First, the formulation of questions

In the process of providing legal services for equity investment trust projects of trust companies, the author's team often encounters the following transaction structure arrangements: the trust company uses the trust funds to increase the capital to the target company, part of the funds in the capital increase are included in the registered capital, and part of the funds are included in the capital reserve of the target company, and it is clarified that this part of the capital reserve is exclusively enjoyed by the trust company (as the trust trustee representing the trust, the same below).

The transaction structure arrangement is usually based on the following transaction background: the registered capital of the target company is small, and the trust company has a large amount of capital increase, but it is necessary to retain that the original shareholders of the target company still hold a certain proportion or even more than 50% of the equity of the target company to ensure that the target company is still a company within the scope of the consolidated statements of the original shareholders of the target company.

Regarding the transaction structure, clients frequently ask the following questions:

01. Does the agreed capital reserve exclusively enjoy by the trust company have legal effect?

02. What is the legal significance of the capital reserve being exclusively enjoyed by the trust company?

03. Will the transaction structure adversely affect the investment exit arrangement of the trust?

2. Legal analysis

Focus

01. On the legality and realization of part of the capital reserve exclusively enjoyed by trust companies

Article 79 of the Accounting System for Business Enterprises stipulates that "owner's equity refers to the economic benefits enjoyed by the owner in the assets of an enterprise, and its amount is the balance of the assets minus liabilities. Owner's equity includes paid-up capital (or share capital), capital reserve, surplus reserve and undistributed profits. Article 82 stipulates that "capital reserve includes capital (or equity) premium, donated assets, transfer of appropriations, difference in foreign currency capital conversion, etc." Capital reserve projects mainly include: (1) capital (or equity) premium, which refers to the part of the capital invested by enterprise investors that exceeds its share in the registered capital; ......。 ”

According to the above provisions, the capital reserve belongs to the owner's interest. Under normal circumstances, the owner's equity is enjoyed by all shareholders of the company in proportion to their shareholding. However, laws and regulations such as the Company Law of the People's Republic of China (hereinafter referred to as the "Company Law") do not prohibit shareholders from making special agreements on the rights and interests of owners, and the Interim Provisions on the Management and Financial Treatment of State-owned Capital in the Reform of the Enterprise Company System and other relevant documents contain provisions on exclusive state-owned capital reserves. Therefore, the author's team believes that the agreement that the capital reserve formed by the trust company due to the investment premium shall be exclusively enjoyed by the trust company does not violate the mandatory provisions on the validity of the current effective laws and regulations.

Combined with the author's team's previous project operation experience, the trust company's exclusive part of the capital reserve is mainly realized in the following ways:

1. When determining the profit distribution ratio of the target company, all shareholders of the target company agree that the exclusive capital reserve held by the trust company shall be regarded as the capital contribution of the trust company to calculate the profit distribution ratio, that is, the profit distribution ratio of the trust company shall be determined by "(the amount of capital contributed by the trust company included in the registered capital + the exclusive capital reserve of the trust company) / (the registered capital of the target company + the exclusive capital reserve of the trust company) × 100%";

2. When the target company converts the capital reserve into registered capital, all the exclusive capital reserve held by the trust company is used to increase the capital contribution held by the trust company in a directional manner;

3. When determining the proportion of residual property distribution after the liquidation of the target company, the exclusive capital reserve held by the trust company shall be regarded as the capital contribution of the trust company to calculate the proportion of residual property distribution, and the proportion of residual property distribution shall be determined according to the formula 1 above.

However, the author's team also noted that Article 186 of the Company Law stipulates that "the remaining property of a limited liability company after paying liquidation expenses, employees' wages, social insurance fees and statutory compensation, paying the taxes owed, and paying off the company's debts shall be distributed in proportion to the capital contribution of the shareholders of the limited liability company and the shares held by the shareholders by a joint stock limited company." According to the above provisions, the remaining assets of a company after liquidation shall be distributed according to the proportion of capital contributed by shareholders or the proportion of shares held by shareholders, and the Company Law does not stipulate that shareholders may agree on the distribution ratio of residual assets on their own. In the relevant transaction documents and the articles of association of the target company, it is stipulated that the exclusive capital reserve held by the trust company shall be regarded as the capital contribution of the trust company and the remaining property distribution ratio shall be calculated, which may not be protected by law.

Under the above-mentioned capital increase arrangement, in order to fully protect the rights and interests of the trust company, the trust company may, according to the actual situation of the project, determine whether it needs to make a special agreement on the exercise of voting rights, that is, the voting rights are not exercised according to the proportion of capital contribution, and the trust company exercises the voting rights according to the proportion determined in the formula 1 above.

Focus

02. On the impact on the withdrawal of trust and countermeasures

In view of the fact that part of the capital reserve of the target company is exclusively enjoyed by the trust company, it needs to be implemented by signing relevant agreements between the trust company and the target company and the original shareholders of the target company, and there is a risk that the agreement on the distribution ratio of the remaining property is inconsistent with the provisions of the Company Law and not protected by law, compared with the transaction structure arrangement in which the trust company includes all the capital increase funds in the registered capital of the target company, the trust company directly holds the equity of the target company, and the part of the capital increase funds is included in the capital reserve and exclusively enjoyed by the trust company , there is a certain uncertainty about the rights and interests enjoyed by trust companies.

If the transaction structure has arranged for the proposed transferee to be obliged to accept the subject equity and the proposed transferee performs the transfer obligation as agreed, the above capital increase arrangement will not have an impact on the withdrawal of the trust. However, in the event that the proposed transferee fails to perform the obligation to transfer the subject equity as agreed, if the trust company transfers the subject equity to an unspecified third party to realize the withdrawal of the trust, the uncertainty of the rights and interests enjoyed by the trust company due to the above-mentioned capital increase arrangement and the recognition of the relevant agreement arrangement (exclusive use of capital reserve through the agreement arrangement) may lead to the inability to smoothly realize the transfer of the subject equity or affect the transfer price of the subject equity.

The author's team believes that the transaction structure arrangement in which the trust funds are included in the capital reserve and exclusively enjoyed by the trust company is usually only used in financing projects with clear shares and real debts, and the smooth exit of the trust should mainly depend on the transferee's ability to transfer and whether the corresponding guarantee measures can fully protect the main claim, rather than on the actual value of the underlying equity. If it is a real equity investment project, the investment conditions of the trust should be consistent with the original shareholders of the target company, and if the trust funds are included in the capital reserve, the original shareholders of the target company should include the corresponding proportion of funds in the capital reserve according to the shareholding ratio.

(This article is translated by software translator for reference only.)