According to the gambling terms, the net profit of Shi Heng in Gansu Province in 2008 shall not be less than 30 million yuan, otherwise Shi Heng in Gansu Province or its affiliated enterprises shall provide compensation to Haifu Investment, with the amount of: (1-actual net profit in 2008/30 million yuan) × 20 million yuan. However, in 2008, the actual net profit of Shi Heng was only 26,800 yuan. According to this calculation, it is necessary to compensate Haifu's investment of 6,543,800 yuan+099,800 yuan. Gansu Shi Heng refused to fulfill the agreement, so Haifu Investment took it to court.
The court of first instance held that "the agreement that Haifu Company has the right to claim compensation from Shi Heng Company does not conform to Article 8 of the Law of People's Republic of China (PRC) on Sino-foreign Joint Ventures, which stipulates that the net profit of the enterprise shall be distributed according to the proportion of the registered capital of each party to the joint venture", ruled that the gambling clause was invalid, rejected all the requests of Haifu Investment, and demanded that Haifu Investment bear all the litigation costs.
The court of second instance quoted the judicial interpretation of the Supreme Court. "An enterprise as a legal person or institution invests in a joint venture as a joint venture, but it does not participate in the joint venture and does not bear the risk responsibility of the joint venture. Regardless of profit or loss, the principal and interest shall be recovered on schedule, or a fixed profit shall be collected on schedule. It is called a joint venture, but it is actually a loan. If it violates relevant financial regulations, it should be confirmed that the contract is invalid. "
The court of second instance ruled that of the 20 million yuan invested by Haifu, except 1 15000 yuan has been included in the registered capital of Shi Heng Company, the remaining 1885 million yuan should belong to "investment, but it is actually a loan"; Gansu Shi Heng should return18.85 million yuan and interest during the period.
The focus of this case is the legality of China's gambling agreement.
The basic meaning of gambling agreement
VAM (Valuation Adjustment Mechanism), also known as Valuation Adjustment Agreement, is an agreement between investors and financiers on future uncertainty when they reach an agreement. If the agreed conditions appear, investors can exercise the right of valuation adjustment agreement; If the agreed conditions do not appear, the financier will exercise his other right. Therefore, the gambling agreement is actually a form of option.
Although the gambling agreement has not yet become an institutional setting in China's capital market, in practice, due to the needs of enterprise development or the bottleneck of funds, investors have signed gambling agreements for the purpose of protecting their own investment, which has almost become the basis and basic cooperation form for private equity financing or other investors to participate in the listing and mergers and acquisitions of mainland enterprises in China.
As an investment tool, gambling agreement is widely used in the United States, China, Hongkong and other countries and regions, and is recognized and protected by local laws.
In recent years, the gambling agreement, as an investment tool frequently used in foreign private equity financing, has entered the mainland of China and is frequently used in investment activities in the mainland. Many domestic private equity investment funds also frequently sign gambling agreements to invest.
The two trial results of Haifu Investment vs. Gansu Shi Heng both denied the legality of some gambling clauses in the gambling agreement, but in the United States, Hong Kong and other countries and regions, the gambling agreement was allowed and recognized by local laws.
Enlightenment from Haifu Case and Shi Heng Case
For the financier, the negative impact of non-performance of the gambling agreement on the financier cannot be ignored.
The reason why the financier chose to sign the gambling agreement is that the gambling agreement can easily obtain a large amount of funds and solve the shortage of funds on the premise of maintaining control rights, thus achieving low-cost financing and rapid expansion. Compared with other financing methods such as bank loans, it is flexible, convenient and efficient.
However, once the gambling fails, the financier will bear huge compensation losses. If the financier fails to fulfill the gambling agreement, its reputation and integrity will be deeply affected. Failure to fulfill the gambling agreement almost means that the financier has given up the way of private financing, and other institutions or individuals will not easily borrow money from enterprises that violate the agreement and have low commercial reputation. Because of this, even if some enterprises lose the gambling, they will not hesitate to compensate in order to expect better development.
In the case of Haifu Investment v. Gansu Shi Heng, although the second-instance judgment ruled that the gambling agreement was invalid, the financier (Shi Heng, Gansu) should return RMB 6,543,800+088,500 and the interest during the period. In addition, the investor (Haifu Investment) still retained its equity in the financier. Although the court does not recognize the legality of the gambling agreement, it still protects investors' investment rights and interests. Investment behavior is regarded as lending behavior, and financiers should pay corresponding interest in addition to huge financing principal.
Investment should not be blind
What investors are most concerned about is the income gained after investment and how to exit smoothly. However, in the process of selecting industries, enterprises and due diligence in the early stage, professional ability should be improved.
