Earth Research | Legal Risk Prevention for Private Enterprise Financing (Part 2)
Publish Time:
Dec 10,2024
Source:
Authors: Chen Xia, Wang Yueyu
Legal Risk Prevention of Bank Loan Financing
I
Regarding Loans and Acceptance Bills
① Avoid carelessly filling out loan contracts
It is recommended that enterprises strictly review loan contracts and treat non-standard parts of the contract cautiously.
② Avoid invalidity of bills due to defects in recorded matters
It is recommended that enterprises fully understand the matters that must be recorded when issuing bank acceptance bills, such as indicating the words "bank acceptance bill", unconditional payment instructions, a definite amount, the name of the payer, the name of the payee, the date of issue, and the signature of the issuer. If any of the above-mentioned items are missing, the bill is invalid.
Bank acceptance bills should be issued by depositors who have opened deposit accounts with the accepting bank.
③ Avoid non-continuous endorsement of bills
It is recommended that enterprises, in actual business operations, require operators to be familiar with bill operation procedures to avoid bill endorsement defects due to various errors in the endorsement process, which directly affects the bill holder's rights.
Regarding Guarantees, Mutual Guarantees, and Joint Guarantees
① Avoid risks in using new loans to repay old loans
It is recommended that when providing guarantees for others, enterprises should fully consider whether they are still willing to assume guarantee responsibilities for new loans in loans where new loans are used to repay old loans.
② Avoid illegal external guarantees
When enterprises provide guarantees to other enterprises or individuals, in accordance with the Company Law and articles of association, resolutions must be made by the board of directors or shareholders' meeting (general meeting). Situations where guarantees exceed authority and the counterparty is in good faith, requiring the enterprise to bear the guarantee responsibility, should be avoided.
③ Avoid providing guarantees for loan contracts suspected of illegal or irregular activities
It is recommended that when providing guarantees for others, especially enterprises in mutual guarantees and joint guarantees, when discussing loans with bank staff, they should try to follow operational standards and work procedures to avoid participating in the creation or submission of false materials.
In mutual and joint guarantees, if bank staff or other enterprises request or imply that falsification is necessary to obtain a loan, this should be explicitly refused, and relevant evidence should be retained.
④ Avoid executives taking out loans in the name of the enterprise and having the enterprise bear the responsibility
For enterprises, the most effective preventive measure is to improve the corporate governance structure to ensure its effective operation.
Ensure that the enterprise's business license, organization code certificate, other permits, property registration form, account opening permit, production-related qualifications, the main body's operating status, and financial statements, etc., must indicate their purpose when lent, and if a seal is required, the seal management personnel should verify it.
⑤ Avoid domino effect risks
It is recommended that enterprises fully understand the legal risks in mutual and joint guarantees and carefully select mutual and joint guarantee loans.
Legal Risk Prevention of Equity Financing 范
II
Regarding Equity Transfers
① Avoid differences in equity valuation
It is recommended that enterprises conduct objective analysis in value assessment based on the specific circumstances of the assessment object, select the most appropriate method among various assessment methods, and simultaneously refer to other methods to assess the value of the target enterprise from multiple perspectives to reduce the risk of errors in equity value assessment.
② Avoid leaks of confidential information
In the initial contact stage with investors, financing enterprises have basically prepared business plans for investors' preliminary review. The disclosure of trade secrets should be appropriate; otherwise, if financing fails, excessive disclosure may lead to leaks.
③ Avoid inability to change equity
The strategy that enterprises should adopt is to ensure that all shareholders support the enterprise's financing in accordance with the company's articles of association, clarify the enterprise's responsibilities, authority, and related obligations, and avoid the inability to change equity due to their own reasons.
④ Avoid unclear purposes of private equity financing
It is recommended that enterprises first clarify the purpose of private equity financing: is it for pure financing, partial equity cash-out, introducing strategic partners, or for eventual listing? Different types of private equity require different investors.
