Baofeng case highlights validity of “drawer agreements”


VSCompanies sometimes choose to enter into agreements with partners that are not immediately disclosed or that are intentionally kept secret from third parties. Such agreements are known as “drawer agreements” in China. However, their legal validity is frequently contested, especially when one of the signatories is a listed company.

This column draws on a well-known fairness litigation case in which the author acted as counsel to highlight the litigation strategy in such litigation as well as the findings of Chinese courts on the agreements. of listed companies and judicial review of their validity.

Lu Junxi
Senior partner
Kangda Law Firm

On May 8, 2019, the Baofeng Group announced that Everbright Jinhui and Shanghai Jinxin (collectively referred to as Everbright), wholly-owned subsidiaries of Everbright Securities, had filed a lawsuit against Baofeng and its legal representative. Feng Xin, founder, chairman and CEO, in a share transfer dispute. Everbright demanded a total of 750 million RMB ($ 117 million) from Baofeng for part of the 5.3 billion RMB in losses it claimed resulted from a failed overseas takeover. The action concerned Baofeng’s failure to comply with a repurchase obligation in connection with the transaction, as well as interest for late payment.

The case has generated significant market interest amid speculation that Baofeng will lose the deal, possibly threatening the company’s survival. After an internal assessment, even the two defendants came to the conclusion that they risked losing the case.

Our firm was retained by Baofeng Group and Feng on an emergency basis that if all Everbright’s claims were dismissed or rejected, Baofeng Group would pay our fees in excess of RMB 50 million.

The case was widely reported in the media, including the Southern Metropolis Daily and Jinri Toutiao, quickly becoming the focus of the financial and legal communities. Indeed, the result was not only concerned with the issue of the assumption of investment losses by two listed companies and a number of well-known financial institutions, but also because it would help to clarify the liability relating to a failed overseas investment and acquisition project.

Everbright, as the sole implementing partner, formed a partnership with the Baofeng Group and acquired a majority stake in MP & Silva Holdings (MPS), an Italian-owned company which at the time held a large number of rights to broadcasting of sports leagues, mobilizing RMB 260 million to secure RMB 5.2 billion in bank financing. Two years after the acquisition was completed, MPS went bankrupt for various reasons.

In addition to the framework cooperation agreement between Baofeng and Everbright, Everbright had separately signed a repurchase agreement with Baofeng and Feng, providing that after the delivery of the equity, Baofeng Group would repurchase the MPS assets within a certain period under certain conditions. conditions.

Determination of the validity of the fencer contract. This case was quite complex, involving mountains of evidence, the centerpieces being the cooperation framework and the buyout agreements. The framework cooperation agreement granted Baofeng Group a right of first refusal, and was reviewed and approved by the board of directors and publicly announced. The repurchase agreement specifies that the Baofeng Group has an irrevocable repurchase obligation, but has not been discussed by a meeting of Baofeng shareholders, nor disclosed.

The Beijing Higher People’s Court held that according to Article 121 of the Companies Law, the transaction concerned the material interests of a listed company and that by signing an agreement without the authorization of a resolution of the general meeting, the legal representative has acted ultra vires, or outside his legal authority. The validity of the repurchase agreement depends on whether Everbright was a bona fide counterparty, that is, acting without intent to deceive. The author claimed that at the time of signing the agreement, Everbright was not a bona fide counterparty, for the following reasons:

    • Baofeng Group is a listed company and Everbright, as a well-known securities company, should be aware of the limits that Article 121 of the Companies Code places on the authority of the legal representative of a listed company.
    • The letter of commitment signed by Feng indicated that Everbright was fully aware that Feng had not initiated the request in question and that the repurchase agreement had not been considered at a shareholders’ meeting.
    • Evidence presented by Everbright showed that she was well aware that the buyout deal was a private deal – that is, a drawer deal.

In the end, the Beijing Higher People’s Court accepted our demands, ruling that the buyout was an agreement that had not been authorized by a resolution of a general meeting and that the legal representative had acted beyond his authority. authority, and that it was a drawer agreement signed privately between the parties to provide a means of outgoing funds in the framework cooperation agreement.

Since Everbright was not a bona fide counterparty and the repurchase agreement had not been ratified by the Baofeng Group, it was an invalid contract and the Baofeng Group did not take any responsibility. civil for the invalidity of such an agreement. On December 31, 2020, the Beijing Higher People’s Court issued its first instance judgment, dismissing all of Everbright’s claims and granting the Baofeng Group a total victory at the first instance. Everbright filed an appeal with the Supreme People’s Court on January 14, 2021. The appeal hearing began on May 27, 2021 and the judgment is still pending.


It is the responsibility of investors and intermediary companies to pay particular attention to the repurchase obligation generally set out in the transaction model of an investment project when carrying out a legal risk assessment. A listed company is a public company, involving matters of public interest such as the protection of numerous small shareholders and the maintenance of order in the securities market.

The execution of a contract under which a listed company bears an obligation to repurchase shares without the consent of the general meeting of shareholders in a form of resolution presents potential risks for the listed company, harms the interests of investors retail and disrupts the order of the securities market. With this in mind, the drawer agreements of listed companies should be subject to stricter legal regulation in judicial practice.

Lu Junxi is a senior partner at Kangda law firm. She can be contacted on +86 10 5086 7666 or by email at [email protected]


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