CHINA Law and Practice Contributed by: Nancy Zhang, Xiaoying Tian, Qian Gu and Liangqian Ying, JunHe LLP
Target Property Typical representation and warranties on the tar - get property in an asset deal include clean title to the target property (free from encumbrances or, as the case might be, with disclosed existing encumbrances), the state of the target property, leasing status, no pending fees and no knowl - edge of taking, seizure or expropriation. Target Equity/Shares In an equity deal, sellers are often requested to make additional representations and warranties on the clean title to the target equity/shares (free from encumbrances or, as the case might be, with disclosed existing encumbrances), legal capacity and status, financial condition, tax mat - ters, compliance with laws, environmental mat - ters, indebtedness and loans, leases and other material contracts, employees, intellectual prop - erty and no pending litigation in respect of the target company. Coverage of Representation and Warranties The coverage of representation and warranties is subject to business negotiations between the parties to a transaction. In general, parties to cross-border transactions are more comfortable with standard broad representation and warran - ties provisions, while domestic players tend to welcome a shorter version of an asset or equity transfer agreement; ie, a more condensed cover - age of representation and warranties. Breach of Representations and Warranties If the seller is in breach of the relevant repre - sentations and warranties, the buyer is gener - ally entitled, in accordance with the contract or relevant PRC laws, to claim for damages, refuse to proceed with the closing or even terminate the contract.
A sophisticated seller may insist that the buyer may only refuse to proceed with the closing or terminate the contract when the seller is in breach of fundamental representations and war - ranties, and otherwise only claim for damages in the event of breach of general representations and warranties. The seller’s representations and warranties apply primarily to the facts and circumstances exist - ing at the time of contract execution and are deemed to have been remade on and as of the closing date. A sophisticated seller may insist on adding a time limit for bringing claims for breach of such representations or warranties and cap - ping the seller’s liability for breach of the same. A typical cap for the aggregate of all the claims is 100% of the total contract price, while a sophis - ticated seller generally sets different sub-caps for different categories of claims. Representation and warranty insurance is more often seen in cross-border transactions involv - ing international players, mostly taken out by purchasers in cross-border transactions. Local parties, particularly state-owned enterprises, are becoming increasingly aware of and interested in such insurance. 2.6 Important Areas of Law for Investors See 1.1 Main Sources of Law , 2.2 Laws Appli- cable to Transfer of Title , 2.11 Legal Restric- tions on Foreign Investors and 5.5 Applicable Governance Requirements . 2.7 Soil Pollution or Environmental Contamination The Environmental Protection Law and Soil Pol - lution Prevention and Control Law of provide that the person causing the soil pollution (the “causing person” ) is responsible for managing the soil pollution risks and the remediation of the
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