Viewpoint | A brief exploration of the gambling system under the new Company Law

The Minutes of the National Court Conference on Civil and Commercial Trials (hereinafter referred to as the "Nine People's Minutes") defines the basic concept for the first time: "gambling agreement", also known as valuation adjustment agreement, refers to the investor and the financier when entering into an equity financing agreement, an agreement that includes equity buybacks, monetary compensation, and other adjustments to the valuation of future target companies is designed to address the uncertainty, information asymmetry, and agency costs of both parties to the transaction about the future development of the target company.

According to the Ninth Minute, from the perspective of the subject of the "gambling agreement", there are three forms of "gambling" between the investor and the shareholders or actual controller of the target company; "gambling" between the investor and the target company; and "gambling" between the investor and the shareholders of the target company and the target company. The people's court should not only adhere to the principle of encouraging investors to invest in real enterprises, especially scientific and technological innovation enterprises, so as to alleviate the financing difficulties of enterprises to a certain extent, but also implement the principle of capital maintenance and the principle of protecting the legitimate rights and interests of creditors, and balance the interests of investors, creditors and companies in accordance with the law. There is no dispute in practice about the "gambling agreement" concluded between the investor and the shareholders or actual controller of the target company, if there is no other invalid cause, it is deemed to be valid and supports the actual performance. However, it is controversial whether the "gambling agreement" between the investor and the target company is valid and whether it can be actually implemented.

The biggest consensus on the gambling agreement is the broad recognition of its causes and values, no matter what the different opinions are in other aspects, especially whether the contract is valid or invalid, but in affirming the economic rationality of the gambling agreement, the fairness of the transaction and the practical necessity, except for a few different opinions, both the academic and practical circles have reached a rare high degree of consensus and broad consensus:(1) the gambling agreement can relatively adjust and balance the asymmetry of investment information between the financing parties;(2) the gambling agreement is an effective solution to the helpless move of the investor's post-investment management;(3) the gambling agreement is an important incentive measure to promote and protect the operation and management of the target company. In addition to the above, the most fundamental reason and value is the reasonable allocation and fair arrangement of investment interests and investment risks in the gambling agreement.)²

1. Equity repurchase-type gambling model

There is no dispute about the validity and implementation of the "gambling agreement" signed by the investor and the original shareholder or actual controller, and this paper will no longer focus on this issue. This article will focus on the investor and the target company's share repurchase "bet", see the figure above.

First, on the validity of the betting agreement between the investor and the target company:according to the "minutes of the nine people's meeting,"In the absence of a statutory cause of invalidity in a gambling agreement between the investor and the target company,If the target company claims that the gambling agreement is invalid only on the ground that there is an equity repurchase or monetary compensation agreement, the people's court will not support it ", in view of this, if there is no cause of invalidity of the contract under the Civil Code and other laws and regulations,In general, the "gambling agreement" signed between the investor and the target company is valid,The above point of view is also the result of repeated running-in and discussion of judicial decisions after many times of "historical evolution", which has gone through four stages, as shown in the following figure:

Secondly, it can only be implemented after the targeted capital reduction procedure is carried out (only before the implementation of the new Company Law).According to Article 5, paragraph 2, of the Ninth Minute, "Where an investor requests a target company to repurchase its shares, the People's Court shall conduct a review in accordance with the mandatory provisions of Article 35 of the Company Law on 'shareholders may not withdraw their capital contribution' or Article 142 on share repurchase. Upon review,If the target company has not completed the capital reduction procedure, the people's court shall reject its claim.In summary, from the legal and technical level, the capital reduction procedure and the share repurchase system have been bundled with the technical treatment, that is, the first capital reduction, and then repurchase. In summary, with regard to the reverse flow of the company's assets to shareholders, the Supreme People's Court has expounded the jurisprudence behind the repurchase of the company's shares, which is that, in principle, the company may not return property to shareholders in one direction, one of the exceptions being"Statutory Repurchase". From the perspective of creditor protection and the company's capital maintenance mechanism, according to the nine people's minutes of the decision thinking, whether it is a limited liability company or a limited liability company, it is necessary."First reduce capital, then buy back". Although there is a lot of debate in academia, after 2019, cases involving "gambling" between the investor and the target company will require the target company to fulfill its repurchase obligations,Almost all of the reasons for the failure of the judgment investors were non-compliance with the capital reduction procedure.

