Viewpoint... Study on the legal risk of "gambling agreement".
Published:
2023-02-28
Foreword With the rapid development of China's market economy, the volume of commercial transactions of listed trading entities, especially enterprises, is increasing year by year, so the financing needs of enterprises are gradually increasing. Traditional financing methods have gradually been unable to meet the needs of enterprises efficient and convenient, so a variety of new financing models have emerged. Among them, the "gambling agreement" as a special means of investment and financing, with its unique adjustment of valuation and risk diversification mechanism is widely used. However, from the beginning of the emergence of the "gambling agreement" financing model, there are more legal risks in terms of its own effectiveness and actual performance. The purpose of this paper is to sort out the common risks of the "gambling agreement" behavior model in practice, and put forward their own solutions to seek advice from colleagues. An overview of the financing function of the 1. "gambling agreement" and its basic form. The essence of the "gambling agreement" is a valuation adjustment mechanism, which is widely used in private equity investment and corporate valuation transaction arrangements by eliminating the uncertainty in equity pricing as much as possible. In the process of gambling, the gambling parties or parties will temporarily put aside the valuation dispute of the target company, and set objective conditions or objectives that can be recognized by all parties within a certain period of time according to the actual operating conditions of the company, so as to finally determine the actual value of the equity of the target company. However, due to the essential characteristics of the "gambling agreement", the gambling agreement itself has the characteristics of commercial information asymmetry: that is, the investor can not determine the equity value of its investment. As a result, "gambling agreements" in practice often contain very clear compensation clauses. The existence of the compensation clause enables the investor to inject capital into the target company at a higher equity valuation when the business information of the gambling counterparty is relatively vague, and also allows the financier to temporarily obtain the huge amount of funds needed for business development. The above is the "gambling agreement" to complete its financing value of the practice. In practice, the investors of the "gambling agreement" are mostly equity funds or venture capital institutions established by private placement, while the financing party is the company, the company's shareholders or the actual controller of the company. The types of "gambling agreement" are generally divided into: ① gambling with the shareholders or actual controllers of the target company; ② gambling with the target company; ③ gambling with the target company, the shareholders and actual controllers of the target company; according to the different gambling methods, they are generally divided into: ① agreed repurchase gambling; ② cash compensation gambling. Changes in the legal risk of 2. "gambling agreements": from effectiveness risk to performance risk The legal risk related to the "gambling agreement" is first reflected in the effectiveness risk, that is, the "gambling agreement" signed by the parties is directly found to be invalid by the court. The "Gansu Shiheng case" in 2012 was recognized as a representative case that found the "gambling agreement" invalid. The Supreme Court judge who heard the case held that in private financing activities, the relevant provisions of the Company Law and the contract Law should be followed when the investment and financing parties agree to gamble. The court held that if the contract was performed, it would enable the investor to obtain excess returns, to the detriment of the interests of creditors and the target company, while putting the investor in a superior position, endangering the basic principles of company law and even civil law, and therefore found that the gambling agreement was invalid. The invalid determination determined by the case lasted for a long time in our country, until the emergence of the "Huagong case" in 2019. The Jiangsu High Court believes that the relevant share repurchase clause involved in the "gambling agreement" signed between Jiangsu Huagong Company and Yangzhou Yangforging Company will not violate the principle of capital maintenance of the company after fulfilling the legal procedures, nor will it cause damage to the interests of the company's shareholders and their creditors, so the "gambling agreement" should not be deemed as of course invalid. The emergence of the "Huagong case" has led to differences in the determination of the validity of the "gambling agreement" in China's judicial practice, but at the same time, it also shows that China's judicial attitude towards the validity of the "gambling agreement" has changed. The issue was then clearly combed in the Ninth Minute, and the dispute over the validity of the "gambling agreement" became history. Article 5 of the Ninth Minute stipulates that the validity of the agreement between the investor and the company or the individual shareholders of the company will not be invalid due to the subject of the gambling, and if it does not violate the relevant mandatory provisions of validity, the court will find the gambling agreement valid and support the performance according to the actual conditions. If the investor appeals to the law for actual performance, whether the target company can be judged to perform its gambling obligations, the people's court shall review whether the performance complies with the provisions of the Company Law and other relevant laws. In summary, it can be seen that since the introduction of the Ninth Minute, the legal risk related to the "gambling agreement" has changed from validity to performance. 