directory

1. The court hears the basic situation

2. The Court ascertains the main facts

III. Reflections on the legal issues arising from the VAM clause arising from this case

(1) The legal concept of "listing on the stock market"

(2) Expression of true meaning

(3) Gambling with the target company

(4) Whether the investment and financing agreement can be interpreted as a standard contract

(5) Whether the performance of the right to repurchase is blocked by the issue of the restricted sale period

(6) Relevant provisions on the statute of limitations

preface

VAM clauses are already a familiar concept for professionals engaged in related fields. According to the Minutes of the Nine People, the so-called "VAM agreement" in practice, also known as the valuation adjustment agreement, refers to an agreement designed by the investor and the financier to solve the uncertainty, information asymmetry and agency cost of the target company, including equity repurchase, monetary compensation and other adjustments to the valuation of the future target company when the investor and the financier reach an equity financing agreement.

Generally speaking, investors and financing entities sign VAM agreements to reduce the negative impact of future uncertainties on capital appreciation. The investment and financing entity around the equity repurchase design of the VAM clause is one of the typical VAM models, the parties agree on specific matters of the future operation and development of the target company, when the agreed conditions are fulfilled, the investment entity can require the shareholders and actual controllers of the target company to repurchase the equity of the target company held by the investment entity (according to the "Huagong case", the "VAM clause" entered into between the investment entity and the target company is valid if there is no statutory reason for invalidity, but whether it can support the claim of actual performance of the investment entity, It should be decided according to the actual situation of the target company).

So far, the people's courts have adjudicated more and more VAM cases, and considerable experience has been accumulated in practice on issues related to the validity of VAM agreements, but a large number of legal issues arising from VAM clauses still exist. Based on a retrial case in Beijing, this article intends to analyze the legal issues arising from the VAM clause involving the NEEQ company.

1. The court hears the basic situation

2. The Court ascertains the main facts

This case mainly involved Company A (the target company), Xie (the legal representative and controlling shareholder of Company A) and Jiujiang Company (the investment entity), and in order to clarify the main facts, it was expressed according to the "timeline".

On July 1, 2011, Company A, Xie and Jiujiang Company signed the "Capital Increase and Share Increase Agreement"

Article 7: Jiujiang Company increases its capital to Company A, and all parties urge Company A to start the work of public offering of shares in China and listing on the stock exchange as soon as possible, and Company A shall make every effort to complete the listing application of the A-share market and be accepted before June 30, 2014.

On July 1, 2011, Company A, Xie and Jiujiang Company signed the Supplementary Agreement

Article 2: Company A did not submit the listing application materials before June 30, 2014 and was accepted; If Company A does not complete the listing before December 31, 2014, Jiujiang Company has the right to choose to require Company A to purchase all the shares of Company A held by Jiujiang Company after any of the above circumstances arise.

Article 4: The relevant provisions of Article 2 of the Supplementary Agreement, Article 8 of the Capital Increase and Share Increase Agreement and other provisions required to be terminated by the CSRC at that time shall automatically expire when the company submits formal declaration materials to the CSRC; If the company's listing application is rejected or the company's listing application materials are withdrawn, the validity of such clauses will be restored on its own from the date of rejection or the date of withdrawal, and the corresponding rights and interests of Jiujiang Company in the corresponding clauses during the period of lapse shall be retroactive; The relevant period is automatically extended.

April 9, 2014

Company A held the third meeting of the first board of directors to deliberate and pass the "Motion on Company A's Application for the Listing and Public Transfer of the Company's Shares in the National Small and Medium-sized Enterprises Share Transfer System".

April 25, 2014

Company A held the second extraordinary general meeting of shareholders in 2014 to deliberate and pass the "Motion on Company A's Application for the Listing and Public Transfer of the Company's Shares in the National Small and Medium-sized Enterprises Share Transfer System", etc., and Jiujiang Company signed and affixed the official seal on the resolution of the shareholders' meeting.