Analysis of judicial practice for performance:In view of the performance of the gambling agreement between the investor and the shareholder or the actual controller, there is generally no obstacle to capital reduction, and the repurchase owner may directly request the repurchase party to fund the repurchase. Regarding the performance of the gambling agreement between the investor and the target company, according to the second paragraph of Article 5 of the "Nine People's Minutes", when the target company actually performs the share repurchase, it shall comply with Article 35 of the "Company Law" on "Shareholders shall not withdraw" The mandatory provisions of Article 142 on share repurchase, that is, the company must first perform the procedure of reducing registered capital. According to Articles 103 and 177 of the Company Law and other relevant provisions, the capital reduction procedures include:1. The board of directors formulates a capital reduction plan; 2. The general meeting of shareholders makes a resolution on capital reduction (passed by more than 2/3 of the voting rights held by the shareholders present at the meeting);3. The company prepares a balance sheet and a list of property; 4. The company makes a capital reduction resolution Notify creditors within 10 days from the date of the resolution, and make an announcement in the newspaper within 30 days. Within 30 days from the date of receipt of the notice, and within 45 days from the date of announcement if the notice is not received, the creditor has the right to require the company to pay off its debts or provide corresponding guarantees.Thus, capital reduction requires not only the cooperation of the board of directors and the general meeting of shareholders, but also the payment of debts to creditors or the provision of guarantees.

In practice,For the sake of the principle of capital maintenance, if the company has not completed the capital reduction process, the court will generally reject the repurchase request and will generally not order the company to make a mandatory capital reduction.For example (2020) in the Supreme Famin Shen No. 2957 case, the investor Yinhaitong Company and the target company Xilong Geotechnical New Materials Company failed in a bet and requested Xilong Geotechnical New Materials Company to buy back its shares,However, the capital reduction process was not completed, and the Supreme Court finally rejected Yinhaitong's repurchase claim.In the event that the capital reduction is not completed, most courts will support the repurchase right holder's claim that the company bears the liability for default, or the joint and several liability of supporting other shareholders to assume the repurchase obligation under the repurchase agreement. In the case of (2021) Jing Min Zhong No. 495, the Beijing High Court held that,The subject company's failure to perform the capital reduction procedure violates the obligations attached to the contract, and it shall bear the liability for delay in performance, and the payment of liquidated damages to the repurchase right holder is reasonably justified and will not result in a reduction in the company's registered capital.In addition, in the case of (2020) Supreme Famin Shen No. 6234, the repurchase agreement stipulates that China Southern Broadcasting Group, as a shareholder of Pilot Film and Television Company, shall be jointly and severally liable for the repurchase obligations of Pilot Film and Television Company. In the case that Pilot Film and Television Company has not fulfilled the capital reduction procedure and has not completed the repurchase, the Supreme Court considers that Pilot Film and Television Company is unable to perform,Therefore, the Southern Broadcasting Group should assume the obligation to repurchase shares.

2, money compensation-based gambling model-"Nine Minute" proposed for the targeted distribution of profits to investors and shareholders.

Definition:In accordance with article 5, paragraph 3, of the Ninth Minute,"Money compensation gambling" means that after certain conditions are met, the investor has the right to require the target company to pay the investor a certain amount of money.The Nine Minute provides that only"The target company has profits sufficient to compensate the investor" in order for the court to support the investor's claim to meet the repurchase obligation.

