The target company is a pharmaceutical holding company with 12 subsidiaries and branch offices nationwide, providing medical examination or outpatient services. Its equity structure was as follows: the controlling shareholder held approximately 51% of the equity, the company in which the Claimant holds shares held approximately 32% of the equity, and other shareholders held approximately 17% of the equity.

To obtain control over the target company and its subsidiaries and branches (the “Target Group”), the Claimant and the Respondent entered into a Framework Agreement and an Equity Transfer Agreement (collectively, the “Original Agreements”).Under these agreements, after the Claimant’s investee company acquired the 51% equity of the target company from its controlling shareholder, the Claimant would transfer 100% of the equity in its holding company (which included the 32% equity in the target company originally held by the holding company) to the Respondent, thereby enabling the Respondent ultimately to hold approximately 83% of the target company’s equity. The total consideration was approximately RMB 170 million. The first installment was RMB 95 million (for the 51% equity from the controlling shareholder).The second installment (i.e, the initial consideration for the 32% equity) was to be paid in three tranches: (1) 25% upon completion of the “closing”;(2) 60% after the Claimant’s investee company and the target company completed the relevant commercial registration amendments for the transaction and the Respondent obtained actual control over the Claimant’s investee company and the target company; and (3) the remaining 15% of the acquisition consideration shall be paid 180 days after the Respondent obtained actual control. On the basis of an audit of the Target Group by an auditor designated by the Respondent, the final acquisition consideration was to be determined according to the balance of receivables and payables of the Claimant’s investee company and the Target Group as of the audit reference date. Any contingent liabilities arising from any matter prior to the closing date that caused additional losses or liabilities to the Claimant’s investee company or the Target Group shall be separately compensated by the Claimant to the Respondent, and the Respondent had the right to deduct such amounts from any unpaid equity transfer price.

The agreements also stipulated that upon the completion of the acquisition transaction of the controlling shareholder’s 51% equity, the Claimant shall directly procure that the persons designated by the Respondent assume de facto control over the companies within the Target Group. Such de facto control included, but was not limited to, the following measures: replacing the management personnel of each Target Group company in accordance with the Respondent’s instructions, and handing over all financial statements, tax filing documents, business licenses, company seals, financial seals, bank account information, etc., to the custody of the persons designated by the Respondent.

After the agreements were executed, the parties completed the closing and the relevant industrial and commercial registration amendments and personnel replacements for the Claimant’s investee company and the target company. The Respondent paid the first installment and the first payment of the second installment as contractually agreed, but delayed the second payment of the second installment. When the Claimant demanded payment of the remaining balance of the second payment of the second installment, the Respondent requested the execution of a new supplemental agreement to the Original Agreements as a condition for making such payment. Subsequently, the parties signed the Supplemental Agreement, and in the "Whereas" clause thereof confirmed that: 1. As of the date of executing this Supplemental Agreement, the Respondent has not been able to assume de facto control over three subsidiaries and branches of the Target Company. These three companies and branches remain under the de facto control of their original controller, i.e., the other shareholders of the Target Company, who refuse to transfer to the Respondent any business licenses, seals, documents, materials, or de facto control; moreover, one of such shareholders has frequently filed lawsuits against the Target Company, severely disrupting the normal operation of the Target Company. 2. Due to the non-cooperation of the aforementioned three subsidiaries and branches, who refuse to allow the auditors designated by the Respondent to conduct audits and refuse to provide the relevant financial materials necessary for the audit, and because the Claimant has also consistently failed to fully provide the financial materials of its holding company and the Target Group necessary for the audit, the Respondent has been unable to appoint an auditor to audit the Target Group to date, and thus has been unable to determine the final acquisition consideration. 3. The Claimant still has certain outstanding undertakings to fulfill, including: transferring to the Respondent all financial materials, accounting books, financial system data, etc., of the Target Group since its establishment; cooperating with the renewal of lease contracts for two retail locations upon their expiration; and addressing matters relating to sewage treatment, fire safety acceptance inspection, and the absence of permits for radiation diagnosis, therapy, and radiation safety.

Based on the facts recited in the “Whereas” clauses, the Supplemental Agreement altered the payment conditions for the third payment of the second installment, stipulating that after the Claimant duly and properly performed/satisfied the payment prerequisites and corresponding undertakings set forth in the Original Agreements, cooperated with the auditor designated by the Respondent to complete the audit of the Target Group, and confirmed the final acquisition consideration upon the Respondent's verification, the Respondent shall pay the remaining acquisition consideration to the Claimant.

Disputes arose between the parties during the subsequent performance of the agreements. The Claimant filed for arbitration, inter alia, rescission of the Supplemental Agreement, and requesting the Respondent to pay the interest for late payment of the second payment of the second installment, as well as the third payment of the second installment among other things. The Respondent filed a counterclaim, requesting the Claimant to transfer to it the seals, licenses, financial documents and materials of three subsidiaries and branch offices, and the financial documents and materials of the company in which the Claimant holds shares.

1. The Supplemental Agreement changed the payment conditions for the third payment of the second installment as agreed in the Framework Agreement. Can the Claimant apply for rescission of the Supplemental Agreement on the ground that it is manifestly unfair?

