Research, recalibrate, repeat

Never has there been a one size fits all solution for resolving debt-related disputes, especially in China, as market shakeups bring increasingly complex issues. Sophie Cheng reports

In 2025, China saw the long-awaited revival of its capital markets, with the Shanghai Composite Index reaching a 10-year high. Alongside this surge came equity investment exits and related disputes.

Faced with the pressing needs for debt recovery, companies are weighing litigation, enforcement and bankruptcy liquidation with greater caution, exploring new strategies.

With the revised Company Law in force for more than a year, businesses are caught between old norms and new, realising an unprecedented demand for strategic agility. Meanwhile, technological innovation continues to introduce novel forms of challenges and solutions to disputes.

Move with the capital

Observing the strong capital market momentum, Deng Youping, a Beijing-based partner at Jingtian & Gongcheng, says opportunities are arising for investors to achieve their primary goal of exiting through listings. This is often done by extending the timetable for IPOs or performance-linked bet-on agreements – also known as valuation adjustment mechanism agreements – that tie investor returns to company performance targets.

Zhang Yiwen, a partner at Llinks Law Offices in Shanghai, also notes a growing trend among investors to back portfolio companies in seeking listing opportunities. This has made negotiations and settlements, both within and outside formal dispute resolution, more commonplace between investors and counterparties, subject to share repurchase obligations.

Such negotiations may themselves give rise to new disputes. Zhang says some investors, particularly those backed by state-owned assets, often use deferrals on repurchase obligations as leverage to seek compensation from companies and their controlling shareholders. These side arrangements are typically negotiated privately between individual investors and controllers, and are signed in so-called “drawer agreements”, meaning contracts kept off the official books.

Such “drawer agreements” pose challenges to regulatory order in primary and secondary markets, and often trigger disputes over enforceability. Zhang explains: “For investors in the primary market, when a company grants financial compensation to selective investors in exchange for deferring repurchase obligations, it clearly amounts to unequal treatment of other investors. As a result, investors today are increasingly cautious towards such practices in negotiations, with mutual suspicion steadily deepening.”

Zhang adds that these hidden agreements may violate regulatory requirements mandating disclosure and clearance of special arrangements between investors and controlling shareholders at the time of listing.

“At present, there is no clear and consistent judicial standard on whether drawer agreements that breach disclosure and cleanup rules should be deemed valid,” he says. “Consequently, many investors, when drafting compensation or make-up clauses with companies, repeatedly revise the wording and calculation methods in light of recent cases, attempting to reduce the risk of invalidity.”

With markets gaining strength, Yan Hao, a partner at Tian Yuan Law Firm in Beijing, advises that special attention should be paid to the validity of “bottom-line commitments” – agreements in which controlling shareholders personally guarantee returns for pre-IPO investors.

In June 2022, the Supreme People’s Court issued its Opinions on Providing Judicial Safeguards for the Deepening of the NEEQ Reform and the Establishment of the Beijing Stock Exchange, article 9 of which held that guarantee agreements signed between investors and controlling shareholders in the course of IPO financing or post-IPO private placements are invalid.

“Although this judicial interpretation was directed at companies listed on the NEEQ and the Beijing Stock Exchange, some court rulings in recent years have begun to extend its application to listed companies beyond these venues,” says Yan.

Zhou Zheren, a managing partner at the Shanghai office of Grandall Law Firm, observes views on the limitation period for exercising share repurchase rights. He points out that China’s official judicial Q&A platform selected response issued in August last year (batch IX), along with more recent judicial rulings, established a six-month exercise period. Exercising repurchase rights within this period signals the commencement of the limitation period for initiating legal action. Failure to do so means the lapse of such rights.

An opposite view was expressed in two articles published this year by the Supreme People’s Court in its journal, Application of Law. “This reflects the ongoing uncertainty over the limitation period for exercising repurchase rights in judicial practice,” says Zhou.

In arbitration, Zhou says that tribunals generally take a more pragmatic view, evaluating cases involving equity repurchases through commercial practice, parties’ reasonable expectations, and autonomy of will. He advises rights holders to secure as long an exercise window as possible, specify it in the agreement, and set strict deadlines for the obligor’s performance and penalties for breach.

Once repurchase conditions are met, the rights holder should promptly notify obligors within the agreed, or a reasonable, period, stating the timeframe and manner of performance. Continual reminders are also essential, adds Zhou, to avoid the claim being barred by time limitations.

In securities misrepresentations, particularly stock-related ones, Zhang, of Llinks, sees progress in how courts assess materiality. Courts now adopt more standardised criteria by weighing listed companies’ disclosures, trading volumes, price movements, and the proportion of misrepresentation relative to financial indicators.

“The analysis is becoming more sophisticated – for example, courts now look at whether there was overreaction in the securities market, and which industry indices should serve as the benchmark for price comparisons,” he says. “It is foreseeable that the stock-related misrepresentation cases will increasingly be handled through modular and factor-based frameworks.”

Zhou Wei, an equity partner at Zhong Lun Law Firm in Beijing, also notes that courts are more focused on examining transaction causation. Factors such as the “proximate cause”, which, unlike actual cause, refers to the primary reason as recognised by law, and the impact of other significant events are now part of causation analysis.

At the same time, the evaluation and quantification of systemic and non-systemic risks on investor losses has gained acceptance in judicial practice, with third-party institutions routinely engaged to determine damages.

“As for the liability of directors, supervisors, senior executives and intermediaries, there is a growing consensus in practice that proportional joint liability should be allocated based on the degree of fault and causal contribution of each responsible party,” she says.

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