The legal logic behind the aforementioned rules is: the principle of capital maintenanceOne-way return of company property to shareholders is prohibited unless there is a clear legal basis for it to be a "lawful distribution".³Therefore, the Supreme People's Court held that investors who want to obtain money from the company can only pay from the profits that the company can distribute, otherwise it will constitute a withdrawal of capital contributions.Therefore, the investor's claim can only be supported if the target company has distributable profits.⁴

This paper holds that the Supreme People's Court's treatment is actually a legal and technical treatment, the target company to investors.The "obligation to compensate money for gambling" is proposed as a targeted profit distribution by the target company to investors.Although this technical treatment still ignores the true intention of the parties, it is still reasonable in terms of business practice, because from the perspective of creditors, the target company's monetary compensation to investors is not much different from the target company's targeted dividends to investors.⁵

1, the new "Company Law"-the same proportion of capital reduction of the new rules.

Article 224, paragraph 3, adds a new rule for capital reduction in the same proportion: "when a company reduces its registered capital, it shall reduce its capital contribution or shares in accordance with the proportion of shareholders' capital contribution or shares, unless otherwise stipulated by law, unless otherwise agreed by all shareholders of a limited liability company or otherwise stipulated in the articles of association of a joint stock limited company".

Article 226 of the new Company Law adds the legal consequences of illegal capital reduction:"If the registered capital is reduced in violation of the provisions of this Law, the shareholders shall refund the funds they have received, and the reduction or reduction of shareholders' capital contributions shall be restored to the original state; if losses are caused to the company, the shareholders and the responsible directors, supervisors and senior managers shall be liable for compensation".

2, Legal Analysis

Specifically to the share repurchase type of gambling, the new "Company Law" on the "directional capital reduction" of the new regulations actually set obstacles for the share repurchase type of gambling trading model, increasing the practical difficulty of the share repurchase type of gambling, in fact, to a certain extent "overhead" the share repurchase type of gambling system.The rules set by the Minutes of the Ninth People's Meeting are actually the target company's first "targeted capital reduction" to gambling investors, after which the gambling investors can require the target company to fulfill its obligation to buy back gambling. Under the new Company Law, gambling investors need not only the cooperation of the original shareholders/controlling shareholders, but also the unanimous consent of all other small and medium-sized shareholders (limited liability company) or the consent of shareholders who meet the voting rights required to amend the articles of association of the target company (limited liability company) in order to ensure the validity of the corresponding capital reduction resolution.

3, risk response-investor perspective.

Premise: Under the premise that the original shareholders are willing to cooperate, the repurchase clause of the "Hanlin case" in which the founder repurchases the shares and the target company assumes joint and several guarantee liability is adopted as far as possible to avoid the complicated capital reduction procedure of the pre-process.⁶

(1) When signing the investment agreement, all shareholders are required to sign a capital reduction agreement with conditions.That is, when the conditions for the repurchase of the target company are met, all shareholders agree that the target company will conduct a targeted capital reduction and repurchase the shares of the target company held by investors (or in a joint stock limited company, the targeted capital reduction will be allowed to be written into the articles of association, but it should still be noted that in practice, the market supervision and management department may still require all shareholders to sign a capital reduction resolution);

(2) In order to ensure that all shareholders cooperate in completing the legal capital reduction process, a liquidated damages clause is set up in the aforementioned capital reduction agreement.It is agreed that if it does not cooperate to complete the capital reduction procedure, the shareholders who fail to perform their obligations shall bear the liquidated damages, so as to urge other shareholders to cooperate to complete the capital reduction procedure;

(3) In post-investment management: always pay attention to whether new shareholders join the company, and agree on the obligations of the original shareholders in the investment agreement in advance.If the target company subsequently joins new shareholders, the aforementioned conditional capital reduction agreement will no longer be the agreement of all shareholders of the target company. And if the new shareholders do not agree to the targeted capital reduction, there is still a risk that the capital reduction process will not be legally performed. The investor may, when signing the investment agreement, require that it be the founder's obligation to induce the new shareholder to agree to the targeted capital reduction, and set a liquidated damages clause, and the investor has the right to require the founder to bear the liability for breach of contract if the new shareholder does not agree to the targeted capital reduction;⁷

1, the new "Company Law"-the prohibition of targeted profit distribution of new rules.

