Vanke v Wanda: controversy over valuation of preserved shares

The recent dispute between China Vanke and Dalian Wanda has ignited debate over the valuation of preserved shares in China’s judicial regime. The high-profile case centred on a contract dispute between partners in the Changchun International Movie Metropolis, a mega-cluster for the film, video and pan-cultural entertainment industries, touted as China’s answer to Hollywood, in the capital of Jilin province.

Acrimony flared over the disputed valuation of Vanke’s shares when seeking to exit the project, with the company filing a lawsuit with the Hongkou District People’s Court of Shanghai claiming principal and interest amounting to RMB1.38 billion (USD910 million).

Vanke subsequently secured a pre-litigation preservation order to freeze RMB1.98 billion worth of shares held by Wanda in its subsidiary, Dalian Wanda Commercial Management Group (Wanda Commercial Management).

This freeze secured by Vanke can be seen as a decisive legal manoeuvre, immediately putting Wanda in such legal dilemmas as delayed listing of the imminent IPO of Wanda Commercial Management, breach of financing agreements, and triggering of the valuation adjustment mechanism.

Wang Jianlin, the chair of Wanda, quickly turned to Professor Liu Jipeng, dean of the Institute of Capital and Finance of Political Science and Law at China University of Political Science and Law, to mediate. Liu released several video clips discussing the so-called “20,000” dispute, sparking hot public debate. Taking this dispute as an example, the author analyses the valuation of preserved shares.

Lacking legal basis

The valuation of preserved shares is a prerequisite for determining whether their value exceeds the amount of subject matter. In judicial practice, the preserved shares (stock) of a listed company can be valued pursuant to article 7 of the Opinions of the Supreme People’s Court on Further Strengthening the Concept of Good Faith and Civilised Enforcement in the Implementation Work.

However, there is no legal basis for determining the value of preserved shares of an unlisted company, such as the disputed shares of Wanda Commercial Management.

First, no judicial interpretations have addressed it. For example, article 5(1) of the Provisions of the Supreme People’s Court on Several Issues Concerning the Enforcement of Shares by People’s Courts provides in principle that the value of the shares frozen should not exceed the amount of the subject matter. But it provides no practical measures.

Second, no legislation has addressed the issue. For example, the Civil Compulsory Enforcement Law (Draft) promulgated in June 2022 has no specific provisions for it.

Judicial practice

Liu believes that freezing shares based on the share capital of Wanda Commercial Management constituted an obvious excess. They should be frozen based on the company’s net assets.

His opinion involves two ways to determine the share value: (1) historical value, such as value corresponding to the share capital amount (registered capital and paid-in capital of RMB4.5 billion); and (2) real value, such as the value corresponding to the company’s net assets (audited net assets of RMB293.3 billion, stated in the 2022 balance sheet).

The mainstream judicative view in judicial practice is courts cannot merely determine the value of the preserved shares in a company based on the paid-in amount of its registered capital.

The author believes judgment on preservation in this case is likely to draw reference from judicial practice in Shanghai. There are two reasons for the judgment.

First, the value of frozen shares is uncertain. Uncertainty in the company’s operating conditions, the value of physical assets and repayment of external liabilities will change the value of shares. Second, the freeze on shares will not cause any actual harm, as an interim measure rather than a disposal of shares.

In the civil judgment for China Minsheng Jiaye Investment v Huang Bofeng, Xie Wei et al, the court held that, given the uncertain value of seized shares, it was impossible to conclude that the realisable value of shares held by China Minsheng Jiaye Investment (Minsheng Jiaye) significantly exceeded the amount of the subject matter.

As shown by market regulatory data, the assets of Shanghai Jiacai Investment Management and Shanghai Dongjia Property – in which Minsheng Jiaye held stakes – had liability records
in 2018.

The preservation or seizure imposed on the shares held by Minsheng Jiaye was also an interim measure, rather than disposal of the shares. In view of all this, and the plaintiff’s refusal to partially lift the seizure of shares, the court did not uphold Minsheng Jiaye’s request for lifting the seizure.

In the civil judgment for Wan Xun v Gu Feng, the court held that determining whether the preservation significantly exceeded the amount of the subject matter was necessary to determine the value of the preserved asset first.

The subject matter of preservation is shares of a limited liability company, with the value contingent on the company’s net physical assets, investments, liabilities and intangible assets such as intellectual property rights, as well as the market players’ recognition of business prospects, teamwork and other management capabilities of the company.

The paid-in amount of the company’s registered capital is just one of the considerations, and far from an adequate basis for determining the actual value of shares.

Remedies available

Thanks to Liu’s mediation in the Vanke-Wanda dispute, in the form of a public opinion war, the Shanghai court has now partially unfrozen the shares in question. But that doesn’t address the core issue.

Article 5(2) of the provisions provides that, “where the person subject to enforcement considers that shares frozen significantly exceed the subject amount, he or she may raise a written objection in accordance with article 225 of the Civil Procedure Law, attached with evidence of the prices or values of the seized or frozen assets including shares”.

Wanda can file an objection against enforcement with the Shanghai court and submit a full set of Wanda Commercial Management financial documents for an entrusted third party to determine the value of the shares in question, so the court can freeze the corresponding shares accordingly. This is the fundamental solution.

The Vanke-Wanda dispute spotlights how to determine the value of preserved shares in an unlisted company in China’s judicial system. Since the settlement has failed and preservation will inevitably trigger a challenge against enforcement, subsequent developments are worthy of attention.

Amid considerable controversy, the Supreme People’s Court is expected to issue a timely judicial interpretation or guiding cases for the final word.

Gong Jiong is an associate at Liang Gao Law Firm. He can be contacted at +86 185 1825 6378 or by e-mail at gongjionglawyer@163.com.