The Validity On Gambling Agreement Between Shareholders And Target Companies

With the China's capital market has become increasingly active,more and more private equity investments appear in China investment market.In order to lock in gains,private equity investments are more willing to choose gambling agreement.The function of this kind of investment agreement is to suspend the indefinite results that cannot be reached by both sides of the transaction until the uncertainty is determined.If the result is a preference,there will be a win-win situation.On the contrary,there would be a big compensation needed to pay.This may-be structure makes both parts evaluate the equity value and to achieve equity trading easily,so it can be said that the gambling agreement can increase the welfare of the community as a whole.In 2002,Mengniu Group concluded a gambling agreement with joint investment banks such as Morgan Stanley group,in order to obtain the development funds.At last,Mengniu Group made success and the enterprise had obtained the huge financing.However,its success cannot be copy easily.Yongle electrical appliances,Taizi milk company and other enterprises failed and unable to get up after all while gambling with foreign capital.The gambling agreement has been widespread in Chinese capital markets,whether it is an angle or a devil,the moment is still unable to agree on which is right.In 2012,the Supreme People's Court made a judgment on the first case of the gambling agreement,"Haifu investment case",and a basic consensus is generally formed in judicial practice.That is,gambling agreement between shareholders of both parties are truly conveyed and do not violate lay prohibitions.But the legality of the gambling agreement between shareholders,which as investors at first time,and target companies is not supported yet.This verdict of the judgment has caused controversy in the academic circles.Until now,the effectiveness of the gambling agreement between shareholders has formed a unified view.So,this paper will focus on the effectiveness of the gambling agreement between shareholders and target companies.In the first part,we introduce an overview of gambling agreements.First we clarify the misunderstanding of the gambling agreement and Valuation Adjustment Mechanism.While contrast with the concept in the US,we can found no clause exactly same with it.A similar concept is earn-outs term which often be found in mergers and acquisitions.As for the legal nature debate of the gambling agreement,it is different from aleatory contract,conditional contract and security contract.It is a typical nameless contract and therefore should not be attributed to a certain category of current contract.As for the different type of gambling agreement,we can focus on the gambling agreement between shareholders and target companies which still on the dispute.In the second part,this paper focuses on the clause content of the agreement.First of all,the common terms of the gambling agreement include the equity adjustment clause,the equity repurchase clause,the cash compensation clause,the management incentive clause and the preferred stock clause.When we look back on the development of Chinese capital market,there are new characteristic of gambling agreement,which is simpler valuation model,more debt financing-like and more private lending-like.In the third part,this paper analyses the divergence of the gambling agreement between shareholders and target companies.In the opinion of academic circle,some believe the agreement destroy the principle of capital maintenance,while some believe this is the independent meaning of the commercial subjects,and the judiciary should not interfere too much.In the opinion of the Supreme People's Court,considering the guidance on prudent investment,the agreement is not effective.On the other hand,the Trade Arbitration Commission thought it effective because of the equality means self restraint.In the last part,this paper is trying to solve the divergence of validity on the gambling agreement.The divergence arises from three reasons:lacking of specific upper laws,the conflict between civil law principle and commercial law principle,and lack of flexible use of the principle of capital maintenance.The problems can be solved in three ways.Firstly,we should improve the preferred stock system,and the agreement which not violate the preferred stock terms should be deemed valid.Secondly,the effectiveness should be guided by the idea of commercial law.In principle,the validity of gambling agreements between shareholders and companies is affirmed.Finally,the agreement should be deemed valid while making no damage to the company's liquidity from the experience of Thought Works Case.