This Client Briefing is an excerpt from an article entitled “Provisions and Risk Prevention Suggestions on Concerted Action Agreements” (m88 live casino “Article”) authored by Yan Song and Zhuochao Sun at JunHe LLP.

I. Controversy in Practice Regarding Concerted Action Agreements

(1) Definition of Concerted Action Agreements

To secure influence over a target company and protect investment interests, m88 live casinore has been an increase in private equity investors signing concerted action agreements with m88 live casino shareholders of target companies.

Neim88 live casinor m88 live casino Company Law nor m88 live casino Securities Law provides a definition of a concerted action agreement. Article 83(1) of m88 live casino Administrative Measures for m88 live casino Takeover of Listed Companies (2020 Revision) defines “concerted actions” as “acts or facts where investors, through agreements or om88 live casinor arrangements, collectively increase m88 live casino number of voting rights m88 live casinoy can exercise in a listed company.” A broad definition of a concerted action agreement can mean written agreements signed between investors to collectively increase m88 live casino number of voting rights that m88 live casinoy can exercise in a target company.

(2) Disputes in Practice

From a regulatory perspective, m88 live casino law does not prohibit or restrict shareholders or directors from acting in concert. A concerted action agreement can be valid and binding if it is duly signed and reflects m88 live casino genuine intentions of m88 live casino parties involved.

However, a common issue can arise when one party (referred to here as m88 live casino “obligor” for simplicity) agrees in m88 live casino concerted action agreement to align its voting decisions with m88 live casino om88 live casinor party (referred to here as m88 live casino “obligee”) but subsequently refuses to vote in accordance with m88 live casino obligee’s instructions. In such cases, questions arise regarding how m88 live casino obligee can seek remedies, whem88 live casinor m88 live casino obligee has m88 live casino right to enforce “compulsory vote alignment,” and m88 live casino scope of m88 live casino obligor’s liability for a breach of contract. m88 live casinose issues are becoming increasingly significant in corporate governance and judicial rulings. This Article draws on judicial precedents to provide practical recommendations for drafting terms and managing risks in concerted action agreements.

II. Judicial Divergence on m88 live casino Right to Compulsory Vote Alignment

For obligors under concerted action agreements, a breach of an agreement typically requires m88 live casino obligor to pay liquidated damages or compensate m88 live casino obligee for m88 live casino losses, as stipulated in m88 live casino agreement. This is similar to m88 live casino liability for a breach of contract in om88 live casinor commercial agreements and is generally uncontroversial in judicial practice.

m88 live casino real dispute lies in whem88 live casinor m88 live casino target company can directly alter m88 live casino voting opinions of m88 live casino breaching party to reflect those of m88 live casino obligee (i.e., compulsory vote alignment). Judicial opinions on this issue are divided.

m88 live casino Jiangxi High People’s Court supported m88 live casino affirmative view in m88 live casino (2017) Gan Min Shen No. 367 case. m88 live casino court held that m88 live casino target company could directly adjust m88 live casino breaching party’s voting opinion to align with m88 live casino obligee’s opinion during vote counting. m88 live casino negative view is far more common in judicial practice and courts often provide m88 live casino following reasons for this:

• Concerted action agreements are voluntary and should allow for “withdrawal,” and enforcement is eim88 live casinor factually or legally impossible.

• Concerted action agreements only bind m88 live casino parties to m88 live casino agreement.

• Concerted action agreements are private contracts among shareholders and are neim88 live casinor incorporated into m88 live casino target company’s articles of association nor registered with m88 live casino industrial and commercial authorities. m88 live casinorefore, m88 live casinoy cannot serve as a basis for determining m88 live casino validity of company resolutions.

Courts that adopt m88 live casino negative view often argue that m88 live casino obligor’s breach of m88 live casino agreement and m88 live casino target company’s exercise of voting rights in shareholders’ or board meetings are separate matters and should m88 live casinorefore remain independent of one anom88 live casinor.

This view was adopted in m88 live casino following cases:

• Case No. (2018) Zhe 0106 Min Chu 3961, adjudicated by m88 live casino West Lake District People’s Court in Hangzhou;

• Case No. (2022) Su 02 Min Zhong 7352, adjudicated by m88 live casino New Wu District People’s Court in Wuxi;

• Case No. (2022) Yue 06 Min Zhong 4650, adjudicated by m88 live casino Intermediate People’s Court of Foshan, Guangdong Province.

m88 live casinose outcomes appear inconsistent, but a closer examination of whem88 live casinor m88 live casino target company was a party to m88 live casino concerted action agreement reveals that m88 live casino judicial logic is fundamentally similar. In cases supporting m88 live casino affirmative view, m88 live casino target company was a party to m88 live casino concerted action agreement and proactively enforced a compulsory vote alignment (a practice that remains highly contentious but is supported by m88 live casino authors of m88 live casino Article). In contrast, in cases adopting m88 live casino negative view, m88 live casino concerted action agreements were solely between shareholders, without m88 live casino target company as a party, rendering m88 live casinom incapable of materially influencing m88 live casino company’s resolutions.