On May 4, 2014, Company A, Xie and Jiujiang Company signed the Revocation Agreement

In order to assist Company A in realizing this listing, the parties wish to terminate the provisions of the Capital and Share Increase Agreement and the Supplementary Contract that adversely affect Company A. In view of this, the parties hereby agree to the following terms: Article 1 The parties agree to abolish the Capital Increase and Share Increase Agreement and the following clauses in the Supplementary Contract: Related Party Transactions in Article 6.4 of the Capital and Share Increase Agreement, Article 7 Listing of the Company, Article 8.1 and Article 9 Information Disclosure, Article 13.3, and Article 2 of the Supplementary Contract, Article 4. The above terms are collectively referred to as the "Repeal Clauses".

Article 7 stipulates: "This Agreement shall not affect the validity of other provisions under the Capital and Share Increase Agreement and its Supplementary Contract, except for the repealed provisions."

On May 4, 2014, Xie and Jiujiang Company signed the Agreement

Xie undertakes the obligation to repurchase the shares of Company A held by Jiujiang Company, as follows: unless Jiujiang Company agrees otherwise in writing to extend the extension, if: (1) Company A does not submit the listing application materials before June 30, 2014 and is accepted; or (2) Company A has not completed its listing before December 31, 2014. Jiujiang Company has the right to elect to require Xie and/or a third party designated by Xie to purchase all the shares of Company A held by Jiujiang Company after any of the above circumstances arise.

7. July 11, 2014

The National SME Equity Transfer System Co., Ltd. sent the "Letter on Agreeing to the Listing of Company A's Shares in the National SME Share Transfer System" (hereinafter referred to as the "Letter of Consent to Listing") to Company A.

III. Reflections on the legal issues arising from the VAM clause arising from this case

(1) The legal concept of "listing on the stock market"

Under the VAM agreement in this case, one of the conditions for triggering the share repurchase is whether the target company can be "listed" as agreed. However, can "listing" be used at the same time, and is there a difference between "listing" and "listing"? What is the context in which "listing" is used? Taking this case as an example, one of the conditions for share repurchase in the Supplementary Agreement and the Agreement is that "Company A has not completed its listing before December 31, 2014", and the different understandings of the two parties on the concept of "listing" are one of the important points of dispute in this case.

According to the common understanding, in the context of share repurchase, "listing" usually refers to "listing on the New Third Board", and "listing" usually refers to IPO. According to the provisions of the Several Opinions of the State Council on Further Promoting the Healthy Development of the Capital Market (Guo Fa [2014] No. 17) and the current situation of the capital market system, China's multi-level capital market system currently includes the stock exchange market, the main board and SME board market, the ChiNext market, the science and technology innovation board market, the national small and medium-sized enterprise share transfer system and the regional equity market. The main board market refers to the main board and the SME board relying on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, the ChiNext market refers to the ChiNext board of the Shenzhen Stock Exchange, the science and technology innovation board market refers to the science and technology innovation board of the Shanghai Stock Exchange, and the national small and medium-sized enterprise share transfer system is the new third board market.

As we all know, the stock exchanges established in accordance with the law in China include the Shanghai Stock Exchange and the Shenzhen Stock Exchange, and the listing and trading of publicly offered stocks means that the publicly issued stocks are traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.

Initial public offering and listing (IPO) refers to the act of a company to be listed on the securities market for the first time to raise funds and list shares in the securities market. Initial public offering and listing refers to the listing of the company's shares on the above-mentioned stock exchanges, and through the initial public offering and listing, the target company becomes a listed public company.

The application scenario of "listing" seems to be more extensive. For example, when trading state-owned assets, it is usually carried out through the property rights market, which is called "entry transaction", in which the act of public trading after entering the market is also called "listing transaction", and the act of non-public transaction is also called "transfer by agreement". Therefore, listing itself refers to a form of transaction: the transferor issues a listing announcement, lists and announces the subject matter and trading conditions of the proposed transfer on the designated trading venue according to the time limit specified in the announcement, accepts the bidder's quotation application and updates the listing price, and determines the transferee according to the bidding results at the end of the listing period.

Listing in the national SME share transfer system has its specific meaning. Article 3 of the Interim Measures for the Administration of National SME Equity Transfer System Limited Liability Companies stipulates: "A company whose shares are listed on the national SME share transfer system is referred to as a listed company and is an unlisted public company. "The application for the transfer of the company's shares on the New Third Board market is listed, and after the listing on the New Third Board, the target company becomes an unlisted public company.

