With the increasing improvement of the market economic system, more and more companies have chosen to use investment and mergers and acquisitions to achieve rapid business expansion. "Gambling agreement" is a commonly used method in the process of investment, mergers and acquisitions and restructuring.
gambling agreement is an important valuation adjustment mechanism in the field of private equity investment and is of great significance to protecting investors.
1, definition of gambling
gambling agreement, in short, is a private equity investment agreement containing the gambling terms, the English name is Valuation Adjustment Mechanism ("VAM" for short), which is literally translated as "valuation adjustment mechanism".
gambling agreement is actually an agreement between the enterprise valuation and the shareholding ratio of the financing investor. Its basic core is reflected as follows:
When private equity investment occurs, in order to avoid the normal dispute between the two parties over the existing value of the invested company, the investor and the financing party put the dispute point that cannot be negotiated immediately without dispute for the time being. jointly set the company's future performance goals and adjust the company's valuation and the equity ratio of the two parties based on the actual performance of the company's operation.
The usual agreement is:
If the company's future profitability reaches the performance growth indicator, the financing party shall exercise the right to valuation adjustment to make up for the losses suffered by the undervalue of the company; otherwise, the investor shall exercise the right to valuation adjustment to compensate for the losses suffered by the overvalued company.
2, typical betting type
(I) Equity betting type
When the target company fails to achieve the performance standards stipulated in the betting agreement, the actual controller of the target company will transfer part of the equity to a private equity investment institution at a free or symbolic price.
Otherwise, a part of the equity will be transferred to the actual controller of the target company at a free or symbolic price by the private equity investment institution. This is the most common bet agreement.
For example: XX company must complete its listing in 20XX. If it cannot, the investor will obtain more equity; if it is realized, it can obtain equity from the investor.
(II) Cash compensation type
When the target company fails to achieve the performance target stipulated in the betting agreement, the actual controller of the target company will pay a certain amount of cash compensation to the private equity institution and will no longer adjust the equity ratio of both parties. On the contrary, private equity investment institutions will be rewarded with cash to the actual controller of the target company.
For example, if XX Company's net profit in 20XX was less than XX million yuan, the actual controller of the company should compensate each transferee (private equity institution) in cash.
(III) Equity dilution type
When the target company fails to achieve the performance target stipulated in the betting agreement, the target actual controller will agree to the target company issue a portion of the additional equity to the private equity investment institution at an extremely low price to dilute the equity ratio of the target company's actual controller and increase the equity ratio of the private equity in the company.
For example: In the first three years after receiving the investor's XX million injected capital, if XX Company's performance growth exceeds 50%, the investor's equity ratio can be adjusted; if the 30% performance growth is not achieved, the actual controller of XX Company will lose its controlling stake.
(IV) Equity repurchase type
When the target company fails to achieve the performance goals stipulated in the betting agreement, the actual controller of the target company will repurchase all or part of the shares it holds at the price of investment funds of the private equity investment institution plus fixed returns.
For example: If XX Company has not yet been listed before 20XX, the investor has the right to request XX Company to repurchase all the equity of XX Company held by the investor with an investment of XX million yuan plus 10% interest.
(V) Equity incentive type
When the target company fails to achieve the performance goals stipulated in the betting agreement, the actual controller of the target company will transfer part of the equity to the enterprise management at a free or symbolic base price.
For example: in 20XX, the compound annual growth rate of XX Company shall not be less than 50%. If it cannot be achieved, the company's management will lose to the investor about XX million shares of listed company; if the performance growth reaches the target, the investor will have to give out their corresponding shares to the XX company's management.
(VI) Equity priority
When the target company fails to achieve the performance goals stipulated in the betting agreement, private equity institutions will obtain specific rights. For example, the right to share priority, the right to distribute remaining property, or a certain voting right, such as the board of directors' veto power.
For example: XX Company's net profit in 20XX was less than XX billion yuan, and the investor, as a shareholder, will obtain the right to nominate the financial director.
