CHINA Law and Practice Contributed by: Jeff Liu, Jeanette Wang, Yulong Lai and Yun Bi, Shihui Partners
8.2 Challenges to Deal Process, Governance and Disclosure In China, challenges based on these grounds are fre - quent and high-stakes, especially following the 2024 PRC Company Law’s heightened emphasis on fiduci - ary duties. Procedural defects are a primary trigger; shareholders often petition to revoke or nullify resolutions due to irregularities in voting, notice or quorum. In SOE trans - actions, the absence of mandatory asset appraisals or administrative approvals can render a deal void as a matter of law. Conflicts of interest are increasingly litigated through shareholder derivative suits. Transactions involving “self-dealing” without proper disclosure or the man - datory recusal of interested directors are highly vulner - able to claims regarding breach of the duty of loyalty. Disclosure failures are most prevalent in public M&A. Material omissions or misrepresentations regard - ing connected transactions, significant liabilities or pending litigation frequently result in both regulatory sanctions and civil compensation claims. Additionally, minority shareholders actively challenge deals through “appraisal rights” if they perceive unfair pricing during mergers. While Chinese courts are generally cautious about interfering with substantive business judgement, they maintain strict scrutiny over procedural compliance and transparency, making these grounds the most common basis for M&A litigation. 8.3 “Broken Deal”, MAC/MAE and Conditions Litigation Under Chinese law, there is no statutory concept of material adverse change or effect. Courts and tribu - nals usually enforce such clauses under the princi - ple of party autonomy. In the absence of a specific contractual clause, parties often invoke the “change of circumstances” doctrine as stipulated in the Civil Code. The following three aspects are examined: (1) whether there is a fact constituting a change of cir - cumstances; (2) whether such fact was unforeseeable at the time of signing and not a commercial risk; and
jumping compliance, so it is generally avoided unless necessary.
8. M&A Litigation and Disputes – Substantive Deal Issues
8.1 Frequency and Types of M&A Litigation In China, disputes may arise during the entire process of M&A transactions, and among them, M&A deals involving listed companies and SOEs are subject to higher regulatory requirements and also involve more stakeholders, resulting in more disputes compared to deals among private entities. Notably, a significant portion of these disputes are resolved through arbitra - tion rather than court litigation, due to confidentiality and the expertise of arbitrators. The main types of disputes include: • Pre-closing and deal failure: Disputes over the validity of framework agreements (MOUs), breach of exclusivity, or the failure to satisfy “conditions precedent” (eg, regulatory approvals or internal SOE authorisations). • Post-closing price adjustments and VAM: This is where most disputes arise nowadays. It involves “valuation adjustment mechanisms” (VAM) where targets fail to meet performance targets, lead - ing to disputes over cash compensation or share redemption. • Representations and warranties: Claims arising from a breach of warranties, typically involving undisclosed liabilities, financial misrepresentation (fraud), or issues relating to environmental and tax compliance discovered post-closing. • Corporate governance and minority rights: Disputes triggered by “procedural irregularities” in company resolutions, infringement of minority shareholders’ right of first refusal (ROFR), or the exercise of shareholders’ right to information. • Control and exit disputes: Conflicts over the handover of corporate seals (chops), licences and management rights, as well as deadlocks leading to petitions for company dissolution.
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