2. How should the contractual terms “directly procure” and “actual control” be interpreted? Should the Respondent bear liabilities for breach of contract for the delayed payment of the second payment of the second installment?

3. How should the responsibility for the failure to determine the final acquisition consideration be allocated? Is the Claimant entitled to the third payment of the second installment?

1. Rescission of the Supplemental Agreement

The Claimant contended that the Supplemental Agreement was entered into under deception by the Respondent. The Supplemental Agreement changed the payment conditions for the third payment of the second installment as stipulated in the Original Agreements and imposed specific requirements on the Claimant’s due performance of its undertakings. However, the Claimant argued, performance of these undertakings required corresponding authorization from the Respondent and subsequent confirmation by the Respondent. The Respondent’s prolonged failure to grant such authorization after the Supplemental Agreement was executed would allow the Respondent, through its unilateral actions, to obstruct the satisfaction of the payment conditions. The Claimant argued that this arrangement imposed an additional burden on the Claimant, was "manifestly unfair", and should therefore be rescinded.

The Respondent argued that the Supplemental Agreement represented the true intentions of the parties, was not manifestly unfair, and should not be rescinded. The Respondent further argued that, under circumstances where the Claimant had not fully performed its relevant obligations and the payment prerequisites had not yet been satisfied, the Respondent nevertheless made an advance payment of the second payment of the second installment to the Claimant, in exchange for the Claimant's timely performance of its undertakings, thereby demonstrating its goodwill for cooperation.

The arbitral tribunal held that a contract that is manifestly unfair at the time of its conclusion generally refers to a contract entered into by a party under pressing circumstances or lacking experience, resulting in a serious disproportion between the parties’ rights and obligations. Objectively, such a contract features a clear imbalance between the parties’ rights and obligations, e.g., a gross discrepancy between the value of the subject matter and the price, or evidently unreasonable allocations of liability or risk. Subjectively, one party intentionally takes advantage of its bargaining power or the other party's recklessness, inexperience, or similar circumstances to conclude a manifestly unfair contract. Therefore, in determining whether the Supplemental Agreement constituted a  manifestly unfair contract, both subjective and objective elements must be considered together. However, because the Claimant failed to prove that it was reckless or lacked experience in contracting or negotiating ability at the time of signing the Supplemental Agreement, the subjective element required for rescission was not satisfied. The arbitral tribunal did not uphold the Claimant’s request for rescission of the Supplemental Agreement.

2. Interpretation of De facto Control and Directly Procure

The Claimant contended that the amendment of the commercial registration for the Claimant’s investee company and the target company had already been completed, and the relevant personnel had been replaced as requested by the Respondent. Therefore, the Claimant had fulfilled its obligation to assist the Respondent in controlling the Target Group, and the premise for the second payment of the second installment had therefore been satisfied. After the closing of the transaction, the Claimant had lost its shareholder status in the Claimant’s investee company and the target company, and was unable to take further action with respect to them. The Claimant further argued that how the Respondent handles internal issues of the Target Group was the Respondent’s own right and obligation, and the Claimant’s assistance should not be a condition precedent for the contractually stipulated payment, and the Respondent had repeatedly and unreasonably delayed making due payments and should pay interest for the delayed performance.

The Respondent argued that, as of the time of the arbitration of this case, the Respondent still had not achieved de facto control over three subsidiaries and branches of the Target Group. The other shareholders of the target company that have actual control over the aforesaid three entities and branch offices refused to cooperate with the audit, refused to hand over certificates, financial information, and control, and had continuously filed lawsuits against the target company, severely affecting its normal operations. Therefore, the Claimant had still not fulfilled its obligation to assist the Respondent in achieving de facto control over all companies of the Target Group. The prerequisite for the second payment of the second installment had not yet been satisfied, and the Respondent was not liable for any interest for delayed payment.

The arbitral tribunal held that the obligation of “directly procure” the person designated by the Respondent to achieve de facto control over all companies of the Target Group, as stipulated in the contract, was essentially an assistance obligation, rather than a guarantee obligation. The Respondent obtained approximately 83% of the target company’s equity through the equity transfer, but was still not a sole shareholder. Therefore, the Respondent still faced risks from claims and bargaining by other minority shareholders. Such risks could not be avoided or eliminated by the Claimant, which originally held only about 32% of the target company’s equity. While the former shareholder (the Claimant) had an obligation under the contract and commercial practices to confirm assistance for the new shareholder to complete the equity registration and transfer formalities and to hand over the seals and documents belonging to the Target Group that were in its actual possession and control, it had no obligation to guarantee that the new shareholder would exercise its rights as a controlling shareholder without obstruction, opposition, or limitation from other minority shareholders of the target company. The equity transferee should not blame the equity transferor for failing to hand over control of the Claimant’s investee company or the target company, when the transferee’s exercise of rights in the name of the target company over its subsidiaries or branches was obstructed or limited by third parties.