3, gambling in current judicial practice
(I) Court
From the existing effective judgment, the court generally believes that the gambling agreement is a valuation adjustment mechanism and a common financing contract in private equity investment behavior, and it is not invalid in itself; but the "betting agreement" should not become a speculative behavior. Correspondingly, the "betting agreement" is an investment agreement, and there is no special protection for it by law.
At present, the effective judgments of the court worthy of attention include:
1, the retrial judgment made by the Supreme People's Court on the "Gansu Shiheng Case" ([2012] Minti No. 11)
This judgment determines that the bet clause between the investor and the company (i.e. the performance compensation agreement) is invalid, and the bet clause between the investor and the original shareholder is valid.
2. The second instance judgment made by the Supreme People's Court on the "Appeal of Investment Contract Dispute between Lanzeqiao, Hubei Tianxia Sturgeon Co., Ltd. and Yidu Tianxia Special Fisheries Co., Ltd." ([2014] Min Er Zhong Zi No. 111)
This judgment determines that the share repurchase bet agreement signed between investors and shareholders is valid.
3, the first instance judgment made by the Beijing No. 1 Intermediate People's Court on the "Beijing Fir Investment Center (Limited Partnership) and Cao Wubo's equity transfer dispute case" ([2013] No. 6951 of No. 6951 of the First Zhong Minchu)
This judgment determines that the share repurchase bet clause signed between the investor and the original shareholder is valid.
4, the final judgment made by the Shanghai No. 1 Intermediate People's Court in the "Zhejiang Ningbo Zhengye Holding Group Co., Ltd. v. Shanghai Jiayue Investment Development Co., Ltd. and Chen Wukui" (Shanghai Yizhong Civil 4 (Business) Final No. 574)
This judgment determines that the guaranteed income bet clause signed between the investor and the original shareholder is valid.
5. The final judgment made by the Jiangsu Higher People's Court on the "Share Transfer Dispute Case between Guohua Industrial Co., Ltd. and Xi'an Xiangyang Aerospace Industry Corporation" ([2013] Su Shang Wai Final No. 0034)
This judgment determines that the equity repurchase bet clause signed between the investor and the shareholder (Xi'an Xiangyang Aerospace Industry Corporation, which is a state-owned enterprise) has not been approved by the foreign investment authority and shall be an uneffective agreement.
6. The final judgment made by the Jiangsu Higher People's Court on the "Appeal of Liu Laibao and Ruan Ronglin's Equity Transfer Dispute" ([2014] Su Shang Zhongzi No. 255)
The judgment in this case determines that the share repurchase clause between the investor and the target company violates the company's capital unchanging principle and the relevant provisions on the company's equity repurchase, and shall be invalid; the share repurchase clause between the investor and the original shareholders of the target company is legal and valid.
The above-mentioned court effective judgment shows that Currently, the court adopts an acknowledgement attitude towards the effectiveness of the betting agreement between investors and shareholders. The court believes that these agreements are conducive to efficiently promote transactions, play a certain benign guidance on the operation and management of the enterprise, and has a certain guarantee function for transactions between the two parties. As long as there is no harm to the public interest, the betting agreement between shareholders is valid.
, and a negative attitude is adopted as to the effectiveness of the betting agreement between the investor and the target company, and it is believed that once the target company is triggered and caused to fulfill its compensation liability to the investor, it will lead to the withdrawal of the company's capital and damage the interests of the company's creditors, it should be deemed invalid.
(II) Arbitration
From the perspective of the arbitration awards currently available from public channels, compared with the court, arbitration institutions have a more open and flexible attitude towards betting between investors and companies.
As long as the relevant agreement is signed on the basis of following the basic principles of equality, voluntary rights and interests, fairness and rationality, honesty and trustworthiness, the betting clause itself does not constitute an illegal act, and it is then determined to be valid.
In its arbitration award ([2014] China Trade Arbitration No. 0056) made by the China International Economic and Trade Arbitration Commission in January 2014, it determines that the bet clause between the investor and the target company is valid.
