Pay Close Attention To The 70Th Issue Of Supervision On Restructuring Performance Compensation

In the domestic capital market, performance commitment, as a supporting institutional arrangement in M & A, is accompanied by M & A.

According to the current regulatory requirements, if the target of restructuring is valued by the income method and other methods based on the expected future earnings, both parties of the transaction shall sign a compensation agreement for the situation that the actual profit of the underlying assets is insufficient to the predicted amount within three years after the implementation of the reorganization. However, if the listed company purchases assets from the controlling shareholder or actual controller and does not cause the change of control right, there is no mandatory requirement.

In practice, in order to cover the overvalued and high pricing of the underlying assets, avoid the operational risks and reduce the possible losses caused by asymmetric information, the vast majority of restructuring parties have negotiated and agreed on performance commitments and compensation terms.

However, in the actual performance of the contract, due to differences in the completion of the commitment and other reasons, the uncertainty of performance increases significantly, which also causes disputes between the two sides of the transaction, and the interests of listed companies and investors are infringed.

This issue of "deep vision supervision" focuses on the "minefield" in the performance commitment implementation.

What is the difficulty in performing the contract?

A few years ago, the phenomenon of "three high restructuring" in the A-share market is relatively common. With the expiration of performance commitment time, cases of non performance of compensation obligations begin to appear frequently. So, what is the difficulty in fulfilling the contract?

According to the 21st century economic report, the most common reason why compensation is difficult to fulfill is that the performance commitment party does not accept the audit results of the underlying assets.

In the case of * ST Tianrun's acquisition of dianle's equity, the accountant believed that dianle's net profit in 2017 was 27 million yuan, which was lower than the commitment of 101.5 million yuan. However, the trading party did not recognize the audit results of the accountant, and proposed that income should be recognized in some transactions and the compensation obligation should be refused.

In the case of Yitong century's acquisition of betaI health, the other party also refused to fulfill its compensation obligation because it did not agree with the accountant's opinion that "betaI health has not fulfilled its performance commitment in 2018". The financial report of Zhang Beitai health, the counterpart of the transaction, was issued an audit report that could not express opinions. The financial data could not be trusted and could not be used as the basis for judging whether the performance was completed.

Differences of opinion among accountants may also lead to performance difficulties.

For example, in the case of Wantong technology's acquisition of saiying technology's equity, the former accountant verified that the performance completion rate of the underlying assets was 101.43%. One year later, the later accountant thought that part of the income of the underlying assets did not meet the recognition conditions, and the performance completion rate was only 84.90%. The Indemnifying Party insists on the opinion of the former accountant and has not fulfilled the compensation obligation so far.

The problem of the underlying asset itself is also an important factor affecting the performance of the commitment.

Generally speaking, in order to ensure the continuity of the underlying assets, the degree of participation in the operation and management of Listed Companies in the commitment period is relatively low, even "only consolidated statements, no management". This can easily lead to the underlying asset integration is not in place, serious development for the target out of control. In the case of Tanaka Seiki's acquisition of Sino ocean Xiangrui, the company did not adjust its main management personnel after the acquisition. At the end of the commitment period, the company's dispatch of a working group to Sino ocean Xiangrui was blocked, and the accountants were unable to enter the audit site, and the corresponding compensation was in the distant future. Up to now, COSCO Xiangrui has been bankrupt and liquidated, and the performance compensation has not been fulfilled.

In order to avoid the compensation obligation, some commitment parties will "make an article" on the financial results of the target company, which usually shows that the performance of the target company reaches the standard accurately during the commitment period, and then the performance declines precipitously after the expiration of the commitment period, and large amount of impairment is withdrawn. What's more, a few companies also evade the responsibility of performance through financial fraud. For example, Juli culture acquired 100% equity of Meisheng yuan by 3.4 billion yuan, and the evaluation value added was nearly 20 times. During the commitment period, the annual performance completion rate was 102.6%, 113.9% and 103.6%, which was accurate. After the expiration of the commitment period, the company said that it planned to withdraw more than 2 billion yuan of goodwill impairment due to the related business not as expected. The rapid change of the underlying performance has attracted wide attention and query from the market. The exchange also conducted key inquiries. Under the pressure of all parties, the company admitted that the subject matter had financial fraud.

