PE And The Three New Board Companies Were Placed In Court, Reflecting The Effectiveness Of Gambling And Performance Problems.

Around 2015, the private equity market entered the peak period, and the financing of the primary market was new and high. At this stage, as the project continues to enter the exit cycle, there will be more and more disputes over gambling.

A private equity firm in Shanghai is currently entering the exit management phase. Recently, it has been battered by a gambling dispute between a new three board listed company.

It is understood that in the process of private equity investment, gambling agreement is a more common existence. It can protect the investors' interests as far as possible when there is uncertainty in the future earnings of the invested company, and at the same time, it will play a certain incentive and constraint role for the financing side.

But after the trigger of the gambling clause, the performance can not always be fulfilled. The dispute between the Shanghai private equity agency and the new three board enterprises is not a case. When the performance of the project is not satisfactory, it will eventually trigger a bet on repurchase. How to properly handle the disputes and maximize the possibility of protecting the LP rights and interests may be the problems faced by many organizations in the post investment work.

Market timing is expected to be better, and post crash cliff fall.

It is understood that the above private placement institutions were established around 2010. In 2015, it joined another investment institution to invest in a business enterprise that operated and operated data center.

Li Wei, the investment director of the private-equity firm (pseudonym), introduced the economic report in twenty-first Century, when the investment in the company was based on three points.

First of all, the team is optimistic about the data center industry. At that time, two or two listed companies have appeared in the industry, mainly as bank customers, and the overall business situation is very good. At the same time, the transformation of Xiang Yun data center of enterprise self built data center is the general trend. The operation and maintenance business of the start-up enterprise is the basic service, and the business volume will also grow.

Second, members of the company's founding team have served as the Greater China executives in world-renowned software companies. The company can get stable client resources and reduce operational risks. Third, the founding team said that the company developed a set of automated remote operation and maintenance products, which can reduce human dependence and reduce operating costs.

At the same time, the private equity agency also signed a bet agreement with venture enterprises, as well as the actual controllers and original shareholders of the company. For gambling agreement, the company needs to achieve a net profit target in 2015 -2017. If the actual net profit of the company in 2015 and subsequent years is less than 50% of the target, the investor shall have the right to ask the original shareholder to repurchase the shares according to the 12% compound interest.

Li Wei explained that as a financial investor, the team will sign a bet agreement when investing in all projects, aiming to prevent the moral hazard of controlling shareholders. The signing of the gambling agreement is also the principle of mutual willingness. If the founder is unwilling to accept the bet, the investment negotiations may fail, which is also common.

About half a year after the investment, the start-up enterprise is listed on the new three boards. At that time, the two sides had higher expectations for the liquidity of the new three boards, and thought that enterprises might welcome opportunities after their listing. But then, the overall performance of the new three board market was not as good as expected, and the business situation of the enterprise itself was gradually deadlocked.

Zhou Xin, a private equity investment assistant, revealed to the twenty-first Century economic report that the business itself was dependent on big customers, but later the company terminated cooperation with its existing major customers, which eventually led to a cliff breaking performance.

"We still have hopes for it when the initial performance of the company declines. But after losing its original customer, the company did not have any new major client resources to supplement it. The rest of the small customer business is relatively fragmented and does not play a big role in boosting performance. " She said.

The decline in performance for several years finally triggered a bet. The private sector offered a repurchase request to the founder of the company in accordance with the agreement, but failed to get the positive response from the other side.

Li Wei recalled that when the two sides first discussed the issue of repurchase, the founder was willing to accept the obligation to buy back, but the two sides did not reach an agreement on the amount of repurchase and time. It is understood that in the earliest version of the plan, the founder had proposed that interest would be avoided and the principal payment would be completed within two years.

After careful consideration, the private sector did not agree. "We do not do this at the fund level." Li Wei said. First, the repurchase time is too long, which is not consistent with the original agreement. Second, there has been a gap between the two sides, and there is no way to ensure that the accounts can be received in a timely manner.

In addition, the situation faced by the private sector that invested in the enterprise is confirmed. It is willing to give up some of its interests in the face of the same question of gambling and performance, and make a transfer on the amount and payment cycle of the repurchase, but it does not receive the accounts on time.

"Third, we believe that the other party has the ability to repay. From 2015 to 2017, the company was always in a state of micro deficit. The tens of millions of funds invested by the two agencies are likely to be repaid. The founder also has many properties on his own. Li Wei said.

Court: the repurchase effectiveness and application time become the focus of controversy

Under the premise of several communication failures, the private sector can only choose to be in court with the founder. From 2018 to 2020, the private sector filed a lawsuit against the local court for the two time, asking the founders to repurchase it according to the supplemental agreement. However, the outcome of the first instance and second instance did not support its appeal.

Why is there no support for the betting agreement signed at the time of investment? The focus of controversy behind this is mainly the effectiveness and application time of the right to buy back.

The reporter contacted the founder of this venture company. He said his views, reasons and opinions were reflected in the verdict, and declined the further interview of the twenty-first Century economic report reporter.