Article 210 of the new "Company Law" stipulates: "For the remaining after-tax profits after the company makes up for losses and withdraws the provident fund, the limited liability company shall distribute the profits in accordance with the proportion of the capital contribution paid by the shareholders, except where all shareholders agree not to distribute the profits in accordance with the proportion of the capital contribution; The company distributes profits in accordance with the proportion of shares held by the shareholders, unless otherwise stipulated in the company's articles of association."

Article 211 of the new Company Law: "If a company distributes profits to shareholders in violation of these regulations, the shareholders shall return the profits distributed in violation of the regulations to the company; if losses are caused to the company, the shareholders and the responsible directors, supervisors and senior managers shall be liable for compensation."

2, legal analysis-the new rules increase the litigation risk of monetary compensation gambling.

(1) Re-opening the "Nine Minute" on the monetary compensation type of gambling rules set.

(2) Legal analysis of the prohibition of targeted distribution of profits under the new Company Law

First, the proportion of voting rights adopted by the directional profit distribution: the limited company shall agree unanimously, and the joint stock company shall agree in accordance with the articles of association.

The Ninth Minute establishes the rules for monetary compensation by way of profit distribution, which also requires a resolution of the shareholders' meeting. Similar to the share repurchase type of "gambling", the distribution of profits to some investors in the case of "gambling" is a targeted distribution,

Second, the consequences of profit distribution in violation of regulations

The current "Company Law" and the new "Company Law" provide for the corresponding consequences for the distribution of profits in violation of the provisions, the difference is that under the new "Company Law,Shareholders who cause losses to the company and the responsible directors, supervisors and senior managers shall be liable for compensation.

Third, the setting of class stocks has eased the release of monetary compensation "gambling points"

The relevant provisions of Article 144 of the new Companies Act, "A company may issue the following classes of shares different from the rights of common stock in accordance with the provisions of the articles of association:(I) shares that give priority or inferior distribution of profits or surplus property;Among them, there is a similarity between "priority or inferior distribution of profits or shares of surplus property" and "gambling" in which the investor receives monetary compensation in preference to other shareholders,Therefore, the joint-stock company may be able to realize the "gambling" monetary compensation in disguise by setting up the investor's priority to receive profit distribution.It should be noted that, in the case of "gambling", there is no right to priority distribution of profits under normal circumstances, and only when the "gambling" condition is triggered. In addition, these provisions are currently only applicable to limited liability companies, and whether limited liability companies are applicable is yet to be clarified.

Fourth, the capital reserve can make up for losses to a certain extent to increase the company's profit to meet the possibility of monetary compensation obligations.

Article 168 of the current Company Law stipulates that "the company's provident fund shall be used to make up for the company's losses, expand the company's production and operation, or to increase the company's capital.However, the capital reserve may not be used to cover the company's losses."The Understanding and Application also considers that where the investor is a shareholder of the target company,For whatever reason, money cannot be taken from the company's "capital provident fund", I .e. the company's capital provident fund cannot be used for monetary compensation.

The change in the new Companies Act compared to the current Companies Act is reflected in the fact that capital reserves are allowed to be used to cover losses. Section 214 of the new Companies Act provides that,"The company's provident fund shall be used to make up for the company's losses, expand the company's production and operation, or convert it to increase the company's registered capital. To make up for the company's losses, the provident fund shall first use the arbitrary provident fund and the statutory provident fund; if it is still unable to make up for the losses, the capital provident fund may be used in accordance with the regulations."According to this, after using the capital provident fund to make up for the loss, the company can immediately pay dividends on the subsequent profits generated by the company, compared with the current Company Law, the company is more likely to perform monetary compensation with profits.

1, the new "Company Law"-prohibit the provision of financial assistance new rules.

Article 163 (1) of the new Companies Act states:"The company shall not provide gifts, loans, guarantees and other financial assistance for the acquisition of shares in the company or its parent company by others,Except where the company implements an employee stock ownership plan."Paragraph 2 provides for certain exceptions, where the target company may provide financial assistance up to 10 per cent of the issued share capital by resolution of the effective shareholders' meeting or by resolution of the board of directors.