3. Combing and Exploring the Performance Risk of "Gambling Agreement" From the relevant provisions of the Ninth Minute on the "gambling agreement", the legal risks of the "gambling agreement" in the performance of the "gambling agreement" are broadly as follows: 1. Agreed repo-type bets may not be materially performed due to the shackles of the capital reduction process. If the "gambling agreement" stipulates the terms of share repurchase, when the target company needs to buy back the shares in order to fulfill the "gambling agreement", according to the principles and relevant provisions of the nine people's minutes and the company law, the capital reduction procedure must be carried out. This is because a share buyback without fulfilling the capital reduction process would violate the capital maintenance principle at the heart of the three principles of corporate law. However, according to the relevant provisions of the Company Law, the resolution of a company to reduce its registered capital needs to be passed by a vote of shareholders representing more than 2/3 voting rights, that is, an absolute majority.. And the legal and effective capital reduction procedure needs to follow the principle of capital maintenance and meet the requirements of protecting the interests of the company's creditors. Such tough regulations bring about the cumbersome nature of the capital reduction process. At the same time, fulfilling the repurchase obligation means that the company uses its own funds to repurchase shares from shareholders that have little commercial value and are not highly held, so in practice, other shareholders do not treat the company's capital reduction process in a positive manner based on their own interests. 2. The source of compensation cash in a cash compensation "gambling agreement" may result in the agreement not being performed or not being fully performed. In judicial practice, the parties in many cases will ask the court to adjust the amount of funds in the "gambling agreement. The reason for the adjustment is unambiguous and is nothing more than underfunding. But the problem behind the lack of funds is worth pondering: what is the scope of the source of funds for cash compensation? The Nine People's Minutes stipulates that the source of funds for cash compensation must be the after-tax profits after the withdrawal of the statutory provident fund. However, the Ninth Minute does not make a clear scope for the "after-tax profits" it refers. Therefore, the following problems arise in practice: Is the source of cash compensation limited to the company's after-tax profits in the current year, or should it include the undistributed after-tax profits in the past business process of the company in order to achieve the business objectives? And is it reasonable to use the existence of distributable profits as the standard for whether the agreement should be fulfilled? Because logically, as long as the prohibition of the law is not violated, the company can fulfill its obligations under the agreement with its own assets. 4. risk response recommendations From the above description, it is easy to see that there are various legal risks in the performance of the "gambling agreement", which may lead to the agreement not being fully performed. In my opinion, most of the above legal risks stem from the restrictions on the performance of agreements imposed by the relevant provisions of China's Company Law. The author thinks that to solve the above risks, we can try to jump out of the scope of the company law regulation: that is, regardless of the nature of the "gambling agreement", from the legal attribute, it belongs to the contract. The failure to perform the agreement due to the principle of capital maintenance, the shackles of the capital reduction procedure or the significance of the repayment of the source of funds constitutes a default in the nature of the contract law. The above-mentioned reasons for delayed performance are often subject to the peremptory norms of the Company Law, but should not prevent the contract law rules from delaying the liability for breach of contract due to temporary performance. Therefore, the author suggests that when the parties to the transaction enter into a "gambling agreement", it is best to agree on a liquidated damages clause in the gambling agreement to ensure the realization of their own legitimate interests. Conclusion With the increasing development of financing means, accurately grasping the legal risk of financing behavior is an indispensable part of the process of improving the efficiency of transactions, so the author introduces the risk of "gambling agreement" and the rough risk response model in this article, with a view to discussing with you.
