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The "Baofeng case" represented by Kangda lawyers won the judgment of the first instance before the Beijing high court

The case of equity transfer dispute between Baofeng Group and Everbright represented by Lu Junxi, a senior partner of Kangda Law Firm (hereinafter referred to as "Kangda"), was heard by the Higher People's Court of Beijing Municipality in the first instance. The case was highly concerned by the securities and financial markets. The lawyer Lu Junxi represented the defendant Baofeng Group and its legal representative Feng Xin. Recently, the Higher People's Court of Beijing Municipality made the first-instance judgment, ruling that "all the claims of the plaintiff were dismissed, and all the litigation costs of the first instance of the case of RMB 3,797,739 and the preservation costs of RMB 5,000 were borne by the plaintiff". Baofeng Group won the case in the first instance.


I. Case situation

On March 14, 2019, China Everbright Group's subsidiaries Shanghai Jinxin Investment Consultancy Partnership (Limited Partnership) and Everbright Jinhui Investment Management (Shanghai) Co., Ltd. (hereinafter collectively referred to as "Everbright"), as the plaintiff, sued Baofeng Group Co., Ltd. (hereinafter referred to as“Baofeng Group”) and Feng Xin to the Higher People's Court of Beijing Municipality. The plaintiff requested the defendant to compensate part of the losses of about RMB 680 million caused by the failed acquisition of the Italian MPS Project and liquidated damages of RMB 70 million, totaling RMB 750 million. Judging from the claims and contents of the complaint filed by Everbright, if the case is lost, Everbright will continue to claim the remaining RMB 4.62 billion of compensation from Baofeng Group. Therefore, the case is also directly related to whether Baofeng Group is liable for compensation for the loss of RMB 5.3 billion in the acquisition of the Italian MPS Project. The case will have a significant impact on the survival of Baofeng Group and its assets and liabilities.


In response to Everbright's suing, on August 7, 2019, Baofeng Group announced that it had signed a contract with Kangda, and entrusted Kangda to provide legal services for the case that Baofeng Group was sued by Everbright Jinhui and Shanghai Jinxin. The charging method of risk agency is agreed on by Baofeng Group and the Firm. If all the claims of Everbright Jinhui and Shanghai Jinxin are dismissed or not supported, Baofeng Group will pay the lawyer fee of more than RMB 50 million. Many media such as Southern Metropolis Daily and Jinri Toutiao have reported on the matter. The case has attracted the attention of the securities market, financial market and legal community. The trial result of the case will not only affect the investment losses of two listed companies and many well-known financial institutions, but also clarify the responsibility for the failed acquisition of the famous "overseas M&A investment pit" Italian MPS Project to a certain extent.


In the case that Feng Xin, the actual controller of Baofeng Group, was held in criminal custody and the operation of Baofeng Group was in trouble, on December 31, 2020, the Higher People's Court of Beijing Municipality made the first-instance judgment, dismissing all the claims of Everbright. Baofeng Group won the case.


II. In that year, the star overseas M&A project - the Italian MPS Project failed to acquire, which taught us a profound lesson. Only correct and objective cause analysis can prevent the recurrence of similar mistakes.


In February 2016, Everbright Jinhui (a third-level wholly-owned subsidiary of the listed company Everbright Securities), as the executive partner, launched the establishment of an industrial M&A fund - Shanghai Jinxin with a scale of RMB 5.203 billion. Based on the industrial and commercial registration information, there are 14 investors in the list of shareholders of Shanghai Jinxin. The investors set up a complex structure of "priority-interlayer-inferior" for the fund: priority RMB 3.2 billion, interlayer RMB 1 billion and inferior RMB 1 billion.


From March 2016 to the first half of 2017, the equity transaction of MPS was completed.


MPS was once called "a door to the sports kingdom" by Chinese investors. Shanghai Jinxin's main goal is to acquire 65% equity of MPS, a sports media company. MPS was once one of the top companies in the global sports copyright market. It was founded by three Italians. In 2016, MPS had top-level competition resources such as European Football Championship and Serie A, and its valuation reached USD 1.4 billion in the current year.


After the equity of MPS changed in 2017, its founders successively cashed out and even made a fresh start after leaving the company, which constituted direct competition with MPS. In 2017, the acquisition was just completed. Under the circumstances of the founders' departure and limited funds, MPS was defeated by the competitor IMG and lost the copyright of Serie A. Subsequently, MPS successively lost its series of copyrights in South America and other places. In the following year, Arsenal, the Premier League club, also terminated its cooperation with MPS.


One year after the acquisition of equity was completed, on October 17, 2018, the High Court of the United Kingdom ruled that MPS went bankrupt and liquidated, and MPS fell completely. The cross-border transaction with the funds of RMB 5.3 billion invested by Shanghai Jinxin eventually got into a mess, and the funds of RMB 5.3 billion from many domestic investors were basically wiped out.


