Documents to review before accepting a deed of guarantee provided by a PRC company - CWG

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Jiaolu Zhou
Dentons, Beijing
jiaolu.zhou@dentons.cn

Documents to review before accepting a deed of guarantee provided by a PRC company: a new trend following the issuing of National Court Work Conference for Civil and Commercial Trials minutes ^[1]

It is common in a cross-border M&A transaction for the foreign vendor to require a Chinese purchaser to provide a deed of guarantee with the transaction documents as a security to the vendor for the purchaser’s obligations. Other than requiring a deed of guarantee executed by the guarantor with the signature by its legal representative and company stamp, what other documents are required to be checked and reviewed in order to make sure that the deed of guarantee is enforceable according to the Chinese law? The Minutes of the National Court Work Conference for Civil and Commercial Trials ('the Minutes') issued by the Supreme People’s Court of the People’s Republic of China in 2019 sets out a number of rules to clarify this issue.

Although the Minutes are not a judicial interpretation, which cannot be cited as a basis for adjudication, for those cases pending or having not yet been concluded by the courts, relevant provisions in the Minutes could be used as reasons for the application of laws and adopted in the ‘this court holds that…’ section of the judgment documents.

These rules, which relate to the provision of guarantee for third parties in the Minutes aim to protect minor shareholders and the company’s interests and prevent major shareholders or the ultimate owner from controlling the company or its legal representative. They also provide a guarantee to third parties without obtaining any shareholder or board resolution. Instances where the legal representative provides guarantee on behalf of the company for others without due shareholder or board authorisation, violate article 16 of the Company Law of PRC,^[2] and constitute ultra vires representation. To decide whether the deed of guarantee under such circumstance is valid or enforceable, it should be further explored whether the creditor is a bona fide third party.

In accordance with the Minutes, in order to show its good faith, the creditor shall provide evidence to prove that:

• For a related party guarantee (guarantee provided for one of the shareholders or ultimate owner of the company), the creditor has reviewed the shareholders’ meeting (general meeting) resolution of the guarantor with respect to the entry of deed of guarantee. The voting procedure of the meeting was in compliance with the Company Law and the voting rights of the shareholder being guaranteed was excluded.
• For a non-related party guarantee, the creditor has reviewed either the guarantor’s shareholders’ resolution or board resolution, and the voting procedure of such was in compliance with the guarantor’s articles of association.
• For guarantee provided by a Chinese stock market listed company, the creditor has reviewed the listed company’s disclosure information in respect of the guarantee.
• Or the business of guarantor falls within one of the following exceptions, in which case resolution is not required:
  • the guarantor is a guarantee company whose main business is to provide guarantees to others;
  • the guarantor directly or indirectly controls the debtor;
  • the guarantor and the debtor have a business partnership in the form of mutual guarantee; or,
  • the deed of guarantee has been signed by the shareholders holding more than two-thirds of the voting rights of the guarantor.

The Minutes also state that the standard of resolution review is not strict and an examination as a formality is sufficient.

In our practice, in addition to the review of shareholders or board’s resolution, we always request that the guarantor supplies its company registration documents filed with SAMR (State Administration for Market Regulation or its local counterparts) including the latest updated version of articles of association. It makes the client feel more comfortable to be informed of what sort of resolution is required as stipulated in the guarantor’s articles of association, although it usually is compulsory under the Minutes. In the meantime, the creditor’s lawyer will be able to check the form of company’s legal representative’s signature and the company’s stamp by examining the company registration documents.

As a gentle reminder for foreign lawyers involved in Sino-related cross-border guarantee, under the rules of Administrative Provisions on the Foreign Exchange for Cross-Border Guarantee,^[3] the guarantor shall go through the contract registration procedure at the foreign exchange authority where its domicile is located within 15 business days of the conclusion of the deed of guarantee for overseas loans under domestic guarantee.

In conclusion, it is suggested that the creditor and their lawyer at least review the following documents before accepting and executing a deed of guarantee provided by a Chinese company in a cross-border guarantee deal:

• deed of guarantee, the content of which has been reviewed by Chinese lawyers to make sure that they would be enforceable under Chinese law, and the signature of the legal representative and the guarantor’s company stamp are consistent with those in its company registration documents;
• the guarantor’s latest version of articles of association; and
• the shareholders’ resolution or board resolution formed and delivered according to the guarantor’s articles of association and the company law.

Finally, don’t forget to insert a post-contract obligation of guarantor in the transaction document, who shall be liable to obtain the registration documents for the filing of deed of guarantee with the foreign exchange authority in China.

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