The Setup Of Performance Commitment Agreement In Mergers And Acquisitions:Motivation And Economic Consequences

During the development of the capital market,mergers and acquisitions are not only an important way for a country to promote the restructuration,integration and upgrade of industrial systems,but also an effective means for a company to achieve strategic goals and optimize resource allocation.China is in a critical period of restructuration,integration and upgrade of industrial systems.The enthusiasm of listed companies to participate in M&As has been continuously improved,both the number of M&As and the transaction amount have reached a considerable scale.In order to ensure the healthy and orderly and stable operation of the capital market,at the institutional level,the China Securities Regulatory Commission and the Exchange have continuously deepened the market-oriented reform of M&As and restructured the basic system to give full play to the role of M&As in serving the real economy.In 2011,after been revised by the CSRC,the “Regulations on the Management of Major Assets Restructuring of Listed Companies” clearly stipulate the signing and the relevant clauses of the Performance Commitment Agreement,the PCA began to be gradually applied in the process of M&As of listed companies and played a certain role in guaranteeing the process of M&As and preventing M&A risks.With the Supreme People's Court's final judgment on the “Haifu Investment Case” in December 2012,the relative validity of the PCA was recognized in principle,the PCA was more and more widely applied in the process of M&As of listed companies.As a contractual arrangement that can adjust the pricing of M&As transactions,the application of the PCA in the M&As of Chinese listed companies has experienced a long-term development process of regulatory enforcement,policy guidance and market regulation.At the same time,the specific clauses of the PCA are undergoing a process of continuous improvement from simple to complex,from one-way to two-way.However,after the completion of the M&As,the incidents of target company's performance are not up to the standard are frequently seen in the newspapers.The news of changes in clauses of the PCA is endless.The events of both parties to the M&As are in a lawsuit due to the failure to complete the PCA have occurred from time to time.However,even if there is such a large risk in the PCA,it does not seem to reduce the enthusiasm of Chinese listed companies in applying the PCA in the process of M&As.Therefore,it is an important issue to be solved in the current theoretical and practical circles to explore the black box of setting up the PCA in the process of M&As of listed companies,and then to observe the economic consequences.As an important contractual arrangement to promote the successful completion of M&As of listed companies,the PCA consists of several clauses.Although the PCA signed by different listed companies in M&As are different in terms of specific clauses,they will all include the performance level(performance target),the compensation content when the performance is not up to standard(what is added),and the compensation method when the performance is not up to standard(how to supplement),and so on.The listed company can restrict the target company by setting these clauses.Due to the different clauses,the PCA will have different binding force to the target company,and this kind of binding difference will affect the success of the M&As,which provides a good research opportunity for this paper to discuss the motivation and economic consequences of the PCA from the perspective of setting the clauses of the PCA.Therefore,the author manually collects and compiles the information of the PCA and the specific clauses in the domestic M&As of China's A-share listed companies in 2011-2016,and deeply studies the motivation and economic consequences of the PCA and the clauses in the process of M&As of listed companies,based on the theory of contract,principal-agent theory,information asymmetry theory and signal transmission theory.First of all,this paper examines the motivation for the signing of PCA and the setting of clauses in M&As of listed companies.The study found that when the management self-interest is higher,the listed company tends to require the target company to sign a PCA.In the setting of specific clauses,the higher the degree of self-interest of the management,the lower the threshold of performance is seted;On the compensation content,it is more inclined to sign the clause of “replenishment of profits”;On the compensation methods,the clause of "cash compensation" is more inclined.Further research found that the internal control quality,information transparency,and related party transactions of listed companies have different degrees of adjustment to the relationship between management self-interest and the PCA and its specific clauses,and the signing of the PCA has a certain substitution effect on the monetary compensation of senior management,but the specific clauses do not have a significant impact on it.This research proves the important role of the PCA in the process of M&As of listed companies.It also reveals that listed companies are keen to require the target companies to sign PCA in the process of M&As.In order to obtain more personal benefits after the completion of the M&As.In order to achieve this goal,the senior management will also manipulate the setting of the specific clauses of the M&As,deliberately set up more loosely clauses to facilitate the completion of M&As,and ultimately achieve the purpose of seeking personal interests.Secondly,this paper examines the impact of the PCA and its specific clauses on the M&A performance of listed companies.The study found that the signing of the PCA significantly improved the short-term M&A performance of listed companies.However,with the continuous expansion of the observation window period,the positive impact of the signing of the