In summary, the court held that the expression of the trading method of the company's shares differs depending on the stock trading venue: (1) the application for the company's shares to be traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange can be expressed as listing or listing; (2) If the company's shares are applied for trading on the New Third Board, it is expressed as listing, and usually not as listing or listing.

Revelation:

When drafting relevant legal documents, lawyers and other professionals must distinguish between "listing" and "listing", must clarify the specific trading venues of "listing" and "listing", and try to avoid vague expressions such as "listing".

(2) Expression of true meaning

Expression of intention is the core element of a legal act, and without expression of meaning, there is no civil legal act. The expression of true meaning is that the external expression of the actor is consistent with his inner true will. Its requirements are twofold: that is, the internal intention is consistent with the external expression and that it is of the will of the perpetrator.

The case mainly involved four legal documents, namely the Capital Increase and Share Increase Agreement, the Supplementary Agreement, the Revocation Agreement and the Letter of Agreement. The "Capital Increase and Share Increase Agreement" is an agreement between Jiujiang Company and Company A and Xie on the legal relationship between capital increase and equity investment. The Supplementary Contract is a VAM agreement signed between Jiujiang Company and Company A, and the agreement on the withdrawal arrangement in the contract is a VAM clause reached by the two parties around the share repurchase. The Revocation Agreement is an agreement between Jiujiang Company, Xie and Company A on the termination of some of the provisions of the Capital and Share Increase Agreement and the Supplementary Contract. The Agreement is a VAM agreement signed between Jiujiang Company and Xie around the content of share repurchase. The focus of the dispute between the parties in this case that Xie could not reach an agreement on the repurchase of the equity of Company A was whether the agreement that "Company A did not complete the listing before December 31, 2014" was the true intention of the parties and whether it was still valid, provided that Company A had already been listed on the New Third Board.

According to paragraph 1 of article 125 of the Contract Law, if the parties have a dispute over the interpretation of the terms of the contract, they shall determine the true meaning of the clause in accordance with the words and phrases used in the contract, the relevant terms of the contract, the purpose of the contract, trading habits and the principle of good faith.

According to paragraph 1 of Article 142 of the Civil Code, which has not yet entered into force, the meaning of the expression of intention shall be determined in accordance with the words and phrases used, taking into account the relevant provisions, the nature and purpose of the act, customs, and the principle of good faith.

Contract interpretation belongs to the category of methodology and hermeneutics, and is the logical starting point for understanding contracts, applying laws and resolving contract disputes. According to the general theory, the method of legal interpretation is the rules and principles recognized by the specific legal community that legal persons must follow in their legal interpretation. The methods of legal interpretation can be roughly summarized into: textual interpretation, purpose interpretation, historical interpretation, comparative interpretation, system interpretation, etc., and contract interpretation must first start from the textual interpretation to determine the usual meaning of contract terms.

The judge of second instance in this case comprehensively discussed several aspects such as textual interpretation, historical interpretation, system interpretation, and objective purpose, and determined that the true intention of the parties expressed that the author has certain doubts about this, and the parties have modified the original repurchase conditions to be listed on the New Third Board, so it is obviously impossible for Company A to complete the listing within the time limit stipulated in the Agreement after listing, so what is the significance of the parties signing the Agreement? Taking a step back, assuming that the purpose of signing the Agreement is to achieve the purpose of the repurchase by the investment entity (because the repurchase conditions cannot be achieved), there is no need for the parties to sign a Letter of Agreement at this point in time or cause disputes between the parties.

The following is a brief list of several cases in which contract interpretation methods determine the true intention of the parties:

1. Explanation of purpose

Court: Shanghai Putuo District People's Court

Case No.: (2019) Hu 0107 Minchu No. 10566
The Court Ruled: ... From a textual point of view, the term "employee" in Article 11.1 of the Cooperation Agreement does have an unclear concept, which can be interpreted as an employee who has an employment contract relationship with the defendant, but it cannot be excluded that it includes all workers who accept the defendant's management and are paid labor remuneration by the defendant. Therefore, the meaning of the expression needs to be clarified by interpreting it purposefully. Article 125 of the Contract Law clarifies that purpose interpretation is one of the important methods of contract interpretation. By interpreting the purpose of the parties' conclusion of the clause, the Court held that the purpose of the clause was to clarify the subject of liability in the event of an accident occurring in the course of the work of the defendant employee... Therefore, it is reasonable for the parties to agree in advance through the terms of the contract as to the subject subject to bear such liability. If the word "employee" is simply interpreted to mean an employee who undertakes management work with the defendant who has an employment contract relationship, it is not in line with the purpose of the contract...