The target company’s control over its subsidiaries or branches derives from the Respondent’s control over the target company. The contractual phrase “de facto control by the Respondent over the Claimant’s investee company and all companies of the Target Group” should be interpreted as the Respondent directly or indirectly achieving de facto control at the following legal levels:(1) the Respondent’s 100% equity in the Claimant’s investee company and the control derived from its status as the sole shareholder;(2) the Respondent’s approximately 83% controlling equity in the target company and the control derived from such controlling equity;(3) the target company’s legally owned controlling equity and control over its subsidiaries as legally entitled; and (4) the target company’s property rights, operational and management rights, and control over its branches. Control at any of these levels pertains to legal rights and status. If the exercise of such legal control is obstructed by other minority shareholders in practice, and if the equity transferor is not at fault in that regard, the equity transferee cannot attribute such obstruction to a breach of contract by the transferor. To be sure, the equity transferor shall perform its corresponding notification and assistance obligations in accordance with Article 60(2) of the Contract Law, the principle of good faith, and trade practices.

Given that the shareholders and legal representatives of the Claimant’s investee company and the target company had been changed, the commercial registration amendment had been completed, and the certificates, seals, and actual control of nine underlying companies of the Target Group had been transferred to the persons designated by the Respondent, the arbitral tribunal held that the Claimant had fulfilled its contractual and ancillary obligations to procure the Respondent’s control over the Claimant’s investee company and the Target Group. However, the Respondent had delayed the second payment of the second installment and should bear liabilities for such delay.

3. Final Acquisition Consideration

The Claimant argued that the time for the third payment of the second installment under the Original Agreements had arrived, the amount of the equity transfer payment was determined, and the Respondent should make the payment in accordance with the agreement.

The Respondent, on the other hand, contended that the Claimant had not cooperated with the audit as required under the Supplemental Agreement. Consequently, the amount of the third payment of the second installment had not been determined and the payment condition had not been satisfied. Therefore, the Respondent was not obliged to make the third payment of the second installment.

The arbitral tribunal held that the Supplemental Agreement extended the time for the Respondent to make the third payment of the second installment to the Claimant and added additional conditions and procedures for the Respondent to perform its final payment obligation. The Supplemental Agreement specified a time period for determining the final acquisition consideration. However, as of the time of this award, the agreed audit procedure had not been completed, and the final acquisition consideration had not been determined. In the Supplemental Agreement, the parties jointly confirmed two reasons for the failure to complete the audit: first, the refusal of the subsidiaries and branches of the Target Group to cooperate; and second, the Claimant’s failure to fully provide the relevant financial information. The first reason stemmed from the legal risk posed by the target company’s minority shareholders. When entering into the equity transfer contract in dispute, the parties failed to fully account for the risks posed to the third-party transferee of equity by the close-ended nature and the personal conformity element characteristic of a limited liability company, nor did they mutually assist each other in taking necessary and prudent measures to prevent or resolve legal risks arising from dissenting minority shareholders. Both parties bore a certain degree of fault for the formation of this legal risk and its impact on the completion of the audit procedure, and their fault was roughly equivalent. As to the second reason, on the one hand, the Claimant should have duly performed its undertakings under the Supplemental Agreement and the Original Agreements and had the obligation to assist the Respondent in initiating the audit procedure; on the other hand, the Respondent had the obligation to provide necessary facilities (including but not limited to providing authorization documents, etc.) for the Claimant to perform its assistance obligation. The Claimant failed to prove that it had performed its obligations under the Supplemental Agreement or its assistance obligation regarding the audit, while the Respondent failed to prove that it had requested the Claimant’s assistance within a reasonable period or that it had provided necessary facilities to the Claimant. Both parties were at fault for the failure to complete the audit procedure to date.

The arbitral tribunal further held that a strict distinction should be drawn between the Respondent’s obligation to make the third payment of the second installment to the Claimant and the Claimant’s obligation to cooperate with the auditor designated by the Respondent to audit the target company. The former constitutes a substantive right-obligation relationship, while the latter is a necessary procedure to determine the substantive right and obligation. The two must not be conflated. However, the tribunal also noted the internal logical connection between them must be recognized, as the audit procedure is a mandatory prerequisite for determining the final acquisition consideration. Before the parties determine the final acquisition consideration through the agreed audit procedure, the arbitral tribunal cannot determine whether the third payment of the second installment sought by the Claimant from the Respondent is indeed the remaining equity transfer amount within the final acquisition consideration.

Considering the various factors contributing to the delay in initiating the audit procedure and the concurrent fault of both parties, and in order to encourage the parties to promptly jointly determine the final acquisition consideration, avoid prolonged disputes harming the legitimate rights and normal business operations of all parties, the arbitral tribunal, based on the principles of fairness, good faith, and commercial practices, held that it was both fair, reasonable, and practical to order the Respondent to temporarily prepay 50% of the third payment of the second installment to the Claimant. The tribunal urged the parties to cooperate with each other and jointly initiate the audit procedure as soon as possible after the award takes effect, so as to determine the final acquisition consideration. Thereafter, the parties shall settle the remaining balance of the equity transfer price in accordance with the relevant agreed-upon principle of making up any shortfall or refunding any overpayment. Should the parties become involved in further disputes in this regard, they may initiate a separate arbitration to seek relief.