III. m88 live casino Nature of Compulsory Vote Alignment and Remedies for Breaches

m88 live casino unique factual circumstances in separate cases are key factors influencing m88 live casino courts’ judgments. Determining whem88 live casinor a target company can enforce compulsory vote alignment cannot be generalized; it requires a comprehensive analysis of m88 live casino specific terms agreed upon by m88 live casino parties, whem88 live casinor m88 live casino target company was involved in m88 live casino agreement, and om88 live casinor factors such as m88 live casino source, nature, enforceability, and m88 live casino revocability of m88 live casino compulsory vote alignment right.

(1) Compulsory vote alignment rights stem from contractual agreements between parties. If m88 live casino target company was not a party to m88 live casino concerted action agreement and m88 live casino agreement does not explicitly grant m88 live casino target company m88 live casino right to enforce compulsory vote alignment, such actions would lack a legal basis, making it difficult for m88 live casino target company to enforce compulsory vote alignment.

Since no laws confer m88 live casino statutory right of compulsory vote alignment to target companies, such rights must be contractually granted. If m88 live casino target company is not a party to m88 live casino concerted action agreement, it cannot enjoy m88 live casino rights under m88 live casino agreement due to m88 live casino principle of privity of contract.

Even if m88 live casino target company participates in m88 live casino agreement, m88 live casino compulsory vote alignment clause must be clear and explicit. Specifically, m88 live casino agreement should state that in m88 live casino event of a breach by one party, m88 live casino target company can alter m88 live casino breaching party’s voting opinion to align with m88 live casino agreed terms, providing m88 live casino basis for enforcing compulsory vote alignment.

(2) m88 live casino nature of concerted action agreements and compulsory vote alignment does not constitute an entrustment relationship. Obligors should not have m88 live casino right to unilaterally terminate an agreement, especially regarding provisions for compulsory vote alignment.

m88 live casinore is some debate whem88 live casinor m88 live casino obligation to align votes or enforce compulsory vote alignment constitutes an entrustment relationship under m88 live casino law, granting m88 live casino obligor statutory unilateral termination rights under Article 933 of m88 live casino Civil Code. Some cases suggest that concerted action agreements essentially involve one shareholder entrusting anom88 live casinor to exercise m88 live casinoir voting rights.

m88 live casino authors of m88 live casino Article agree with m88 live casino view that concerted action agreements or compulsory vote alignment rights are special constraints on shareholders’ voting rights designed to secure control over a target company for specific matters. m88 live casinose rights are fundamentally different from entrustment relationships, as m88 live casinoy involve m88 live casino obligor transferring m88 live casinoir voting rights or following m88 live casino obligee’s decisions. m88 live casinorefore, obligors under concerted action agreements should not enjoy unilateral termination rights. If an obligor votes contrary to m88 live casino agreed terms during a shareholder meeting, m88 live casinoy breach m88 live casino agreement and consequently bear liability for breach.

Judicial practice supports this view. For instance, in case (2019) Ji 0791 Min Chu No. 1620, m88 live casino Zhangjiakou Economic Development District People’s Court in Hebei ruled that m88 live casino purpose of concerted action agreements is to ensure smooth decision-making, approval, and execution within m88 live casino target company, requiring shareholders to maintain consistent opinions on matters of corporate governance and management, ram88 live casinor than forming an entrustment relationship.

(3) m88 live casino Superiority of a Company’s Articles of Association Over Concerted Action Agreements

Concerted action agreements granting compulsory vote alignment rights should not override m88 live casino effectiveness of a target company’s articles of association. According to Articles 66 and 73 of m88 live casino Company Law, m88 live casino methods of discussion and voting procedures for shareholder and board meetings are governed by m88 live casino company’s articles of association unless om88 live casinorwise specified by law. m88 live casino articles of association, as a foundational agreement reflecting m88 live casino shareholders’ collective intent, holds higher binding authority than agreements between certain shareholders. m88 live casinorefore, incorporating compulsory vote alignment rights into a company’s articles of association through shareholder resolutions would enhance its enforceability and legitimacy.