Foreword
With the rapid development of China's market economy, the volume of commercial transactions of listed trading entities, especially enterprises, is increasing year by year, so the financing needs of enterprises are gradually increasing. Traditional financing methods have gradually been unable to meet the needs of enterprises efficient and convenient, so a variety of new financing models have emerged. Among them, the "gambling agreement" as a special means of investment and financing, with its unique adjustment of valuation and risk diversification mechanism is widely used. However, from the beginning of the emergence of the "gambling agreement" financing model, there are more legal risks in terms of its own effectiveness and actual performance. The purpose of this paper is to sort out the common risks of the "gambling agreement" behavior model in practice, and put forward their own solutions to seek advice from colleagues.
An overview of the financing function of the 1. "gambling agreement" and its basic form.
The essence of the "gambling agreement" is a valuation adjustment mechanism, which is widely used in private equity investment and corporate valuation transaction arrangements by eliminating the uncertainty in equity pricing as much as possible. In the process of gambling, the gambling parties or parties will temporarily put aside the valuation dispute of the target company, and set objective conditions or objectives that can be recognized by all parties within a certain period of time according to the actual operating conditions of the company, so as to finally determine the actual value of the equity of the target company. However, due to the essential characteristics of the "gambling agreement", the gambling agreement itself has the characteristics of commercial information asymmetry: that is, the investor can not determine the equity value of its investment. As a result, "gambling agreements" in practice often contain very clear compensation clauses. The existence of the compensation clause enables the investor to inject capital into the target company at a higher equity valuation when the business information of the gambling counterparty is relatively vague, and also allows the financier to temporarily obtain the huge amount of funds needed for business development. The above is the "gambling agreement" to complete its financing value of the practice.
In practice, the investors of the "gambling agreement" are mostly equity funds or venture capital institutions established by private placement, while the financing party is the company, the company's shareholders or the actual controller of the company. The types of "gambling agreement" are generally divided into: ① gambling with the shareholders or actual controllers of the target company; ② gambling with the target company; ③ gambling with the target company, the shareholders and actual controllers of the target company; according to the different gambling methods, they are generally divided into: ① agreed repurchase gambling; ② cash compensation gambling.
Changes in the legal risk of 2. "gambling agreements": from effectiveness risk to performance risk
The legal risk related to the "gambling agreement" is first reflected in the effectiveness risk, that is, the "gambling agreement" signed by the parties is directly found to be invalid by the court. The "Gansu Shiheng case" in 2012 was recognized as a representative case that found the "gambling agreement" invalid. The Supreme Court judge who heard the case held that in private financing activities, the relevant provisions of the Company Law and the contract Law should be followed when the investment and financing parties agree to gamble. The court held that if the contract was performed, it would enable the investor to obtain excess returns, to the detriment of the interests of creditors and the target company, while putting the investor in a superior position, endangering the basic principles of company law and even civil law, and therefore found that the gambling agreement was invalid.
The invalid determination determined by the case lasted for a long time in our country, until the emergence of the "Huagong case" in 2019. The Jiangsu High Court believes that the relevant share repurchase clause involved in the "gambling agreement" signed between Jiangsu Huagong Company and Yangzhou Yangforging Company will not violate the principle of capital maintenance of the company after fulfilling the legal procedures, nor will it cause damage to the interests of the company's shareholders and their creditors, so the "gambling agreement" should not be deemed as of course invalid.
The emergence of the "Huagong case" has led to differences in the determination of the validity of the "gambling agreement" in China's judicial practice, but at the same time, it also shows that China's judicial attitude towards the validity of the "gambling agreement" has changed. The issue was then clearly combed in the Ninth Minute, and the controversy over the validity of the "gambling agreement" became history. Article 5 of the Ninth Minute stipulates that the effect of the agreement between the investor and the company or the individual shareholders of the company will not be invalid due to the subject of the gambling, and if it does not violate the relevant mandatory provisions of validity, the court will find the gambling agreement valid and support the performance according to the actual conditions. If the investor claims that the law requires actual performance, whether the target company can be judged to perform its gambling obligations, the people's court shall examine whether the performance complies with the provisions of the Company Law and other relevant laws.