2, Legal Analysis

(1) What is a disguised form of gambling by the target company?⁸

In view of the nine people's minutes of"Investors bet directly against the target company"Given the extremely strict restrictions, and taking into account the founder shareholders in the name of the non-debt assets, the source of debt repayment is mostly in the name of the target company, and taking into account the circumvention of the summary restrictions, investors objectively need the target company as the "gambling" of the real credit subject. This demand has given rise to the business practice of "disguised gambling by the target company", namely:The investor formally gambles with the original shareholder/de facto controller, and the target company is not the subject of the gamble; however, the original shareholder's liability for the gamble is ultimately borne by the target company by translating it into legal liability of another nature. Try two examples (refer to the figure below):

A: Convert gambling liability into guarantee liability.⁹That is, by the target company's original shareholders and investors to bet, the target company for the original shareholders of the gambling obligations to provide a "guarantee" or disguised guarantee.

B: Transforming liability for gambling into liability for breach of contract.¹⁰For example, in the gambling agreement, the target company is obliged to urge the corresponding shareholders to complete the capital reduction procedure (or the target company is obliged to ensure that the profits meet the distributable conditions). If the gambling obligation cannot be fulfilled due to the aforementioned reasons, the target company shall bear the liability for breach of contract, and the liability for breach of contract is equivalent in amount to the gambling liability payable by the target company.

By requiring the target company to assume joint and several guarantee liability for the repurchase obligations of the founding shareholders, the investor has the opportunity to claim the target company's guarantee liability directly through litigation after the triggering of the gambling conditions. In this kind of "disguised gambling", the target company avoids the direct "capital transaction" with gambling investors by assuming the guarantee responsibility, bypassing the procedural requirements of capital reduction or profit distribution set by the "Jiumin Minutes". With reference to the cases of (2016) Supreme Law Miner No. 128 and (2017) Supreme Law Miner No. 258, the above-mentioned "disguised guarantee" may be recognized by the court.

(2) Legal analysis of the new law

The legislative purpose of this provision of the new Companies Act is not to regulate gambling transactions, but to implement the principle of capital maintenance and, to a certain extent, to restrict leveraged buyouts, as well as to prevent market manipulation and shareholder discrimination.¹¹However, the objective situation is that the article is likely to be aimed at the occasion of "disguised gambling by the target company. For example, the most common arrangement of "disguised betting by the target company,It is the original shareholders who bet against the investors, and the target company guarantees the payment obligations of the original shareholders.The arrangement is identical to the structure provided for in section 163 of the new Companies Act, which may be regulated by section 163 of the new Companies Act as long as the target company in fact pays a certain economic benefit on behalf of the original shareholders in the gambling transaction.

It also needs to be pointed out that the new "Company Law" Article 163 provisions in the joint stock limited company chapter, can apply to limited liability companies? Only on the occasion of gambling, this paper tends to think that can refer to the application. The reason is that the Nine People's Minutes, when setting the rules for gambling, will also apply directly to limited liability companies with reference to Article 142 of the original Company Law for joint stock companies.

1. Provisions of the new Companies Act

The third paragraph of Article 89 of the new Company Law stipulates:If the controlling shareholder of a company abuses the rights of a shareholder and seriously harms the interests of the company or other shareholders, the other shareholders shall have the right to request the company to purchase its equity at a reasonable price.