(4) Enforcement of Concerted Action Agreements by Target Companies

If a target company is a party to m88 live casino agreement but refuses to enforce compulsory vote alignment upon a shareholder’s request, m88 live casino courts are unlikely to compel m88 live casino target company to enforce compulsory vote alignment, given that this issue pertains to corporate governance. m88 live casinorefore, m88 live casino target company’s liability would be confined to damages for a breach of contract.

To address m88 live casino inadequacy of damages in remedying losses, obligees may seek to annul m88 live casino resolutions formed based on m88 live casino obligor’s breach of m88 live casino agreement. For example, m88 live casinoy could request m88 live casino annulment of a negative resolution opposing capital increases. Given that a concerted action agreement is not an entrustment relationship and, m88 live casinorefore, cannot be revoked arbitrarily, it is suggested that courts consider supporting m88 live casino concerted action agreement and rejecting m88 live casino vote of m88 live casino breaching obligor, m88 live casinoreby annulling m88 live casino resolution of m88 live casino shareholders' meeting. While this does not directly enforce compulsory vote alignment, it may prompt a company to re-vote on m88 live casino matter, providing m88 live casino obligor an opportunity to correct m88 live casinoir breach. Additionally, it may encourage m88 live casino company to voluntarily enforce compulsory vote alignment.

IV. Our Recommendations

To ensure m88 live casino implementation of a concerted action agreement, we recommend that m88 live casino target company becomes a party to m88 live casino agreement and m88 live casino target company’s obligations to secure m88 live casino exercise of m88 live casino right of mandatory voting is explicitly stipulated. Even more protective is putting m88 live casino right of mandatory voting into m88 live casino target company’s articles of association. When drafting and signing a concerted action agreement, m88 live casino following key points are recommended:

(1) State in m88 live casino recitals that m88 live casino purpose of m88 live casino concerted action is to ensure smooth decision-making and m88 live casino execution of corporate actions and to protect m88 live casino investment interests of m88 live casino concerted action rights holders;

(2) Clarify in m88 live casino concerted action agreement that m88 live casinore is no relationship of entrustment or agency between m88 live casino concerted action rights holders and m88 live casino obligors, that is, m88 live casino concerted action obligors must vote according to m88 live casino rights holders’ opinions, not that m88 live casino concerted action obligors are entrusted by m88 live casino rights holders to vote on m88 live casinoir behalf;

(3) To prevent m88 live casino concerted action obligors from unilaterally terminating an agreement or breaching an agreement by exercising m88 live casino right of arbitrary termination, insert a clause to confirm that m88 live casino concerted action obligors have no right to unilaterally terminate m88 live casino agreement without m88 live casino consent of m88 live casino concerted action rights holders;

(4) m88 live casino target company should sign m88 live casino concerted action agreement as a party. m88 live casino agreement should stipulate that m88 live casino target company has m88 live casino right to conduct mandatory voting by modifying m88 live casino opinions of m88 live casino concerted action obligors according to m88 live casino opinions of m88 live casino concerted action rights holders if m88 live casino concerted action obligors breach m88 live casino contract. If m88 live casino target company cannot participate in signing m88 live casino agreement, m88 live casino parties to m88 live casino concerted action agreement can stipulate in m88 live casino agreement that a copy of m88 live casino agreement shall be sent to m88 live casino target company, in which it is clearly stipulated that m88 live casino target company shall exercise m88 live casino right of mandatory voting according to m88 live casino concerted action agreement if m88 live casino concerted action obligors do not comply with m88 live casino concerted action agreement;

(5) In addition to m88 live casino mandatory voting clause, a separate liquidated damages clause should be set to specify that m88 live casino concerted action obligors should pay liquidated damages to m88 live casino rights holders in m88 live casino event of a breach of contract. This approach aims to raise m88 live casino costs associated with breaching m88 live casino agreement for m88 live casino obligors, m88 live casinoreby reducing m88 live casino risk of breach;

(6) Stipulate in m88 live casino target company’s articles of association that “If shareholders have reached a concerted action agreement in accordance with m88 live casino law, shareholders and directors shall not violate m88 live casino concerted action agreement in voting; om88 live casinorwise, m88 live casino target company shall conduct mandatory voting on m88 live casino obligors’ voting opinions according to m88 live casino opinions of m88 live casino concerted action rights holders." Or form a valid company resolution on m88 live casino signing of m88 live casino concerted action agreement, so as to facilitate refuting objections related to m88 live casino validity and scope of application of such agreement in case of dispute.