiwan (hereinafter referred to as “Taiwan Party”)
Respondent: Certain Printing Company in Beijing (hereinafter referred to as “Chinese Party”)

Case Brief

Taiwan Party and Chinese Party are trade partners for many years. Upon the approval of in 1995, both Parties invested in and established a joint venture company, and it is stipulated in the joint venture agreement that Chinese Party invested in facilities and factories valuing 6,000,000 Yuan, which amounts to 60% of the capital amount of such joint venture company; Taiwan Party invested in printing equipment valuing 4,000,000 Yuan, which amounts to 40% of the capital amount of such joint venture company; the duration of such joint venture is 15 Years. Examination and Verification Authority of Foreign Investment approved the equipment list of 5 sets of printing equipments imported by Taiwan Party (specifying the value of each equipment).

Chinese Party fulfilled its obligations of capital contribution on due term. And after the first batch of equipments (3 sets of equipments, valuing 2,450,000 Yuan according to the Equipment List) invested by Taiwan Party were transferred to the Company, the statutory evaluation agency examined and estimated that the value of such equipments reached 4,050,000 Yuan. Because the joint venture company was eager to start operation and borrowed a loan from the bank, the capital of such company was verified on basis of that. It is indicated in Capital Verification that: the capital contributions of both Parties had reached their respective contribution amount.

Henceforth, Chinese Party urged Taiwan Party to perform its remaining contribution obligations of investment in two sets of equipments valuing 1,500,000 Yuan, Taiwan Party replied that: the 3 sets of equipments already invested in such joint venture company are upgraded products of 3 sets of equipments specifying in the equipment lists, and its value had exceeded the contribution amount agreed. Thus, the Taiwan Party’s contribution obligation shall be deemed as fully fulfilled. If such joint venture company needs the remaining two sets of equipments, it shall purchase by itself. Chinese Party believed that although the three sets of equipments invested by Taiwan Party are upgraded equipments, such equipments do not constitute complete sets of equipments, therefore, such upgraded equipments are meaningless. Taiwan Party shall perform its contribution obligations of the remaining two sets of equipments according to the Equipments Lists, otherwise, Taiwan Party shall be deemed as violating its contribution obligations. After that, Taiwan Party failed to transfer the remaining two sets of equipments and did not participate in the board of directors for many years.

Under the circumstances of incomplete equipments and lack of capital in such joint venture company, Chinese Party reached an Equity Transfer Agreement with third party, which stipulated the transfer of 20% of such joint venture company’s equity held by Chinese Party. After that, Chinese Party raised a proposal to the board meeting that: with the purpose of purchasing corollary equipments and conducting technical transformation to the original equipments, the registered capital of such joint venture company shall be increased to 15,000,000 Yuan according to the ratio of investments of each shareholder. Taiwan Party had been required to attend the board meeting, approve the resolutions of equity transfer and increase of registered capital, and failed to reply, therefore, Chinese Party forged the signature of Taiwan Party and filed an application to the Examination and Verification Authority of Foreign Investment for approval of such equity transfer and capital increase. After that, such joint venture company experienced a sound state of performance.

In 2010, the operating period of joint venture will soon expire, therefore, Chinese Party and Taiwan Party entered into negotiation on the extension of operating period or transfer of shares held by foreign investors. Taiwan Party found that Chinese Party illegally adopted resolutions regarding to equity transfer, capital increase, issuance of dividends to Chinese Party and third Party through illegally using Taiwan Party’s name and forging Taiwan Party’s Signature. Then, it requested to check the financial books and audit reports of such joint venture company in recent ten years and claimed dividends in the proportion of equities held by Taiwan Party (40%), while, Chinese Party claimed that only after Taiwan Party fulfills its contribution obligations by transferring the remaining equipments pays up the corresponding default fines and increased capitals, then, it can check the financial book and claim the dividends. Therefore, disputes occurred between Chinese Party and Taiwan Party, and Chinese Party firstly borrowed money from such joint venture company on ground of early audit, so that, Taiwan Party cannot check the financial book of such joint venture company. After repeatedly negotiations, Taiwan Party filed a lawsuit against such Joint Venture Company and Chinese Party on the ground of “infringement upon shareholders’ right to be informed”. Chinese Party not only raised an objection on the jurisdiction of the Court, but also initiated arbitration in CIETAC and required Taiwan Party to fulfill its contribution obligation, pay up its default fine and asked the arbitral tribunal to liquidate such joint venture company.

At this moment, Taiwan Party cannot realize its aims in short time, and has to engage a lawyer to attend such arbitration in Beijing, besides that, it is possible that Taiwan Party may not recover any money after the liquidation of such joint venture company. Upon the introduction of local Taiwanese Affairs Office and under the premise that Chinese Party consented to such mediation, Taiwan Party filed an application to Mediation Center.