The MPS acquisition failed and the risk was intensified. Various domestic investors passed the buck and were involved in the "chain set" litigation.


Due to the failure to withdraw as originally planned, two priority partners China Merchants Bank and Shanghai Huarui Bank sued Everbright Capital according to the Difference Make-up Letter issued by Everbright Capital. In 2020, Everbright Capital was awarded compensation of about RMB 3.116 billion and RMB 400 million respectively in the first instance of the above two cases.


Moreover, Everbright Jinhui sent a letter to Baofeng Group requesting Baofeng Group to repurchase the equity of MPS at the purchase price plus the agreed interest according to the provisions specified in the Repurchase Agreement. After it failed, the lawsuit was filed against Baofeng Group. The main contract basis for filing the lawsuit is the above Repurchase Agreement signed by Baofeng Group and Feng Xin and Everbright Jinhui.


With the increasing internationalization of Chinese enterprises, the lessons learned from the failed acquisition of the Italian MPS Project exposed in the litigation process shall be correctly understood, otherwise, the failure of similar overseas M&A transactions will occur repeatedly.


III. Trial of the case


On March 14, 2019, the case was filed in the Higher People's Court of Beijing Municipality. Everbright sued Baofeng Group and Feng Xin to pay [part of the losses] of RMB 680 million caused by non-performance of repurchase obligations and the delayed payment interest for the loss of RMB 70 million, totaling about RMB 750 million. It is worth noting that in the case, the plaintiff only claimed for "part of the losses" and did not require to repurchase the equity yet, and the trial result of the case will have a significant impact on whether the plaintiff further required the defendant to repurchase the equity of MPS exceeding RMB 5.3 billion.


After representing the case, lawyer Lu Junxi made great efforts to find out the favorable legal and factual basis of the case and determine the optimal litigation ideas and strategies. The amount of subject of the case is large, the circumstances of the case are complex, and there are many files and materials. Only in terms of the evidence of the case, the plaintiff submitted more than 50 groups of about 1,000 pages of evidence one after another. Lawyer Lu Junxi gave response positively, and finally sorted out and submitted more than 20 groups of about 800 pages of evidence. In the case, Kangda's lawyer carried out a lot of work and made great efforts from the basic fact combing, legal argumentation, judicial case collection, to the subsequent evidence production, evidence submission, multiple evidence exchanges and cross-examination, and then to the participating in the trial, drafting, revision and confirmation of written cross-examination opinions and representation opinions, and finally won the case in the first instance.


The core controversy of the case is the effectiveness of the Repurchase Agreement and whether Baofeng Group shall be liable for compensation.


The plaintiff believed that the Repurchase Agreement was legal and valid because it was stamped with the official seal of Baofeng Group and signed by Feng Xin, the then legal representative, and there was no illegal or revocable situation, and it was binding on both parties. Article 121 of the Company Law (the adoption of special matters of listed companies should be decided by the shareholders' meeting) is a management specification rather than a mandatory one. It can not be concluded that the Agreement was invalid hereby.


On behalf of the defendant, Lu Junxi, a lawyer from Kangda, held that according to the Articles of Association of Baofeng Group, the Agreement should be deliberated by the Shareholders' Meeting, while the Agreement was not deliberated by the Shareholders' Meeting, nor was it disclosed. Baofeng Group is a listed company, and its articles of association are open to the public. The plaintiff should be aware of the decision-making process of the listed company and the articles of association of the Baofeng Group, as well as that it is not a bona fide counterpart. The validity of the Repurchase Agreement should be determined in accordance with Article 50 of the Contract Law, and there is sufficient evidence to prove that the Repurchase Agreement is a "drawer agreement", which is null and void, and the defendant should not be held responsible.


In addition, the listed company belongs to a public company, involving many public interest issues such as the protection of interests of investors and the maintenance of order in the securities market. Signing a contract for the listed company to assume the obligation of share repurchase without the consent of the shareholders' meeting resolution will bring potential risks to the listed company, its shareholders and even the whole securities market, infringe upon the interests of public investors and disrupt the order of the securities market. Therefore, "drawer agreements" involving listed companies should be subject to stricter legal regulations.


Finally, the Beijing Municipal Higher People's Court accepted the claim of Kangda Law Firm and found that the Repurchase Agreement was invalid and that Baofeng Group and Feng Xin should not be held responsible, and ruled that all the claims of the plaintiff, Everbright were dismissed.


The first-instance verdict of the Baofeng case gained high attention from the regulatory authorities and the securities market. The verdict of the Baofeng case winning the entire first instance of the Beijing Municipal Higher People's Court once again perfectly proved the professional strength of Kangda Law Firm as a first-class civil and commercial dispute resolution law firm in undertaking hot cases in the securities and financial markets.

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