DeHeng Lawyers Won a Dispute Case over the Joint and Several Liabilities of a One-Person Company Shareholder After Two Years of Trial

2023-08-01

Recently, DeHeng won the judgment in the Beijing Higher People’s Court in a case where Company A represented by DeHeng sued Company B, a one-person company, and its original shareholder Company C, and current shareholder Company D: the court finally determined that Company B and its shareholders should jointly and severally compensate Company A for investment losses of about RMB 100 million. This case is rare in which a listed company, as a one-person corporate shareholder, is judged to be jointly and severally liable for “audit failure.”

Around 2018, Company A signed the Strategic Cooperation Framework Agreement and its supplementary agreement with Company B, a wholly-owned subsidiary of Company C, a listed company. According to the agreement, Company A and Company B would jointly develop film and television drama projects, and Company B and its affiliates would ensure the guaranteed investment income of Company A during the cooperation period; otherwise they would be liable to make up the difference. Later, the related film and television productions either hit a dead end or had terrible ratings, with no return for Company A’s investment. During this period, Company C transferred all its shares of Company B to Company D. Therefore, DeHeng, on behalf of Company A, filed a lawsuit to Beijing No. 3 Intermediate People’s Court, demanding that Company B compensate for the investment losses as agreed, and that its former shareholder Company C, its subsequent shareholder Company D and the guarantor E bear joint and several liabilities.

During the first instance, Company C defended on the grounds that the case was suspected of economic crimes, that its external guarantee was invalid without going through proper decision-making procedures, that the content of the contract violated the mandatory provisions of the law, and that the special audit report determined that the assets were not mixed. During the second instance, Company B, together with Company C, provided the annual audit reports, financial statements, and announcements of Company C over the years to prove that there was no mix of property between the two companies.

The DeHeng team was led by Zhu Jianwen, Deputy Party Secretary of its Hangzhou Office, with primary support from lawyers He Xinran and Zheng Jiahui and paralegal Yang Ye, and represented the client in this case. Thanks to their meticulous work, the first-instance judgment upheld all of the plaintiff’s claims, and was later upheld in the second instance.