The basic situation of this case is as follows:
In this case, the investment agreement signed by the investor and the target company stipulates the gambling terms for performance compensation. If the target company's profit does not meet the performance commitment standard within the commitment period, it must provide cash compensation to the investor according to the gambling terms according to the certain calculation formula; at the same time, the investor also makes corresponding commitments. If the company's profit exceeds the performance commitment standard within the commitment period, the investor will provide cash compensation to the company according to the certain calculation formula.
In response to the issue mentioned by the Supreme Court in the Gansu Shiheng case, the investor and company bet against the company, causing the company's capital to escape and damage the interests of the company's creditors, the arbitration institution believes that:
(1) Investment compensation is independent
Investment funds are different from premium investment funds, and the contract basis generated is also different. The specific processing of premium investment funds in the accounts is a company's liability or the company's capital reserve fund does not affect the generation, calculation and legal establishment of investment compensation. The applicant's acquisition of investment compensation does not constitute an infringement of the independent property rights of the company's legal person, or violates the principles of capital maintenance and capital reduction restrictions on the Company Law.
(2) There are no stakeholders who need special legal protection during the betting process
parties to the agreement and stakeholders are equal stakeholders. The betting agreement does not involve the interests of the state or the public, and there are no stakeholders who need special legal protection. The investor requires the respondent to pay the investment compensation in accordance with the legitimate agreement in this case, which is a legitimate and legal right enjoyed by him in accordance with the legitimate agreement in this case.
(3) Performance compensation is not certainly unfair
Investment compensation is the result of valuation adjustment of the investment after investment, it is a compensation act, it is a contingent contractual debt, and according to the profit realization of the invested company, its payment obligor is not of course the invested company, and it may also be the investor, the investor and the company are both under investment risks.
Arbitral tribunal finally determined that the relevant investment compensation agreement is a common valuation adjustment arrangement in the investment market based on the above reasons. It is not only economically legitimacy, fairness and rationality, but also the provisions of the clause and its performance do not violate the mandatory provisions of my country's laws and administrative regulations. Therefore, this clause is legal and valid.
4, Conclusion of this article
Betting agreement is an important valuation adjustment mechanism in the field of private equity investment and is of great significance to protecting investors.
However, the previous introduction shows that during the application process, we should pay attention to the connection with relevant laws and regulations in my country's corporate law, civil code and financial fields. When drafting, the valuation adjustment function of the betting agreement should be explained.
When the Supreme People's Court and other regulatory authorities do not clearly express their attitude, investors should try to avoid betting between investors and target companies, otherwise they may be considered to harm the interests of the company and its creditors;
When investors bet on performance with shareholders and management of target companies, they cannot deviate from the profitability of the target company, otherwise they will be easily considered speculative, which will affect the effectiveness of the agreement.
In addition, since the Gansu Shiheng case has played a demonstration effect in the current judicial trial, if the investor really needs to choose the target company as the bet target, in order to avoid the relevant agreement being determined to be invalid by the court, it should try its best to choose arbitration as the dispute resolution mechanism.
In view of the fact that relevant laws and regulations do not make clear provisions on the effectiveness of the betting agreement, and the Supreme Court has not issued relevant judicial interpretations, investors should be cautious if they choose the betting agreement as their trading conditions.
# Warm reminder #
The following points can be noted in the design of the terms of the "betting agreement":
1. The betting agreement should not involve the setting of rights and obligations such as compensation, compensation and joint and several liability between the target company and the investor;
2. The main body of the betting agreement is the investor and the target public. The shareholders or actual controller of the company should try not to involve the target company itself. If the target company itself needs to be regarded as the subject of the agreement, the interests should be balanced and the interests of the company's shareholders and the company's creditors should not be harmed;
3. The types of equity to bets should be chosen to bet on the equity held by the major shareholder rather than the cash bet, or a mixed bet agreement can be agreed upon. At the same time, the bet agreement should be made to maximize the two-way bets, avoid designing one-way bets to avoid being considered as unfair agreements and not supported.