In summary, it can be seen that since the introduction of the Ninth Minute, the legal risk related to the "gambling agreement" has changed from validity to performance.
3. Combing and Exploring the Performance Risk of "Gambling Agreement"
From the relevant provisions of the Ninth Minute on the "gambling agreement", the legal risks of the "gambling agreement" in the performance of the "gambling agreement" are broadly as follows:
1. Agreed repo-type bets may not be materially performed due to the shackles of the capital reduction process.
If the "gambling agreement" stipulates the terms of share repurchase, when the target company needs to buy back the shares in order to fulfill the "gambling agreement", according to the principles and relevant provisions of the nine people's minutes and the company law, the capital reduction procedure must be carried out. This is because a share buyback without fulfilling the capital reduction process would violate the capital maintenance principle at the heart of the three principles of corporate law. However, according to the relevant provisions of the Company Law, the resolution of a company to reduce its registered capital needs to be passed by a vote of shareholders representing more than 2/3 voting rights, that is, an absolute majority.. And the legal and effective capital reduction procedure needs to follow the principle of capital maintenance and meet the requirements of protecting the interests of the company's creditors. Such tough regulations bring about the cumbersome nature of the capital reduction process. At the same time, fulfilling the repurchase obligation means that the company uses its own funds to repurchase shares from shareholders that have little commercial value and are not highly held, so in practice, other shareholders do not treat the company's capital reduction process in a positive manner based on their own interests.
2. The source of compensation cash in a cash compensation "gambling agreement" may result in the agreement not being performed or not being fully performed.
In judicial practice, the parties in many cases will ask the court to adjust the amount of funds in the "gambling agreement. The reason for the adjustment is unambiguous and is nothing more than underfunding. But the problem behind the lack of funds is worth pondering: what is the scope of the source of funds for cash compensation? The Nine People's Minutes stipulates that the source of funds for cash compensation must be the after-tax profits after the withdrawal of the statutory provident fund. However, the Ninth Minute does not make a clear scope for the "after-tax profits" it refers. Therefore, the following problems arise in practice: Is the source of cash compensation limited to the company's after-tax profits in the current year, or should it include the undistributed after-tax profits in the past business process of the company in order to achieve the business objectives? And is it reasonable to use the existence of distributable profits as the standard for whether the agreement should be fulfilled? Because logically, as long as the prohibition of the law is not violated, the company can fulfill its obligations under the agreement with its own assets.
4. risk response recommendations
From the above description, it is easy to see that there are various legal risks in the performance of the "gambling agreement", which may lead to the agreement not being fully performed. In my opinion, most of the above legal risks stem from the restrictions on the performance of agreements imposed by the relevant provisions of China's Company Law. The author thinks that to solve the above risks, we can try to jump out of the scope of the company law regulation: that is, regardless of the nature of the "gambling agreement", from the legal attribute, it belongs to the contract. The failure to perform the agreement due to the principle of capital maintenance, the shackles of the capital reduction procedure or the significance of the repayment of the source of funds constitutes a default in the nature of the contract law. The above-mentioned reasons for delayed performance are often subject to the peremptory norms of the Company Law, but should not prevent the contract law rules from delaying the liability for breach of contract due to temporary performance. Therefore, the author suggests that when the parties to the transaction enter into a "gambling agreement", it is best to agree on a liquidated damages clause in the gambling agreement to ensure the realization of their own legitimate interests.
Conclusion
With the increasing development of financing means, accurately grasping the legal risk of financing behavior is an indispensable part of the process of improving the efficiency of transactions, so the author introduces the risk of "gambling agreement" and the rough risk response model in this article, with a view to discussing with you.
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