Legal Risk Prevention of Private Financing
III
Regarding Inter-enterprise Loans
① Avoid legal risks in interest-free loans between related enterprises
To avoid the above risks, the best way for enterprises is to prove the legitimacy of their reasons for borrowing, confirming that it is indeed "interest-free".
② Avoid using borrowed funds for lending
When private enterprises use funds obtained from loans to other enterprises or from fundraising from their own employees to lend to borrowers for profit or to obtain financial institution credit funds and then lend them to borrowers at high interest rates, the enterprise may face legal consequences such as invalid loan contracts and criminal offenses. Inter-enterprise loans should be limited to the enterprise's idle funds.
③ Avoid illegal and irregular borrowing and lending between related enterprises
It is recommended that borrowing and lending between enterprises should be strictly conducted in accordance with the company's articles of association. Senior executives and operators must not conduct private transactions, and all meeting decisions and meeting records should be kept complete.
④ Avoid debt conversion loan relationships not being judicially confirmed
It is recommended that for debts arising from other legal relationships such as buying and selling, contracting, and equity transfers, after settlement, if the debtor confirms the debt in writing, the settlement statements, accounts receivable and payable, and letters from both parties should be retained.
Regarding Loans Between Enterprises and Shareholders
① Avoid the inability to recover funds due to delayed litigation after an enterprise borrows from shareholders
Qualified minority shareholders may request the board of directors (supervisory board) or the executive director (executive supervisor) of a limited liability company without a board of directors to file a lawsuit with the people's court in writing.
If the board of supervisors, supervisors of a limited liability company without a board of supervisors, board of directors, or executive directors refuse to file a lawsuit after receiving a written request, or fail to file a lawsuit within 30 days of receiving the request, or if the situation is urgent and failing to file a lawsuit immediately will cause irreparable damage to the company's interests, the minority shareholder who submitted the written request may directly file a lawsuit with the people's court to protect the company's interests.
② Avoid loans from shareholders becoming registered capital.
It is recommended that the company sign a standard loan agreement when financing from shareholders, avoiding clauses that allow overdue loans to be converted into capital increases. Shareholders should object to capital increase clauses in shareholder meetings regarding loan financing. If a compromise is necessary due to financing needs, the equity should be converted at market price or after valuation of the company.
Regarding company fundraising from employees
① Avoid illegal fundraising
It is recommended that companies pay attention to the boundary between legal and illegal activities during internal fundraising.
Loan recipients must be strictly limited to employees within the company, not extended to employees' relatives and friends or other related persons.
Loans can only be used for production development and business expansion, not for purposes such as lending to other companies or individuals. Loan interest should be agreed upon within a reasonable range and preferably approved (or filed) by the relevant authorities.
② Avoid deducting employee wages for fundraising
Companies should negotiate with employees when borrowing funds from them; it should not be determined solely through meetings with employee representatives. If the company faces financial difficulties, a delayed wage payment method can be adopted.
Regarding loans from microfinance companies
① Avoid blindly borrowing from microfinance companies
It is recommended that companies investigate and compare several microfinance companies before borrowing, avoiding situations where microfinance companies require borrowing companies to pay fees in advance under the guise of deposit, handling fees, or interest. It should also avoid situations where interest is deducted upfront (i.e., the actual loan amount received by the financing company is less than the amount actually disbursed by the microfinance company, which the microfinance company explains as interest).
Legal Risk Prevention for New Third Board Financing
Four
Avoid failed listing
The prevention method is that before deciding to conduct New Third Board financing, companies should understand the local policy orientation. If the local government promotes companies to list on the New Third Board, they should understand the conditions and amount of government subsidies.
In addition, before considering listing on the New Third Board for financing, companies should compare various intermediary institutions to avoid the impact of intermediary institution rectification on their own listing.
Avoid financing results not meeting expectations
It is recommended that companies determine their positioning before deciding to conduct New Third Board financing, reasonably evaluate quotations in financing roadshows, and conduct necessary promotion after listing.
