Introduction

This article studies the determination of false equity transfers in judicial practice, explores how to distinguish between collusive虚假 expression and malicious collusion, and analyzes the key factors courts rely on when determining the validity of equity transfers. By analyzing specific cases, it reveals how courts comprehensively consider various external manifestations and evidence to determine the validity of equity transfers and points out the importance of typological research on such conduct in practice.

For purposes such as convenience in equity change registration, providing guarantees, evading capital contribution obligations, or transferring assets, there are numerous instances of false equity transfers in practice. Such equity transfers have a significant impact on the protection of the target company’s creditors’ rights and the assumption of shareholder liability. As adjudicatory bodies, when determining and evaluating false equity transfers, courts typically consider whether the conduct constitutes collusive虚假 expression or malicious collusion harming the interests of third parties as key factors. We find that in judicial practice, collusive虚假 expression is the primary consideration for courts, with only rare cases where courts consider characterization as malicious collusion. Therefore, when handling cases involving false equity transfers—including when bankruptcy administrators handle bankruptcy or compulsory liquidation cases—from the perspective of effectively achieving litigation objectives, the case handling strategy should often focus on proving collusive虚假 expression rather than malicious collusion.

Article 154 of the Civil Code provides: “A civil legal act where the actor and the counterparty maliciously collude to harm the lawful rights and interests of others is void.” It is apparent that determination of ‘malicious collusion’ requires meeting the following four elements:

1. The actor has subjective intent to collude;
2. The actor has subjective intent to harm the interests of the state, a collective, or a third party;
3. The actor objectively engaged in collusive conduct;
4. As a result, the interests of the state, a collective, or a third party are harmed.

Article 146(1) of the Civil Code provides: “A civil legal act performed by the actor and the counterparty based on a false expression of intent is void.” Therefore, determination of ‘collusive虚假 expression’ requires the following elements:

1. There must be an expression of intent;
2. The expression of intent is inconsistent with the true intention, i.e., the expressed effect intention does not match the internal effect intention;
3. There must be false intent;
4. The act must be performed through collusion between the actor and the counterparty.

Combining the above legal provisions, it is evident that the key to false equity transfer lies in its ‘falsity’ —that is, the expression of intent manifested in the equity transfer contract—the equity transfer and payment of consideration—is false, and the true intention of the parties is otherwise. This goes to the core of collusive虚假 expression: a collusive虚假 expression act refers to an act where the actor and the counterparty collude to make an expression of intent inconsistent with their true intention. Both parties know that the meaning they express is not their true intention. That is, the civil legal act itself lacks effect intention, and neither party desires the act to actually produce legal effects.

False equity transfers are often difficult to directly characterize as malicious collusion. Malicious collusion essentially involves the actor and the counterparty colluding with each other to seek private gain, thereby harming the lawful rights and interests of others. There is分歧 among academics on whether malicious collusion constitutes an act where the expression of intent is untrue. The prevailing view holds that as long as the actor has malice to harm the interests of the state, a collective, or a third party, and there is collusion between the parties, malicious collusion is established, and it does not require that the parties’ expression of intent is inconsistent with their true intention.

For example, where the parties to an equity transfer contract collude to allow the original shareholder to evade debts that should be borne通过 the equity transfer, both parties have malice to harm the interests of the company’s creditors. However, as regards the expression of intent to transfer the equity, it is true rather than “false.” Thus, whether the expression of intent is consistent with the inner true intention is the key to distinguishing between collusive虚假 expression and malicious collusion.

Then, in judicial practice, how is collusive虚假 expression or malicious collusion proved, or on what facts does a court rely to determine whether the elements of such conduct are satisfied? For example, how to prove that the expression of intent between the parties is inconsistent with their true intention? How to prove collusion between the parties? How to prove the false intent of the parties?

In civil litigation, for certain objective facts, such as harm to material interests, the loss of tangible or intangible rights and interests can be used as proof. However, for subjective elements such as collusion, false intent, and true expression of intent, it is extremely difficult to find evidence solely from a subjective perspective. It is necessary to rely on evidence of “external manifestations” that can prove subjective intent, and this evidence must be sufficient to meet the standard of proof beyond a reasonable doubt.

Therefore, based on legal practice—i.e., based on relevant practical cases—this article collates, summarizes, and analyzes the “external manifestations” that courts rely on and the standard of proof required for these manifestations to determine that false equity transfer constitutes collusive虚假 expression and is void, thereby facilitating the formulation and execution of litigation strategies in dispute resolution.