PCA on the short-term M&A performance of listed companies has gradually weakened.Especially from the perspective of long-term observation,the signing of the PCA does not have a significant positive impact on the long-term M&A performance of listed companies.In the setting of specific clauses,the performance threshold of performance commitment has a significant positive correlation with the short-term and long-term M&A performance of listed companies,and the positive impact on the short-term M&A performance of listed companies has gradually weakened with the continuous expansion of the observation window period.On the compensation content,compared with the clause of “replenishment profit”,the clause of “compensation price” has a significantly better impact on the short-term and long-term M&A performance of listed companies,and the positive impact on the short-term M&A performance of listed companies has gradually weakened with the continuous expansion of the observation window period.On the compensation methods,compared with the “cash compensation” clause,the “share compensation” clause has a significantly better impact on the short-term and longterm M&A performance of listed companies,and the positive impact on the short-term M&A performance of listed companies continues with the observation window period.Further research found that the self-interest of senior management has weakened the positive impact of the signing of PCA on the short-term M&A performance of listed companies and inhibited the positive effect of specific clauses on the M&A performance of listed companies.This result clarifies the different impacts of the different clauses of the PCA on the long-term and shortterm M&A performance of listed companies.It also unleashes the internal mechanism of the senior management's ability to set up the PCA and specific terms in the process of M&As.Finally,this paper examines the relationship between the signing of PCA and its specific clauses and the shareholding reduction behavior of the major shareholder and senior management.The study found that after the completion of the M&As with the PCA,the number of shares reduced by insiders increased significantly.In the setting of specific clauses,the higher the performance commitment threshold,the more the major shareholder and senior management significantly reduced the stock holdings in a short period of time after the completion of the M&As.On the compensation content,compared with the clause of “compensation price”,under the clause of “replenishment profit”,internal shareholders such as major shareholders and senior management are more inclined to reduce their holdings after the completion of the M&As;On the compensation methods,compared with the “share compensation” clause,under the “cash compensation” clause,insiders are more inclined to reduce their holdings after the completion of the M&As.Further research found that the equity dividend has a certain substitution effect on the reduction of the insiders after the completion of the M&As with the PCA.The degree of regional legal protection inhibits the reduction of the insiders after the completion of M&As with the PCA.The conclusion of this study indicates that insiders such as major shareholders and senior management may pass favorable information to the capital market through the signing of PCA and the setting of its specific clauses,so as to reduce stocks when the stock price rises.This result clarifies that the new way for major shareholders and senior management to encroach on the interests of small and medium shareholders is to require the target parties to sign PCA in the process of M&As,while at the same time setting relatively loose clauses.Therefore,in the practice of M&As,the signing of the PCA and the setting of its specific clauses seem to be conducive to maintaining the value and performance of the merger company,but in fact it may be a kind of “darkness” behavior of insiders such as major shareholders and senior management,which will damage the interests of small and medium shareholders and company value.The academic contributions of this paper are mainly reflected in:(1)The first systematic study of the motivation and economic consequences of the signing of PCA and the setting of its specific clauses from the perspective of contract setting;(2)Deepen the understanding of the current listed companies' enthusiasm and the reason of signing PCA and setting related clauses and conditions in the process of M&As;(3)Reveals the key mechanism for understanding the signing of the PCA in the process of M&As of listed companies and how the relevant provisions set out to produce specific economic consequences;(4)Expanded the crossresearch results on M&As,M&A performance,the self-interest of senior management and insiders' shares selling;(5)Expanded the difference between the PCA in the process of M&As of domestic listed companies and Earnout of foreign listed companies.The research results of this paper have very important reference for policy-making departments,regulatory agencies,listed companies,intermediaries and capital market investors:(1)Providing a very important reference for the establishment and implementation of the PCA for the policy-making department;(2)Providing a relatively reliable decision-making basis for the market supervision department to increase the supervision of the use of the PCA;(3)Providing a preventive guideline for the listed company's shareholders to supervise the senior management behavior of signing the PCA in the process of M&As and the setting of specific clauses;(4)It will help investors to better understand the motivation and economic consequences of the PCA and the setting of clauses in the process of M&As of listed companies,as well as the careful consideration of investment decisions for their own investments;(5)It provides an important reference for intermediaries to improve their independence and supervision in the process of M&As of listed companies.