China: Contract validity in the Transfer of Mining Rights through Equity Transfers

Last Updated: 18 March 2015

To acquire mining rights through equity transfers is a common investment scheme in the mining industry. However, its legal effect is not without problems. This article provides a brief analysis of this scheme and the related legal issues.

Transfer of Mining Rights through Equity Transfers: the Mechanism and Its Potential Problems

To summarize, the typical scheme to transfer mining rights through equity transfers is as follows: the seller transfers all or a majority of shares of a mining company to the buyer, who subsequently becomes the sole or majority shareholder of the mining company. Through its ownership of shares in the mining company, the buyer can exercise the mining company's mining rights indirectly.

On the face of it, this scheme only changes the ownership structure of the mining company, while the mining company remains the registered mining rights holder on the Mineral Resource Exploration Permit or Mining Permit. Therefore, the nature of the transaction is an equity transfer instead of a mining rights transfer, and it will not trigger approval procedures required for the transfer of mining rights.

However, under the circumstances where the seller sold all or a majority of shares of the mining company, although the buyer has not become the registered mining rights holder, it has de facto control over the mining rights registered in the name of the mining company. In practice, many mining companies' only asset is the mining rights, or the mining companies are established for the purposes of transferring mining rights. Such practices further illustrate that the actual transaction purpose is to "transfer mining rights in the name of equity transfers."

There are two main reasons for the popularity of this scheme. First, it simplifies transaction procedures in that an equity transfer normally only requires the lawful performance of the agreement and the registration of the equity transfer at the local office of Administration of Industry and Commerce. It does not require regulatory approval. In contrast, the transfer of mining rights requires approval and registration. The approval process is time-consuming and complex. In addition, there are risks that the approval may not be granted.

Second, it reduces transaction costs. Compared to the taxes and fees involved in the transfer of mining rights, equity transfers can save business tax and surcharges for the seller, and the deed tax and transaction fees for the buyer. As a result, equity transfers can significantly lower the total cost for both parties.

However, under current laws, administrative regulations or judicial interpretations, there is no specific regulation on the issue of contract validity in transferring mining rights through equity transfers. As a result, this issue is disputed in judicial practice. Upon reviewing relevant cases and judicial opinions, we found two main views: the "invalid contract" view and the "valid contract" view. Different regional courts may take different positions in trial practice, which results in uncertainties in the effect of this type of transaction and the outcome of disputes arising therein.

The Main Arguments of the "Invalid Contract" View and the "Valid Contract" View

  1. Invalid Contract View

The "invalid contract" view can be summarized as follows: the equity transfer agreement entered by the parties provides for the transfer of all or a majority of the shares, and specifies the transfer of the mining company's assets and relevant right certificates. The original mining rights holder withdraws from the operation of the mining company. The contract should be deemed as a transfer of mining rights in disguised form and should be invalid. Its main arguments include:

First, this scheme seeks to avoid administrative approval and the payment of relevant taxes and fees. It can also result in multiple "transfers" of the mining rights prior to the expiration of the period during which the mining rights holder is not permitted to transfer its mining rights. Accordingly, the scheme seeks to conceal an illegal purpose with legal forms. Pursuant to Article 52 (3) of Contract Law of the PRC, the contract should therefore be null and void.

Second, Article 6, paragraph 3 of the Mineral Resources Law of the PRC provides that "profiteering in exploration rights or mining rights shall be prohibited." In the process of the equity transfer scheme mentioned above, however, most shareholders (of the mining company, which is the seller) receive high profit margins through the transfer, and therefore profiteer through selling corporate shares. As a result, such equity transfer agreements violate the mandatory provisions of the law. Pursuant to Article 52(5) of the Contract Law of the PRC, the contract should therefore be null and void.

Third, such equity transfer agreements will cause the loss of government tax income, which will also harm the public interest. Pursuant to Article 52(4) of the Contract Law of the PRC, the contract should therefore be null and void.

The above arguments are also supported by some regional High People's Court opinions. For instance, the High People's Court of Heilongjiang Province held that "the act that transfers mining rights by way of contracting or equity transfer, and begin production without obtaining administrative approval shall be deemed concealing an illegal purpose with legal acts. Pursuant to Article 52 of the Contract Law of the PRC, such transfer of mining rights is null and void."

In addition, the High People's Court of Yunnan Province held that "where the contract provides for the transfer of all or most shares or partnership ownership, and a new business entity will take over the operation, and it can be confirmed at trial that it serves as de facto transfer of exploration right and mining right, such contract shall be deemed null and void."

  1. Valid Contract View

The "valid contract" view can be summarized as follows: the equity transfer agreement described above does not violate any mandatory laws and regulations, therefore such agreement should be considered valid. The main arguments include:

First, the subject matter of an equity transfer is the equity, not the substantive rights and benefits of the mining company. Any change in equity may cause the change in control over the substantive rights and benefits of the company. Whether an equity transfer agreement is valid or not should be assessed based upon the Contract Law and other mandatory provisions under relevant laws and administrative regulations. It should not be judged by the change in the company's ownership of proprietary right.

Second, in terms of mining rights, an equity transfer or a change of shareholder may not necessarily disrupt administrative management of the mining rights. In principle, the change of the shareholder of a mining rights holder does not cause the change of management and technical personnel (e.g. mine director). Hence, it is not necessary to deny the validity of such equity transfer agreement.

Third, because partial equity transfers are also employed in practice, despites strict regulations, the parties are able to circumvent such regulations by setting up multi-layer share structures. Hence, it is impracticable to regulate this type of agreement.

In judicial practice, many cases have held that such equity transfer agreements are valid. And the validity of such agreements is not expressly denied in the judicial documents issued by many regional High People's Courts. Some of the judges of the Supreme People's Court also consider such agreements valid. However, the Supreme People's Court has not reach a consensus in the process of drafting the judicial interpretation for cases involving mining rights disputes.

Our Understanding and Suggestions

It is our understanding that one cannot draw a simple conclusion regarding the issue of contract validity in the transfer of mining rights through equity transfers. In fact, disputes over validity of such contracts often involve much more complicated factual issues than anticipated in theoretical discussions. Thus it is necessary to analyze the issue on a case-by-case basis, in order to reach a conclusion that is most consistent with the laws and legal principles.

Before unified rules on this matter are promulgated, when the parties design a specific transaction, they should neither alter the entire transaction for the fear of the contract being found invalid, nor simply conclude that the equity transfer scheme can artfully circumvent laws and regulations governing the transfer of mining rights. Rather, in order to guarantee the legality and efficiency of the transaction, all aspects of the transaction (e.g. share ratio, transfer of licenses and permits, change of management and operation, etc.) should be considered comprehensively. Prior decisions of the local court and local taxation policies (e.g. in some regions, special taxes may be imposed on such transactions) need also be taken into consideration. If any dispute arises from the transaction, a comprehensive consideration is needed when reviewing the terms and conditions of the contract, and searching for evidence that supports the client's position and protect its lawful interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.