2. Interpretation of context, system and purpose

Court: Shanghai Financial Court

Case No.: (2019) Hu 74 Min Zhong No. 718

The Court Ruled: ... The court held that the focus of the dispute in this case was whether the repurchase right clause in Investment Agreement 1 and Investment Agreement 2 was superseded by a subsequent contract text... First of all, as far as the context is concerned, the repurchase right clause in Investment Agreement 1 and Investment Agreement 2 is significantly different from the repurchase right clause in the Joint Venture Contract 2 in at least the following seven aspects... The court held that the above seven differences show that, compared with the Investment Agreement 1 and the Investment Agreement 2, the Joint Venture Contract 2 makes comprehensive and substantive changes to the investor's repurchase right in terms of the subject of the repurchase obligation, the repurchase conditions, the repurchase price, the repurchase procedure, the repurchase remedy, etc., and some of the changes are completely different changes made by the parties on the same matter. Secondly, based on the interpretation of the system and the interpretation of the purpose, combined with the trading habits, the court believes that the three rounds of financing agreements A, B and C of Binda clearly reflect the trading habit of giving priority to the protection of the rights and interests of investors in the second round. Embodied in...

Revelation:

Investment and financing agreements often consist of a series of documents, and the documents contained in the series are largely enlightening. It is recommended that fixed professionals follow up the drafting, negotiation, revision and signing of a series of documents throughout the process, coordinate and integrate the content of the documents, and avoid different understandings of the content between the documents, so as to have an uncertain situation of using the method of contract interpretation to determine the true intention between the parties.

(3) Gambling with the target company

According to Article 2 of the Supplementary Agreement: Company A did not submit the listing application materials before June 30, 2014 and was accepted; If Company A does not complete the listing before December 31, 2014, Jiujiang Company has the right to choose to require Company A to purchase all the shares of Company A held by Jiujiang Company after any of the above circumstances arise.

According to the Agreement, unless Jiujiang Company agrees otherwise in writing to extend the offering, if: (1) Company A does not submit the listing application materials before June 30, 2014 and is accepted; or (2) Company A has not completed its listing before December 31, 2014. Jiujiang Company has the right to elect to require Xie and/or a third party designated by Xie to purchase all the shares of Company A held by Jiujiang Company after any of the above circumstances arise.

According to the "Review Points for the Issuance of Shares of Listed Companies", "2.20 Review Content: Valuation Adjustment Provisions; Key points in the review: 1. The listed company cannot participate in VAM; 2. If VAM is involved, the VAM clause should be clearly disclosed; 3. The VAM clause must not violate the provisions of relevant laws and regulations. "With reference to the above review points regarding the review of the VAM clause in the process of listing on the New Third Board, if Company A is listed on the New Third Board, it cannot participate in VAM as a share repurchase obligor. Therefore, the Agreement changes the entity undertaking the repurchase obligation (changing the repurchase obligor from Company A to Xie and/or a third party designated by Xie). In summary, the court held that the signing of the Agreement was actually to change the subject of the repurchase obligation.

On this point, the author has the following questions:

1. The "Key Points for the Review of Stock Issuance of Listed Companies" was issued by the National Small and Medium-sized Enterprises Equity Transfer System Co., Ltd. ("Share-to-Equity Transfer Company") in 2015, with limited effectiveness levels, and has been abolished in February this year. The second instance judgment of this case was made in August 2019, but it is debatable whether the "Key Points for the Review of the Issuance of Shares of a Listed Company" as an audit document for the share-to-stock transfer company can prove that the reason for signing the "agreement" is to "change the entity undertaking the repurchase obligation", and thus make it feasible for the actual controller to perform the repurchase obligation.