I. Determination of the Parties’ True Inner Intent

In false equity transfers, although the parties have signed an equity transfer agreement, the expression of intent in the contract is not the true inner intention of the parties. Courts typically determine that the expression of intent in the equity transfer contract is false based on inconsistent provisions in other contracts compared with the equity transfer contract. However, in practice, there are still differences in how courts determine inconsistency, mainly regarding how to understand the expression of intent in the contract.

In Case (2022) Xiang 10 Min Zhong No. 2969, the court held that the true expression of intent of the parties was “Li Yuhua, Zhou Jianhua, Lei Yuanqing, and Zhou Zhengzhong obtaining the land involved to be used for certification guarantees and converting it to commercial use for commercial development” as agreed in the “Joint Venture Development Agreement.” The equity transfer in the “Equity Transfer and Guarantee Agreement” was a false expression of intent, and therefore the agreement was void.

Some courts consider that the expression of intent only needs to be understood as whether there is an intention to transfer equity. For example, in Case (2012) Min Yi Zhong Zi No. 98, although the “Equity Transfer Agreement” and the “Overall Acquisition of Bofeng Company Agreement” had inconsistent provisions on the transfer price, the court did not determine inconsistency of expression of intent based on the difference in amount. It held that the true intention of both parties was to transfer all equity of Bofeng Company, and both parties acknowledged that the actual consideration paid was RMB 70 million under the “Overall Acquisition of Bofeng Company Agreement.” The inconsistency with the RMB 10 million in the “Equity Transfer Agreement” and related tax issues (which can be adjusted by administrative law) did not represent inconsistency in the intention to transfer equity.

However, other courts have held that even if there is an intention to transfer equity, inconsistency in price means inconsistency in expression of intent. For instance, in Case (2016) Zui Gao Fa Min Zhong Zi No. 7, the Supreme People’s Court, based on the inconsistency in equity price between the “Equity Transfer Agreement” and the “Equity Transfer Supplemental Contract,” determined that the “Equity Transfer Agreement” was a false expression of intent entered into through collusion by both parties. The “Equity Transfer Agreement” set the equity transfer price at RMB 660,000 and RMB 330,000, while the “Equity Transfer Supplemental Contract” valued the equity at RMB 25 million, which was clearly contradictory.

II. Determination of Collusion

Courts often examine whether there is an关联 relationship between the parties to the equity transfer contract or between the parties and other subjects, thereby determining, to a certain extent, the possibility of collusion between the contracting parties.

In Case (2019) Zui Gao Fa Min Zhong No. 818, the appellant (first-instance defendant) China Urban Construction Development Co., Ltd. claimed that both parties to the contract were under the actual control of Beijing Zhongye Company, which could prove collusion between the two parties. The Supreme People’s Court found that such a control relationship did not exist and held that even if it did exist, it would need to be combined with whether the transaction price was too low to determine whether the contract was void. The Supreme Court’s determination indicates that such a control relationship (between the contracting parties and other subjects) can serve as a factor in determining the possibility of collusion between the parties. However, to further prove the invalidity of the contract, in addition to collusion, other elements must also be satisfied.

III. Determination of False Intent

(A) Contract Formation Process

If during the contract formation process, the parties lack standard actions such as negotiating the equity transfer price and conducting due diligence on the target company’s liabilities, the court may determine, based on inconsistency with normal equity transfer transaction practices, that the parties did not have a genuine intention to transfer equity, and thus find that the parties had false intent.

For example, in Case (2020) Jin 03 Min Zhong No. 849, the court considered both the contract formation and performance processes when examining the parties’ true expression of intent. Regarding the contract formation process, the court found that there was no evidence in the case of any negotiation between the parties on the equity transfer price or of Liang Xiaobo conducting due diligence on the company’s liabilities, which was inconsistent with equity transfer transaction practices. The “Equity Transfer Agreement” signed by the parties did not reflect a mutual expression of intent to transfer equity and pay consideration. In Case (2016) Zhe 01 Min Zhong No. 6469, the absence of a negotiation process also led the court to find the possibility of false intent.

(B) Contract Performance

Similarly, abnormalities in specific performance after contract signing can, to a certain extent, indicate that the expression of intent in the contract is not genuine, thereby establishing false intent.