Avoid loss of company control
It is recommended that original shareholders can: expand the number of voting rights they can control in a listed company through agreements or other arrangements with other investors; increase the difficulty and time cost of acquisition by external competitors by modifying the company's articles of association, thereby ensuring their actual control.
Legal Risk Prevention for Financing Leasing
Five
Avoid signing blank contracts
When companies use financing leasing for financing and obtaining goods, the lessor is in a dominant position and usually uses blank contract texts provided by the lessor. These blank format contracts are extremely favorable to the lessor and extremely harsh on the lessee, and even contain many traps.
There is a risk that the financing company's contract may be altered after a dispute occurs, so this should be avoided as much as possible.
Avoid losses due to lessor's breach of contract
It is recommended that companies stipulate that the financing lease contract will officially take effect after the leased property arrives, is installed, and passes the trial run.
Stipulate that the leased property shall not be mortgaged or used for any other actions detrimental to the lease, and impose severe penalties on the lessor for various breaches of contract in the contract.
Avoid lack of protection when leased property has quality defects
When signing the contract, try to require the seller to promise to assume responsibility for quality to the lessee;
Retain evidence of the lessee's reliance on the lessor's skills intervention choices or direct determination of engineering machinery;
In case of quality problems, submit a written claim to the seller and simultaneously notify the lessor in writing of the specific matters requiring assistance.
Avoid the risk of loss or destruction of leased property
Require the lessor to insure the leased property to reduce the company's liability for loss of the leased property;
In the event of loss or destruction of the leased property, the compensation amount shall be limited to protecting the lessor's actual losses for the unperformed part of the contract;
If the loss or destruction of the leased property leads to termination of the contract, the lessee shall no longer bear the obligation to pay the full rent, but shall provide the lessor with corresponding compensation based on the depreciation of the leased property.
Avoid the risk of huge termination compensation from the lessor terminating the contract and reclaiming the equipment due to the lessee's arrears of rent
Provide evidence to show that the contract is a standard contract repeatedly used by the lessor, such as providing other financing lease contracts of the lessor, and request that the relevant provisions on termination compensation be interpreted in a manner unfavorable to the lessor;
Try to avoid arrears of rent, and even if arrears occur, try to negotiate with the lessor to avoid contract termination;
Once the contract is terminated, the remaining rent should no longer be paid, and excessively high termination penalty fees should be rejected.
Avoid the risk of equipment being repurchased
It is recommended that financing companies propose countermeasures or restrictive clauses when the other party introduces a repurchaser: such as requiring the company to have priority purchase rights to prevent low repurchase prices; stipulating that the company has the right to defend against repurchase under certain specific conditions.
Lawyer Profile
Chen Xia
Chen Xia
Heilongjiang Dadi Law Firm
Director
Currently serves as a member of the Construction and Real Estate Business Committee of the All-China Lawyers Association; Heilongjiang Provincial Committee Member of the Chinese People's Political Consultative Conference; Member of the Heilongjiang Provincial Committee of the China Democratic National Construction Association; Director of the Social and Legal Affairs Committee of the Heilongjiang Provincial Committee of the China Democratic National Construction Association; Arbitrator of Harbin Arbitration Commission; Arbitrator of the Korean Commercial Arbitration Commission; Arbitrator of the Belt and Road Wuhan Arbitration Institute; Member of the Heilongjiang Provincial People's Government Administrative Review Expert Committee; Member of the Harbin Municipal People's Government Administrative Review Expert Committee; Ranked among "Top 60 Construction Lawyers in China" by ENR magazine and Construction Times; Arbitrator of Wuhan Arbitration Commission.
Wang Yueyu
Wang Yueyu
Heilongjiang Dadi Law Firm
Lawyer
Past Review
Dadi Honor | Dadi Awarded 2024 Commercial Law Excellence Law Firm Award (Regional Award)
Dadi Achievements | Our Firm Appointed as Legal Counsel for Beidahuang Grain Group Co., Ltd.
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