In the case of Haifu Investment VS Shi Heng, Gansu, the investor invested 20 million yuan to acquire 3.85% equity of the financier, which is equivalent to the overall valuation of 520 million yuan after investing in Shi Heng, Gansu, with a P/E ratio of 17 times. Gambling financiers should realize a net profit of 30 million yuan in the first year of gambling, but in fact, the net profit realized by financiers in the first year is only 26,800 yuan, with an error as high as119.4 times, which has to question the judgment of investors who specialize in private investment. Therefore, although the case is special, it objectively reflects that many investors are making investment decisions.
For investors, it is necessary to strengthen due diligence on the current situation and development trend of the industry in which they are located, the position of the financier in the industry, the management of the financier and the brand image, so as to make a rational judgment on the growth valuation of the financier. Investors should not only strengthen the necessary pre-financial and legal due diligence on the financier, but also strive for an objective and comprehensive understanding of the financier through various other means. For example, investors can bet in stages. For example, the two bets between Mengniu and investors, the first is a preliminary and tentative game, which is based on the current understanding and understanding. The two sides bet for the second time and finally achieved a win-win situation.
For enterprises with development potential, although the gambling target has not been achieved, they can still broaden the ways and means of quitting by signing supplementary agreements or signing new gambling agreements. For example, some enterprises aim to be listed on the Growth Enterprise Market in China within the specified time, but it has not been realized; Investors can change their thinking, change their gambling objectives, and determine other listing locations in combination with the actual and long-term development of enterprises. If you have enough confidence in the financing party, you can participate in the operation and management of the financing party and realize the role change under the condition of adjusting the gambling valuation and obtaining the compensation equity.
Improve the system of laws and regulations
The case of Haifu Investment v. Gansu Shi Heng has a great influence on investors who invest in private equity in China, because the gambling agreement is the most important tool for them to raise private equity. Although the Haifu investment case is a case with its particularity, once this violation of the gambling agreement is imitated, the consequences will be unimaginable.
At present, private equity investment has achieved rapid development in China. Moreover, private equity funds are conducive to promoting financiers to improve the employment rate, profitability and profit growth rate of enterprises and contribute a lot of taxes to the country.
Gambling agreement is the most important basic document for private investment. Although private investment has developed, as the most important investment tool, the legality of gambling agreement is not clearly defined in China. As a direct result, in China, investors will have no direct legal support and protection after private investment.
Although the case of Haifu Investment v. Gansu Shi Heng is an example, the judgment of the court reflects the denial of the exotic nature of the gambling agreement by some judicial departments. The court of second instance did not support the terms of the gambling agreement, but only recognized the investment facts of Haifu Investment itself. Judging from the result that investors' investment behavior is recognized as disguised lending behavior, according to the current legal framework or case in China, investors can also get basic cost compensation and interest for the same period. In other words, for investors, although the excess profits and returns in the gambling agreement cannot be obtained, the basic cost can still be recovered.
The gambling agreement is the result of the game between investors and financiers, and the realization of the gambling goal will be win-win. The financing party has strong profitability, good benefits and successful listing, which is conducive to the development of enterprises; Investors sell shares of listed companies to earn huge profits and realize excess returns.
However, once the gambling loses, the financier will give the investor huge compensation and suffer heavy losses; Even if investors get compensation for equity transfer from financiers, the decline of financiers' profitability also reduces the market value of equity, which indirectly leads to huge losses for investors.
Therefore, the gambling agreement is the embodiment of the interests of the financier and the investor. The gambling agreement closely links the interests of financiers and investors, and objectively promotes the rapid development of financiers. The essence of the gambling agreement is a lottery contract, which means that the price paid by one party is only an opportunity. For the insured, he may get much more income than the insurance premium paid, but he may not get any income; For the insurer, the premium he pays may be far greater than the premium he collects, but he may only collect the premium and not be responsible for paying it.
In this regard, China has adopted an open attitude in the whole legal practice. With the increasing participation of private equity, especially international private equity funds in domestic investment, the use of gambling agreements will become more and more common. From a legal point of view, the gambling agreement should be legal and effective to achieve a win-win situation for both parties. However, the Haifu investment case highlights the imperfection of the current legal system of private financing in China. The trial result of this case is referential and warning, but it is not instructive.
Disputes related to private placement such as gambling agreements will continue to emerge. In order to maintain the stability of the private investment market and protect the legitimate rights and interests of all parties, it is extremely urgent for relevant competent departments and legislatures to formulate relevant laws, regulations and unified norms from reality.
The writer is a lawyer of Deheng Law Firm.