2. As mentioned above, the Minutes of the Nine People's Republic of China provides a new adjudication view on "gambling between the target company and the investor". According to the Minutes of the Jiu Min, the VAM agreement between the target company and the investor is valid if there is no statutory cause of invalidity, but whether the agreement can actually be performed depends on further review by the court. In February 2020, the stock transfer company issued a notice on revising the "Review Points for the Directional Issuance of Shares of Companies Listed on the National SME Stock Transfer System" and the "Template for the Temporary Announcement of the Directional Issuance of Shares under the National SME Equity Transfer System", which deleted the review points on "valuation adjustment content" in the 2015 Review Points for the Issuance of Shares of Listed Companies.

3. After searching, there have been successful cases of listed companies performing VAM agreements to repurchase the company's shares held by investors, but it is unknown whether these cases are special (for example, whether there are new shareholders during the listing period, whether they harm the interests of other shareholders, etc.).

Revelation:

1. The validity of the VAM agreement depends on the determination of the validity of the contract under the Contract Law, generally speaking, the VAM agreement can recognize the validity of the VAM agreement without violating the mandatory provisions of the law;

2. The design of the VAM clause should be enforceable (such as detailing the performance time and procedures of the repurchase, the different proportions of capital reduction involved in the repurchase, etc.), in addition, from the level of value judgment, the performance of the VAM agreement cannot infringe on the interests of the target company and its creditors, that is, combined with the comprehensive judgment of the target company's operating conditions and solvency at that time;

3. Although the Minutes of the Nine People determine the basic principles that can be gambled with the target company, investors should try not to gamble with the target company on the premise that there are no more judicial practice judgments for further reference and analysis.

(4) Whether the investment and financing agreement can be interpreted as a standard contract

Paragraph 2 of Article 39 of the Contract Law: Standard clauses are clauses that are drawn up in advance by the parties for repeated use and are not negotiated with the other party at the time of concluding the contract.

Article 41: Where there is a dispute over the interpretation of standard clauses, they shall be interpreted in accordance with the common understanding. Where there are two or more interpretations of the standard terms, an interpretation unfavorable to the party providing the standard terms shall be given. Where standard clauses and non-standard clauses are inconsistent, non-standard clauses shall be used.

Paragraph 1 of Article 496 of the Civil Code: Standard clauses are clauses that the parties have drawn up in advance for repeated use and have not negotiated with the other party at the time of concluding the contract.

Article 498: In the event of a dispute over the interpretation of standard clauses, they shall be interpreted in accordance with the common understanding. Where there are two or more interpretations of the standard terms, an interpretation unfavorable to the party providing the standard terms shall be given. Where standard clauses and non-standard clauses are inconsistent, non-standard clauses shall be used.

To sum up, there are three main criteria for determining standard clauses: first, whether the clause is pre-drafted by one party; second, whether the clause is intended for repeated use; Third, whether the clause was unilaterally proposed by one party and not negotiated with the other party at the time of concluding the contract.

Revelation:

The content of the investment and financing documents refers to the parties to the contract, and objectively there is generally no degree of pre-formulation for repeated use. At the same time, investment and financing documents are generally drafted by the investor, but the parties to the agreement will conduct multiple rounds of negotiation when they are concluded, so it is rare for the investor to be unfavorably interpreted as standard clauses.

(5) Whether the performance of the right to repurchase is blocked by the issue of the restricted sale period

Article 36 of the Securities Law: Where the Company Law of the People's Republic of China and other laws have restrictive provisions on the transfer period of securities issued in accordance with the law, they shall not be transferred within the limited period.

Article 141 of the Company Law: The shares of the company held by the promoter shall not be transferred within one year from the date of incorporation of the company. Shares issued before the public offering of shares by the company shall not be transferred within one year from the date on which the company's shares are listed and traded on the stock exchange.

Article 1 of the Business Guidelines for Restricted Sale and Unrestricted Sale of Shares of Companies Listed on the National SME Share Transfer System: The restricted sale and lifting of the restricted sale of shares of listed companies shall comply with the relevant provisions of the Company Law, the Administrative Measures for the Acquisition of Non-listed Public Companies, the Business Rules of the National SME Equity Transfer System (for Trial Implementation) and other relevant provisions, and apply to the National SME Equity Transfer System Co., Ltd. in a timely manner.