There are also some companies who ignore moral constraints, break through the bottom line of law and cheat in the name of trading. In the case of Ningbo Dongli, in order to solve the problem of capital chain fracture, Li Wenguo "beautified" the operation performance of Nianfu supply chain through false transactions, and then sold it to Ningbo Dongli at a price of 2.16 billion yuan, with a value-added rate of 7 times. After that, the fraud was exposed, and Li Wenguo was sentenced to life imprisonment for the crime of contract fraud. However, because the performance compensation agreement violates the provisions of the contract law, it is regarded as invalid contract, so the performance compensation is invalid.

In addition, at the operational level, the lock period of shares does not match the performance commitment period in the restructuring plan, and the shares held by the trading party are pledged or frozen, which will also lead to the failure to fulfill the commitment. In the case of Juli culture's acquisition of meishengyuan and Tianshen Entertainment's purchase of fanciful Yueyou, the above situations have occurred.

Strengthen the performance guarantee by supervision

Performance compensation is difficult to perform, which will inevitably lead to the intensification of contradictions between the two sides, the dispute is time-consuming and laborious, and it is not uncommon to go to court, which often has a negative impact on the operation of listed companies, leading to the damage to the interests of the company and shareholders. From this point of view, although performance compensation is the result of independent negotiation between the two parties, it also has strong externality.

In recent years, the issue of performance compensation performance has been paid more and more attention by regulatory agencies.

At the level of rules, the measures for the administration of reorganization stipulates that if a trading party fails to fulfill or violates the performance compensation agreement or commitment, the CSRC shall order it to make corrections, and may take regulatory measures such as regulatory talks, issuing warning letters, ordering public statements, and identifying as inappropriate candidates. In March 2019, the China Securities Regulatory Commission (CSRC) issued the relevant questions and answers on the performance commitment Party's pledge of consideration shares, requiring the performance commitment party to guarantee that the consideration shares are first used to fulfill the compensation commitment, and shall not evade the compensation obligation by pledging shares. In May of the same year, the Shenzhen Stock Exchange issued the guidelines for information disclosure of listed companies No. 3 - major asset restructuring, which made it clear that the terms of the compensation agreement should be clear, practical and feasible, and there was no dispute.

In the review of specific plans, in view of the fact that some trading parties put the cart before the horse in exchange for "overvalued" chips, the regulatory authorities focused on the rationality and realizability of performance commitments, urged the setting of performance compensation in accordance with laws and regulations, and required full demonstration in the restructuring plan to guard against the risk of difficult performance of subsequent commitments from the source, Through strengthening the information disclosure, strengthening the performance guarantee. According to incomplete statistics, about 80% of the restructuring inquiry letters involve performance commitment related issues.

For those who fail to fulfill their commitments, the exchange will usually remind the listed companies to take timely measures such as urging compensation and resorting to law to promote the commitment parties to fulfill their commitments as soon as possible.

The exchange will crack down on the "Lao Lai" who refuses to perform the contract. Statistics show that since 2018, the Shenzhen Stock Exchange has made more than 30 disciplinary decisions on the non performance of the restructuring performance commitment, among which, the top punishment of publicly denouncing * ST Tianrun, Yitong century, Tianzhong Jingji and other performance commitment parties has been given.

In addition, the reporter learned that the exchange will deal with the situation of financial fraud, low completion rate of performance commitment, intentional borrowing of litigation by the trading party, resulting in the freezing of shares and failure to perform the contract.

Joint efforts to solve the dilemma of performance

Although the regulatory authorities have always stressed and urged the performance guarantee, the merger and reorganization of listed companies is the result of market-oriented negotiation and interest game after all. In order to improve the implementation efficiency of restructuring, optimize the effect of resource allocation, and avoid disputes after the event, it also depends on the joint efforts of all parties in the market.

Some people in the industry said that, unlike the A-share market, performance commitment is not the mainstream in major overseas capital markets. The A-share market can draw lessons from it and consider exploring diversified gambling mechanism. For example, for high-tech and high-growth industries, the early out mechanism of foreign M & A is adopted to change the traditional one-time payment into installment payment according to the performance performance in a certain period in the future; Or combined with the key links and main risks of the underlying asset management, set diversified gambling indicators to avoid the company's unilateral pursuit of net profit.

When signing the agreement, both parties should keep rational and objective, and agree on the dispute settlement mechanism in advance for possible disputes. For example, it is clearly stipulated in the contract which party shall employ the accountant, and how to deal with the non-standard opinions or disapproval of the audit results. To protect the rights and obligations of all parties through accurate, clear and executable contract terms will help to avoid the "gentleman's agreement" becoming a "empty check".

From the perspective of investors, companies should also keep their eyes open when they launch restructuring programs with high overvalued and high commitment, so as to avoid the "pie in the sky" falling into a "trap".

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