Process of Mediation

Requests of Taiwan Party:

1. Transfer of equity and capital increase conducted by Chinese Party shall be deemed to be invalid;

2. Such joint venture company shall pay dividends to Taiwan Party according to the ratio of investment of Taiwan Party.

Mediation requests of Chinese Party:

1. Taiwan Party shall fulfill its contribution obligation in due toward such joint venture company, which amount to 1,500,000 Yuan and pay default fine to Chinese Party.

2. Liquidation of such Joint venture, shareholders shall undertake responsibilities in proportion to their respective capital contribution.

Mediator considered that: with the purposes of seeking common points while reserving difference and avoiding the enlargement of losses for Taiwan Party and Chinese Party, the fundamental problem of distinguishing the responsibilities of Taiwan Party and Chinese Party shall be solved first. Therefore, on the basis of fully comprehension of Taiwan Party’s and Chinese Party’s opinions, obtaining information from Examination and Verification Authority of Foreign Investment, Value Appraisal Authority and Capital Verification Department and understanding the financial status of such joint venture company, mediator gave the following suggestions:

1. Although the amount of capital contribution complies with Joint Venture Contract, the number of equipments specified in the List of Imported Equipments, which shall be the responsibility of Taiwan Party.

2. Although transfer of equity and capital increase are conducted by Chinese Party for the purpose of avoiding the loss of joint venture company, illegally using the Taiwan Party’s name and forging its signature were improper.

3. The operating period of Joint Venture Company is expiring, if both parties cannot reach a consensus, the liquidation of such company will be inevitable. is this what both Parties want?

4. After both Parties obtained objective knowledge on the question mentioned above, mediator prepared a clear timelines for both Parties.:

1. The expiration date of the operation of such joint venture company is less than 60 days from now on. Although Taiwan Party filed an application to People’s court for checking the financial book, Chinese Party has already raised a jurisdiction objection and appealed to the Supreme Peoples’ Court. Even if the court concluded that it has the jurisdiction on such case, it is doubt that whether Taiwan Party can successfully win such case and finish the auditing works of such joint venture and carrying out the auditing works within 60 days.

2. Although Chinese Party had applied for arbitration, is it possible for Chinese Party to win such arbitration within 60 days

Both Parties pointed out that they cannot solve such dispute within 60 days.
Mediator suggested that both Parties shall consider extending the operation period before the expiration of such joint venture; if they have no confidence to the future cooperation of such joint venture, one party may withdrawal its capital contribution through transfer of equity. Both Parties agreed upon the mediator’s objective, fair and reasonable analysis, eliminating the unrealistic desired values previously claimed and jointly inviting mediator to participate in commercial negotiations between Parties involved.


Results of Mediation

After negotiations, Taiwan Party and Chinese Party reached the following Reconciliation Agreement:

1. Taiwan Party shall acknowledge the current equity structure and state of operation of such joint venture company;

2. Taiwan Party shall transfer the shares of joint venture company held by itself to Chinese Party in the price of 5,000,000 Yuan or equivalent foreign currency; thereinto, 3,000,000 Yuan shall be paid within 2 working days after the withdrawal of lawsuit by Taiwan Party and the receipt of withdrawal notice by Chinese Party; the remaining 2,000,000 Yuan shall be paid within 5 working days after the transfer of equities and the completion of alteration registration in industrial and commercial authority, money mentioned above shall be paid to the bank account designated by Taiwan Party, and any taxes or expenses involved shall be assumed by Taiwan Party.

3. Taiwan Party shall actively coordinate with Chinese Party to provide and sign relevant files in conducting the procedures of transfer of equity and changing from foreign capitals to domestic capitals;

4. Chinese Party shall withdraw the application for arbitration to CIETAC within 5 working days after the conclusion of such Reconciliation Agreement;

5. Both parties shall be excused from all obligations and responsibilities involved in the joint venture affairs after the performance of obligations specified in such Reconciliation Agreement.

Both Parties have executed such Reconciliation Agreement.

Comments

The reasons why such complicated disputes involving capital contribution, transfer of equity and management power of company, which lasted over ten years, are settled appropriately, are because that mediator was not eager to promote the reconciliation between Parties involved on the basis of the focuses of such case, but distinguished the main responsibilities of both parties, and then instructed both parties to jointly analyze the results of the continuance of such dispute, proposed solutions from the objective perspective. So that, Parties involved in such dispute avoided “loss at both sides”, and such disputes are solved successfully.

He Guicai, Partner of Beijing Jingze Law Firm. Mediator of CCOIC Mediation Center

Arbitrator of CIETAC, SIAC, KLRCA, Tianjin Arbitration Committee, Shijiazhuang Arbitration Committee.