Recently, the author's team received an award from the Beijing Arbitration Commission, which ruled that the author's team had won the case of equity repurchase dispute between an investment institution and the controlling shareholder of a VIE structure company. The case was complicated, and the agency team summarized nearly 20 points of contention, but the Arbitration Commission finally focused on the "entire agreement" clause (entire agreement), a foreign product, and combined with China's Civil Code to make the application of the law, which could not help but cause the author's team to think about it. At a time when equity investment has been elevated to a core competency by local governments, it has become a problem for equity investment institutions to carefully identify the inherent conflicts of law that may exist in multiple transaction documents when they are in charge of equity transactions.
The author's case under Chinese law can be simply summarized as follows: if between the same transaction subjects, first signed transaction document A, then signed transaction document B, A and B cover different aspects of the transaction (specifically in this case, A is an investment agreement, B is a capital increase agreement) A and B all exist in all the terms of the agreement, but the content of the documents of the B is missing some important core terms in A. Then, how to identify the conflict of law inherent in transaction documents A, how to carefully identify the conflict of law inherent in multiple transaction documents. So, how to determine the Chinese law effect of those important core terms in transaction document A?
The opposing team argued that, because of the "complete agreement" clause, the provisions that existed in Agreement A but not in Agreement B were replaced by the complete Agreement B, which should prevail over the contents of Agreement B. The opposing team also raised the issue of the validity in Chinese law of those important core provisions in the transaction documents. The opposing team of lawyers also put forward the interpretation of Article 470 of the Civil Code by renowned jurists, and argued that Agreement B clearly superseded Agreement A in this case.
The "Entire Agreement" clause in Agreement B states that this Agreement constitutes the entire agreement of the parties with respect to the matters set forth herein and supersedes any prior letters of intent, agreements or understandings between the parties with respect to such matters.
In the author's view, the true American law background of the "complete agreement clause" is as a clause to reduce transaction costs under the consideration of "stability of the transaction": that is, in principle, if the two parties disagree on the understanding of the original agreement, certain oral or written materials agreed upon by the two parties prior to the signing of the agreement shall not be used as a substitute for the original agreement. That is, in principle, if there is a difference in understanding between the parties regarding the original agreement, certain materials, whether oral or written, agreed to by the parties prior to the signing of any agreement may not be used as an aid to the understanding of the formal agreement that has already been signed (with some exceptions). But these materials do not include other formal agreements.
The core of this is the "differences in the understanding of the agreement" must be explained by the agreement itself, including textual interpretation, contextual interpretation, the nature of the agreement, such as the purpose of the interpretation, and can not be hastily introduced into the external evidence to skip the normal method of interpretation of the agreement. About the author of this view, part of the corresponding jurisprudence from the United States law, interested readers can refer to https://www.ashurst.com/en/news-and-insights/legal-updates/entire-agreement-clauses-handle-with- care/.
As the author's point of view, we look at the latest version of the NVCA model document SPA expression: Entire Agreement. This Agreement (including the Exhibits hereto), the Restated Certificate and the other This Agreement (including the Exhibits hereto), the Restated Certificate and the other Transaction Agreements constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and the Restated Certificate and the other Transaction Agreements constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly canceled.
The expression herein has taken into account this issue, if the complete agreement clause in the transaction document B in this case is expressed in accordance with this model document, it is easy to find that the content in the transaction document A belongs to the other Transaction Agreements, and is not invalidated by the fact that the agreement B has not been restated.
In this case, after careful study, the author's team finally obtained the support of the arbitration tribunal without the basis of Chinese law. However, the results of this type of cases depend more on the subjective decisions of the acting lawyers and the arbitration tribunal, and if the lawyers or arbitration courts are changed in this case, diametrically opposite arbitration results may occur, which may cause irreversible and permanent loss of capital for the investment institution.
Equity investment institutions should pay more attention to the intrinsic relevance and possible conflicts in the transaction documents. Transaction lawyers should pay more attention to the possible conflict of terms and be as clear as possible when drafting all the transaction terms, and as far as possible, the content of the commercial terms and conditions without ambiguity should be reflected in the subsequent documents and agreements in order to maintain consistency, and do not rely solely on the final version of the investment agreement. This case would have been more likely to have been avoided had the transaction counsel applied the language in the latest NVCA model document in its entirety at the time.