Paragraph 1 of Article 7: If the articles of association, relevant agreements or shareholders' commitments of a listed company stipulate a longer restricted sale period or a higher restricted sale ratio for the company's shares, the relevant shareholders shall, within two transfer days from the date of occurrence of the above facts, disclose the "Announcement on the Voluntary Restriction on the Sale of the Company's Shares Held by Shareholders" through the listed company, and apply to the national stock transfer company for the restricted sale of shares on the same day.

In summary, the restriction on the sale of shares of a company listed on the New Third Board cannot violate laws and regulations, the business rules of the New Third Board, nor the articles of association, relevant agreements and shareholders' commitments of the listed company.

Revelation:

The relevant provisions/agreements of the restricted sale period constitute the obstruction of the repurchase clause of the investment and financing agreement, and the issues such as the limited sale period, the repurchase clause and the statute of limitations should be considered when drafting the investment and financing agreement, so as to avoid the inability to actually perform the repurchase clause or the loss of litigation rights due to any reason.

(6) Issues related to the limitation of actions

1. Application of the statute of limitations

Article 188 of the General Provisions of the Civil Law and the Civil Code stipulates that the statute of limitations for applying to a people's court for the protection of civil rights is three years. Where laws provide otherwise, follow those provisions.

The limitation period for litigation runs from the date on which the right holder knew or should have known that the right had been injured and that the obligor had been infringed. Where laws provide otherwise, follow those provisions. However, if more than 20 years have passed since the date on which the right was infringed, the people's court shall not protect it, and where there are special circumstances, the people's court may decide to extend it on the application of the right holder.

Under the repurchase clause, the exercise of rights by an investment entity mainly includes two levels: first, an indication of intention to repurchase equity to the obligor; Second, the obligor fulfills the repurchase obligation. Whether the right holder can realize the right depends on whether the obligor fulfills the obligation to pay money. Therefore, the right holder's request constitutes a claim for creditor's right. According to Article 1 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Limitation System in the Trial of Civil Cases: a party may raise a statute of limitations defense against a claim, but the people's court will not support a claim defense against the following claims: (1) the right to pay the principal of the deposit and the right to claim interest; (2) the right to claim principal and interest on treasury bonds, financial bonds, and corporate bonds issued to unspecified targets; (3) the right to claim capital payment based on the investment relationship; (4) Other claims for claims that do not apply to the statute of limitations in accordance with law.

Therefore, in the absence of exceptions, the relevant provisions of the statute of limitations apply to the exercise of the right of claim by the investment entity.

2. The starting point of the statute of limitations

According to the law, the limitation period for litigation is calculated from the date on which the right holder knew or should have known that the right had been damaged and the obligor. The realization of its claim by a right holder depends on the obligor's performance of the debt. The infringement of the rights of the right holder shall be based on the obligor's refusal to pay the repurchase price. In addition, where the obligor has not expressly informed the obligor to perform the repurchase obligation, the obligor's repurchase obligation does not arise. Therefore, only when the right holder notifies the obligor to perform the repurchase obligation, and the obligor expressly refuses or fails to perform the repurchase obligation within the agreed time limit, the fact that the right holder's rights have been damaged will appear, and only then will it constitute the starting point of the limitation of actions.

3. The time limit for the right holder to issue the notice

If the obligor directly files a lawsuit with the court to claim its rights without notifying the obligor to perform the repurchase obligation, the act shall be deemed to have notified the obligor of the share repurchase. If the repurchase agreement stipulates the time limit for the right holder to exercise the repurchase right, and the right holder fails to exercise the repurchase right within the agreed period, the right of formation will be extinguished, and at this time, the right holder still has the right to apply the relevant provisions of the statute of limitations to claim its legal rights.

Due to the complicated and trivial legal issues arising from the VAM clause, especially when listed or listed companies are involved, it is necessary to comprehensively consider the relevant provisions of laws and regulations such as securities, companies, contracts and so on. As a professional, when drafting, researching and analyzing relevant legal documents, it is not only impossible to depart from the understanding of the relevant concepts and terms of the capital market, but also involves the transaction mode in the investment field and the relationship between the agreements, the true intention of the parties, and the understanding and application of the terms of the agreement.

(This article is translated by software translator for reference only.)