Fangda’s Dispute Resolution team represented D Securities Co., LTD. (“D Securities”), who had acquired shares from its debtor Li (who was the ex-shareholder of HS Group Co., LTD. (“HS Group”) through judicial enforcement procedure, on the successful claim by “restricted shares” shareholders to enforce their rights against a listed company to lift the restrictions in a successful judgment decided by the Shanghai High People’s Court. The case was one of the top 10 typical cases issued by Shanghai Financial Court. The decision is a landmark decision because it declares in the case that the relevant commitment conditions of the restricted shares have been fulfilled, the transferee has the right to request the listed company to cooperate with the procedures for unblocking the restricted shares and hidden commitments are not binding on bona fide transferee.

The case involved the issue of restricted shares held in a listed company (HS Group). At second instance the Shanghai High People’s Court decided that HS Group had infringed the rights of D Securities by failing to unblock the restricted shares held by D Securities. D Securities was also awarded compensation of more than RMB 5 million based on D Securities’ restriction on being able to sell its shares freely.

This is a rare case in which the listed company has been successfully sued by the transferee of restricted shares. This was the first such case decided by the Shanghai Financial Court at first instance. The court decreed that it was a matter of good faith that the listed company should unblock the restricted shares. That decision was upheld on appeal by the Shanghai High People’s Court.

In China’s current securities market, there are a large number of cases in which market participants hold restricted shares for reasons ranging from M&A deals and investments. Increasingly, shareholders have sought to pay off their debts by transferring restricted shares or have been required to do so by judicial enforcement. Then, creditors or other third parties may acquire such restricted shares as transferees through judicial enforcement procedure. While these new shareholders seeks to lift the sell restriction after acquiring the restricted shares, the listed company are often unwilling to cooperate due to various reasons, resulting in the transferees still facing difficulties in exercising rights after obtaining restricted shares in judicial enforcement procedure. The effective judgment of this precedent case by Shanghai court that supports lifting the ban undoubtedly makes clear a way for those shareholders to fight for the dealing of their restricted shares without being prevented from doing so by the listed company.

The Fangda team acted for D Securities, initially supporting D Securities‘ participation in the extraordinary shareholders’ meeting and then subsequently in litigation. The Fangda team was co-led by Dispute Resolution Partner Jason Li and Capital Markets PartnerYvette Liu, with members including Dispute Resolution counsel John Tao and associate Eva Xu, and others. Credit also goes to our ex-colleagues Debi Song and Yuyang Li for their contribution to the case.