2, Legal Analysis

Under the trial rules established in the Ninth Minute, the company's performance of the capital reduction procedure became a precondition for the court to support the investor's claim that the target company fulfilled its share repurchase obligation. However, since the company's capital reduction procedure is a matter of corporate autonomy, it is not appropriate for the judiciary to intervene. If the target company does not initiate a resolution process or deliberately fails to pass a capital reduction resolution, the investor's share buyback will be deadlocked. The new Company Law adds the statutory right of repurchase when the controlling shareholder abuses the rights of shareholders, the right of repurchase of other shareholders in the case of a new simple merger, and the right of repurchase of dissenting shareholders of a limited company. In this regard, in the equity repurchase dispute case, if the controlling shareholder of the target company intentionally fails to pass the capital reduction resolution, or intentionally obstructs the company from starting the capital reduction procedure, the controlling shareholder misappropriates the company's funds dishonestly, fails to carry out profit distribution and related party transactions according to the shareholder agreement, the investor may claim to buy back the equity of the target company according to "the controlling shareholder abuses the shareholder's rights and seriously damages the interests of other shareholders. The repurchase obligor of the investor's request for the repurchase right is the company, not the controlling shareholder, but the investor claims the controlling shareholder's liability under this provision, and the investor still needs to prove that the controlling shareholder has committed an abuse and that the abuse is directly causal to the cause of serious harm to the investor.

1, the new "company law" provisions.

The first and second paragraphs of Article 57 of the new "Company Law" stipulate:Shareholders shall have the right to consult and copy the articles of association, the register of shareholders, the minutes of the shareholders' meeting, the resolutions of the meetings of the board of directors, the resolutions of the meetings of the board of supervisors and the financial and accounting reports.

Shareholders may request access to the company's accounting books,Accounting vouchers. Shareholders request access to the company's accounting books,Accounting vouchersA written request should be made to the company stating the purpose. If the company has reasonable grounds to believe that the shareholders' inspection of accounting books and accounting vouchers has an improper purpose, which may harm the legitimate interests of the company, it may refuse to provide inspection, and shall reply to the shareholders in writing and explain the reasons within 15 days from the date of the shareholders' written request. If the company refuses to provide inspection, the shareholder may file a lawsuit in the people's court.

The third and fourth paragraphs of Article 57 of the new Company Law stipulate that shareholders consult the materials specified in the preceding paragraph,Intermediaries such as accounting firms and law firms may be entrusted.Shareholders and their entrusted accounting firms, law firms and other intermediary agencies shall abide by the provisions of laws and administrative regulations on the protection of state secrets, trade secrets, personal privacy and personal information when consulting and copying relevant materials.

2. Legal analysis and risk tips

(1) Mitigates the difficulty of proving that investors trigger gambling conditions.

Common conditions in a betting agreement that trigger a buyback by the target company/founding shareholder includeThe target company did not complete the listing at the agreed time, in fact it was no longer possible to go public within the agreed time, the performance was not up to standard, the founding shareholders defaulted materially or harmed the interests of the company.For such disputes, investors usually need to provide specific financial data of the target company to prove that the relevant conditions have been triggered when requesting repurchase (proving that it is impossible to reach the target of listing or the agreed financial performance standard), while the founding shareholders often use their de facto controller status to hinder investors from collecting and obtaining relevant documents such as company financial data and company business contracts, it is difficult for investors to determine the performance indicators of the target company and whether the founding shareholders have related transactions and other acts that harm the interests of the company. As a result, investors are often vulnerable to adverse situations in judicial proceedings.

After the new "Company Law" comes into effect, investors can obtain the financial data of the target company more comprehensively and truly by reviewing accounting vouchers, and can also entrust law firms, accounting firms and other intermediary agencies to directly consult relevant company documents, so that the work of obtaining evidence can be more convenient and accurate. At the same time, the new Company Law expands the shareholders' right to know to wholly-owned subsidiaries can also help investors prevent founding shareholders from using the wholly-owned subsidiaries of the target company to conceal the operating conditions of the target company, such as the founding shareholders completing foreign business cooperation through subsidiaries or transferring the profits of the target company through related transactions. It is foreseeable that after the new "Company Law" comes into effect, investors will have a new legal way to obtain key evidence when the two parties disagree on whether the gambling conditions are triggered.¹²

(2) Risk warning

The entry into force of the new Company Law cannot solve the problem at the enforcement level. Investors will still face obstacles at the level of the company and major shareholders if they win the lawsuit to obtain the shareholders' right to know. For example, major shareholders forcibly restrict the time and place for investors to access information each time, delay information for various reasons, and deliberately provide incomplete information, so difficulties in the implementation and enforcement of judgments still exist;

As far as possible, the investor shall make a clear agreement in the investment agreement/shareholder agreement on the right to copy accounting books and accounting documents, the period of audit, etc., which are not specified in the law.