The judgment of first instance and second instance obtained by the economic news reporters in twenty-first Century showed that the defendant of the founder believed that the right of repurchase enjoyed by the private placement institution under the "supplementary replenishment agreement" is strictly precondition, and its repurchase rights can only be exercised before the company's IPO or new three boards.

There is also a special agreement in the "supplementary replenishment agreement" that investors' right to buy back and other rights shall be automatically terminated in the case of a conflict between the listing of the new third board and the listing and listing rules when the company submits the new third board. After the company has listed the new third board, the investor's rights and obligations will be subject to the Approved Firm articles of association of the shareholders' meeting.

The founder of the defendant believed that after the company's new three boards were listed, the company's articles of association did not rearrange the investment institutions to have the right of repurchase. The investment organization itself has a perfect exit mechanism, it can transfer its shareholding through the open market, and does not ask the founder to repurchase the stock right.

However, the private sector believes that the repurchase rights of the investment institutions have been disclosed in the public transfer instructions when the new third board is listed, so the right to buy back is not lost due to the listing of the company. At the same time, the terms of repurchase stipulated in the supplementary replenishment agreement are independent of the articles of association and are not related to the articles of association.

In view of the above disputes, the court decided that there were no more than two interpretations in the corresponding provisions. According to the literal interpretation, that means the rights of the investment institutions came from the articles of association after the listing of the new three boards. The Constitution does not give investment institutions the right to buy back, and actually terminates the rights of investors such as repurchase rights stipulated in the supplementary replenishment agreement.

The two-year lawsuit did not achieve the desired result. But Li Wei said that even if the whole lawsuit is time-consuming, laborious and costly, the company may apply for retrial review. If the review is passed, it will be sent back for retrial. "We feel that we are still justified. We can not ignore the true meaning of both sides in the context because of a sentence in the agreement." Li Wei said.

The reporter consulted the industry lawyer on this matter. Many lawyers believed that the rate of final judgment on this matter may be relatively low, but it can not be said that there is no controversy at all.

The lawyer of the Tianchi Jun Tai law firm told the twenty-first Century economic report that from the angle of the new three board listing, the gambling between the investor and the company will be cancelled when the company is listed, but the bet between the shareholders and the shareholders should be continuous and effective. In the past, the controversy about gambling was also focused on the effectiveness of gambling between investors and companies.

As for the defendant's said articles of association no longer agreed on the right to repurchase, Hara Sendai believes that the articles of association mainly restrict the rights and obligations between the company and shareholders, between the company and the senior executives. Whether the civil rights agreed between large shareholders and small shareholders are effective can not be completely stated in the articles of association.

Private placement management has entered the exit cycle, and there are more and more disputes over gambling.

From the industry perspective, around 2010, China's capital market has set off a wave of universal PE. In 2015, the private equity market especially entered the heyday. At this stage, as the project continues to enter the exit cycle, there will be more and more disputes over gambling.

Hara Sendai said that over the past few years, equity investment funds have supported tens of thousands of technological innovation enterprises. Among them, most enterprises have gambling agreements when financing, but in the end, IPO or overseas listed companies are still a minority. For most other enterprises, default is a big probability event. Especially after entering the economic downlink cycle in 2018, the development of enterprises is less than expected.

According to the twenty-first Century economic report reporter, some of the founders may negotiate quickly and solve problems when they are triggered. If some founders are evasive, negotiations between the two sides will often be deadlocked. In the process of dealing with disputes, 90% of the cases will tend to choose arbitration method to solve, and there are not many cases that eventually flow into the legal system.

Many investment institutions in the market do not want to take legal proceedings, not only because it takes time and effort. The main reason is that they think that this may be bad for future projects, and it is easy for other founders to have bad impression on the fund. At the same time, for other potential LP, it may also leave the impression that institutions often face lawsuits and disputes, resulting in fear and reluctance to invest.

There are not many investment institutions such as Shanghai private placement institutions adhering to judicial proceedings. At present, there are about three similar projects in the process of judicial proceedings.

"This is a very positive way of dealing with us. We still want to do our duty to protect the rights and interests of LP." Li Wei said. Exit from some good projects can bring high returns to the fund, but when faced with less desirable projects, they also need to be patient.

At the same time, the private sector also reflected on its pre investment work. Li Wei said, first of all, the fund will take a more rigorous attitude when making arrangements for gambling agreements. Second, from the point of view of self management, the fund will pay more attention to rainy days and prevent moral hazard to the maximum.

Zhang Chi, chairman of the new capital, told the twenty-first Century economic report that the signing of the gambling agreement and the disclosure of all links in the middle should be as cautious and perfect as possible. Because, first of all, especially good projects are generally invested by agencies, and no gambling clause is set. For investment projects that are willing to accept gambling, the investment institutions themselves should consider them carefully.

Second, the main body of participation in gambling can be a company or a founder. Generally, the sign up bet is signed with individuals or individuals or companies, but it is best not to sign only with the company. Because when companies want to sell new three boards, in order to protect the interests of other new investors, gambling between old investors and companies is usually cancelled. The personal gamble between investors and the real controller is still effective after the information disclosure is in place. Some projects will also sign supplementary agreements when listing, so it is necessary to clarify the effectiveness of gambling at such a special time.

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