For example, in Case (2020) Jin 03 Min Zhong No. 849, the court analyzed the performance of the “Equity Transfer Agreement” from three aspects: first, it did not exclude the possibility that Feng Junying (contract party) used litigation to achieve the defensive purpose of not performing the loan repayment obligation to Liang Xiaobo (contract party); second, the specific amount of the claimed equity transfer payment and the already-paid equity transfer payment could not be determined; third, the existing evidence could not fully prove that Liang Xiaobo actually operated and controlled the company. The court held that the combination of these three aspects of abnormal performance and the abnormal contract formation process could establish that the true expression of intent of the parties in signing the “Equity Transfer Agreement” was not to transfer equity but rather equity transfer for guarantee purposes.

In Case (2020) Zhe 02 Min Zhong No. 5716, when determining whether the equity transfer agreement was a true expression of intent, the court considered factors such as the fact that Xu Mouzhen did not pay the equity transfer price to Xu Mouli and Fang Mousong, did not actually contribute capital to Libo Company, the term for Xu Mouzhen’s (aged over 60) subscribed capital contribution remained December 10, 2066, and Xu Mouli still participated as a company employee in litigation where Libo Company was the defendant. The court ultimately found that the parties’ true intention was not to transfer equity.

In Case (2020) Jing 03 Min Zhong No. 5837, the court held that Mingda Real Estate Company registered the change of the equity involved to Zhongke Tiancheng Company without receiving any equity transfer payment. This conduct did not comply with the performance method stipulated in the “Supplemental Agreement to the Equity Transfer Agreement” and did not conform to general equity transfer transaction logic, making it difficult to determine that the “Equity Transfer Agreement” and the “Supplemental Agreement to the Equity Transfer Agreement” represented the true expression of intent of both parties.

(C) Events Before and After the Equity Transfer

Certain conduct of the parties before and after the equity transfer can, to some extent, evidence the falsity of the expression of intent in the equity transfer contract.

For example, in Case (2020) Jin 03 Min Zhong No. 849, the judge found that during the formation of the “Equity Transfer Agreement,” there was a private lending legal relationship between Feng Junying and Liang Xiaobo, and when signing the “Loan Contract,” both parties had the intention to provide a guarantee for the loan, which could, to a certain extent, prove that the equity transfer was not the true expression of intent of both parties.

Similarly, in Case (2020) Zhe 02 Min Zhong No. 5716, the court found that the timing of the equity transfer (August 23, 2018) and the company’s capital reduction decision (August 30, 2018) were during the period of the lawsuit between Libo Company and Zhonglai Company for a sales contract dispute. The proximity in time could, to a certain extent, indicate that the parties’ true intention was not to transfer equity.

(D) Unreasonable Equity Price

The unreasonableness of the equity transfer price can also, to a certain extent, reflect the purpose of the contract, thereby serving as a basis for determining whether the parties’ expression of intent is genuine, i.e., whether there is possible false intent.

For example, in Case (2016) Zui Gao Fa Min Zhong Zi No. 7, the court, based on the inconsistency in the equity transfer price between the contract (RMB 660,000 and RMB 330,000) and the supplemental agreement (RMB 28 million) [1], found that the price provisions in the equity transfer contract were unreasonable and concealed the true equity transaction price, rendering the contract void.

Similarly, in Case (2020) Jing 03 Min Zhong No. 5837, the court assessed the actual value of the equity based on factors such as the capital contribution shown in Beijing Mingda Company’s industrial and commercial registration, the amount of creditor’s rights the transferor might have received, the transferor’s debt situation, and whether the equity value was appraised. The court accordingly found that the equity price stipulated in the equity transfer contract was significantly lower than the actual value of the equity and that the price lacked reasonableness, making it difficult to establish that the equity transfer represented the true expression of intent.

IV. Conclusion

In cases involving false equity transfers, compared with “malicious collusion,” courts in judicial practice tend to negatively evaluate false equity transfers from the perspective of “collusive虚假 expression,” i.e., finding the equity transfer void and thereby determining the rights and obligations of the parties. The determination of “collusive虚假 expression” requires comprehensive consideration from multiple aspects. Therefore, typological research on collusive虚假 expression has significant practical importance and merits attention.

Notes:

[1] The court of second instance found that the price stipulated in part of the supplemental agreement was RMB 25 million.

Acknowledgments: Intern Liu Qinglin also contributed to this article.