1, the new "company law" provisions.

The third paragraph of Article 20 of the current Company Law stipulates:"If the shareholders of a company abuse the independent status of the company as a legal person and the limited liability of shareholders to evade debts and seriously harm the interests of the company's creditors, they shall be jointly and severally liable for the debts of the company."

The second paragraph of Article 23 of the new Company Law further stipulates: "If a shareholder uses two or more companies under its control to commit the acts specified in the preceding paragraph, each company shall be jointly and severally liable for the debts of any company."

2. Legal Analysis and Recommendations

According to the above provisions, in the case of shareholders using the independent personality of multiple affiliated companies under their control to harm the interests of creditors, the controlled affiliated companies are jointly and severally liable to each other because of the mixing of legal personality. When the actual controller of the target company uses other companies under its control and the target company to evade debts through interest transfer, related party transactions, etc., or triggers the gambling clause, this provision will undoubtedly provide investors with favorable protection and post recovery mechanism, and investors can pursue the responsibility to the actual controller, the target company and other companies controlled by the actual controller according to the situation.

(1) Gambling investors should use horizontal personality denial to prudently set up the terms of the agreement, expanding the scope of the subject of responsibility for gambling.

The influence of the system of horizontal denial of legal personality on equity investment and gambling is mainly reflected in the strengthening of the legal protection for investors, especially when the actual controller abuses the independent status of the company as a legal person and the limited liability of shareholders, investors can use the system of horizontal denial of legal personality to investigate the joint and several liability of the actual controller and its affiliated companies for the company's debts, effectively prevent the actual controller from evading debt or triggering the risk of gambling clauses through the transfer of benefits, related transactions and other means.

(2) Gambling investors should conduct regular legal risk reviews.

Regular legal risk reviews of the target company, the actual controller and its affiliates should be conducted to understand the relationships and related transactions between the target company, the actual controller and other entities, and to adjust investment strategies or take legal actions in a timely manner based on the actual situation in order to control risks and minimize losses.

(3) From the point of view of the actual controller: the legal risks of related companies need to be treated with caution.

For the actual controller, when making equity investment gambling arrangements, it is necessary to seriously consider that the related companies under its control may be affected by joint and several liability due to the legal personality denial system. The actual controller also needs to handle related transactions prudently, and in particular should avoid arbitrarily allocating funds between the target company and the related company, so as not to damage the rights and interests of investors and cause itself or the related company to bear joint and several liability.

1. New Company Law

Article 144 of the new Companies Act states: "A company may issue the following classes of shares different from the rights of ordinary shares in accordance with the provisions of the articles of association of the company:"(I) shares in the distribution of profits or surplus property after preference or inferiority;"

2. Legal analysis

The Ninth Minute interprets monetary compensation gambling as a preferential and directed profit distribution to gambling investors, or it can be interpreted as a gambling investor acquiring an equity interest that has priority in profit distribution. As a result, future money compensation bets can be seamlessly integrated into the new Companies Act by converting them into "preferred dividend shares" issued by the target company to investors. According to the relevant provisions of Article 144 of the new "Company Law", "the company may issue the following classes of shares different from ordinary shares in accordance with the provisions of the articles of association: (1) shares with preferential or inferior distribution of profits or surplus property; Among them," shares with preferential or inferior distribution of profits or surplus property "are similar to the profit distribution in which investors obtain monetary compensation before other shareholders in" gambling, therefore, the joint-stock company may be able to realize the "gambling" monetary compensation in disguise by setting up the investor's priority to receive profit distribution. It should be noted that, in the case of "gambling", there is no right to priority distribution of profits under normal circumstances, and only when the "gambling" condition is triggered. In addition, these provisions are currently only applicable to limited liability companies, and whether limited liability companies are applicable is yet to be clarified.¹³