DeHeng Lawyers Saved Huge Economic Losses for the Original Shareholder of the Subject Company in a Bet-on Dispute Case It Represented
2023-04-04
Recently, the Jiangxi Provincial Higher People's Court rendered a final judgment in the performance compensation dispute over the valuation adjustment mechanism (VAM or bet-on) agreement in a merger & acquisition transaction between the client surnamed Lian (the original shareholder of the subject company) and Suzhou XX Technology Co., Ltd. (the new shareholder, a listed company), and supported the defense reasons put forward by DeHeng lawyers.
The case involved an amount of RMB 250 million, and it lasted more than three years after the first instance, second instance, and then first and second instances of retrial.
In this case, the listed company held that following the M&A, it had the right to control the subject company in accordance with The Company Law and relevant regulatory documents of the China Securities Regulatory Commission, and Lian should bear 100% of the performance compensation liability during the VAM period in accordance with relevant provisions of the Profit Compensation Agreement.
DeHeng lawyers argued that during the VAM period, the operating rights of the subject company, especially the right to make business decisions, should be exercised by the original shareholder who bears the responsibility for the VAM; otherwise, the operating results of the subject company during the VAM period should be borne by the listed company which made business decisions.
When the listed company intervenes or even fully controls the decision-making power of the subject company, and the original shareholder which made the performance commitment is demanded to be liable for the business results and bear 100% performance compensation liability, it obviously increases the risk of the performance commitment maker and violates the principles of fairness and reciprocity of rights and obligations established by the Civil Code.
The Yichun Intermediate People's Court and the Jiangxi Provincial Higher People's Court heard the case four times, adopted the representation opinion put forward by DeHeng lawyers, and ruled that Lian only needed to bear 40% of the subject company's performance compensation liability in 2019 (the listed company itself bore the rest 60%).
This case dealt with a new, difficult and complex situation. In judicial practice, the court generally rules that the original shareholder of the subject company as the performance commitment maker bears 100% of the performance compensation liability in accordance with the profit compensation agreement. After case search, it is extremely rare for a Chinese court to rule that a listed company bears a large proportion of its performance compensation liability on its own. The ruling of this case will provide a reference for the future trial of similar cases.
DeHeng lawyers believe that the parties to an M&A transaction should clearly stipulate in the transaction documents the exercise of the business decision-making power of the subject company after the transaction; the listed company that is the acquirer shall exercise “control” modestly during the VAM period and perform its ancillary obligations in good faith; when hearing VAM dispute cases arising from M&A transactions, the people's court should boldly pursue the alignment between judicial fairness and capital market fairness; the CSRC and other regulatory authorities shall guide the healthy and orderly development of M&A and restructuring business in the capital market, promote the honesty and trustworthiness of the parties to the transaction in the process of setting VAM clauses and contract performance, and guide capital for good.
The DeHeng team representing this case was led by partners Xiong Xiaojun and Jin Xiaoyu of Shenzhen Office, with support from lawyer Wang Zengke and other lawyers and paralegals on Xiong's team.
