The counterparty is merged by a third party, can you refuse to do business with the merger?

Company A signed a purchase contract with Company B. Later then, Company B was merged by Company C. Because Company A had disputes with Company C, it was unwilling to do business with Company C. Then, whether Company A could refuse to do business with Company C? 

Article 174 of the “Company Law” stipulates: “when a company is merged, the credits and debts of all parties to the merger shall be inherited by the surviving company or the newly established company”. Article 90 of the “Contract Law” stipulates: “If the parties merge after the contract is concluded, the merged legal person or other organization shall exercise the contract rights and perform the contract obligations.” In view of the above articles, normally, Company A shall continue to do business with Company C, otherwise, it would be deemed as a breach of contract.

In addition, even there is any mistake in the process of mergence, such as there is no shareholders’ resolution and the company fails to notify, or announce to creditors, it is still legal as long as the mergence has not harmed the interests of the counterparty of a contract or relevant creditors ((2016) Gui 12 Min Chu No.2).

However, there must be exceptions to everything. Under the following situations, Company A could refuse to do business with Company C.

The first situation is that Company A could negotiate with Company C, and reach an agreement to terminate the contract. If Company C is not willing to do business with Company A, then it would be the perfect solution for both parties.

The second situation is that Company A could exercise a statutory right of termination under Article 94 of the “Contract Law”, which requires Company C shall has any of the following circumstances, (i) force majeure frustrated the purpose of the contract; (ii) before the time of performance, the other party expressly stated or indicated by its conduct that it will not perform its main obligations; (iii) the other party delayed performance of its main obligations, and failed to perform within a reasonable time after receiving demand for performance; (iv) the other party delayed performance or otherwise breached the contract, thereby frustrating the purpose of the contract; and etc..

The third situation, Company A’s main contract rights are damaged or are in danger of damage. For example, after Company C had merged Company B, Company C changed its key products, and switched the production line to produce other products instead of the products ordered by Company A, then Company A’s main contract rights are in danger of damage, it would be reasonable for Company A to terminate the contract. However, in the majority cases, companies are difficult to prove such concern. For example, in (2014) Wu Zhong Min Si Zhong No. 1093 case, in 2011, the lessee Company Q notified the lessor Company W that it would be merged by Company X. Later, Company X paid the rent in accordance with the original lease contract. In 2013, Company W found that Company Q’s business license had been revoked in 2010, and Company Q completed the cancellation procedures in 2013. Company W filed a lawsuit against Company X, and claimed to terminate the lease contract, with the reason that Company Q had constituted fraud. Finally, the court held that Company W’s main contract right was to collect rent, which had not been damaged. Since Company X did not have any circumstance under Article 94 of the “Contract Law”, Company W did not have an appropriate reason to terminate the contract.

In addition, there is a special situation. According to the “Contract Law”, for certain types of contracts, such as irregular leases, solicitations, donations, technology development or commission contracts, etc., both parties or any of the parties shall have the statutory right to terminate the contract at will. Where a party exercises this right, it shall meet the relevant requirements, and it shall undertake the relevant liabilities for compensation.

Finally, if a company is very sensitive with the counterparties, it could insert a special article in the contract on an agreed right to terminate the contract while any party has any special changes, such as, if the any party has changed its legal representative, the actual controller; merge or split; and etc., then the other party could terminate the contract.