What is a betting agreement? Review of betting agreements

When the financier introduces an investor, the investor will establish this agreement to reduce its investment risk, stipulating that a certain amount of compensation or exit price will be required based on changes in the target valuation. The VAM agreement is legally a contractual arrangement between the investor and the financier, and is protected by freedom of contract in the UK, the US and other regions, but is controversial in mainland China.

concept

Private equity funds evaluate the target companies they invest in, and the valuation of the company's equity depends on the company's ability to provide shareholders with investment returns in the future. Since it is impossible to determine the valuation, in order to reduce investment risks, the investment and financing parties agree on quantifiable standards such as the target company's business volume and listing date. The agreement formed based on this type of agreement can be called a bet agreement, that is, a bet on the agreed indicators. If the agreed content is completed, the investor will give the target a certain benefit; otherwise, the investor will receive corresponding compensation. In the definition of economics, a bet agreement is an investment tool; in the definition of law and legislation of various countries, a bet agreement is a contract between two parties and involves the distribution of rights and obligations of equity owners.

Protocol Mode

There are many ways to implement a gambling agreement. The following are some common forms:

• Equity Adjustment

• Monetary compensation

• Dilution

• Transfer of holding

• Equity Repurchase

• Equity Incentive

• Equity preference

VAT in Economics

In the investment market, due to information asymmetry, the VAM agreement is used to effectively respond to the needs of valuation adjustment and operating incentives for invested companies. The mechanism of the VAM agreement uses the stock value of the target company when it goes public or is acquired by a merger, ties the return of the financing party with the interests of the investor, and transfers part of the control rights to the venture capitalist to ensure the investment security of the investor.

VAM agreements in law

Both parties to a VAM agreement, namely the investor and the financier, are entities engaged in commercial activities. For private equity fund investors engaged in investment activities, signing a VAM agreement is also a form of commercial activity. According to the definition of the 2019 Ninth Civil Affairs Conference, a VAM agreement "refers to an agreement designed by the investor and the financier to resolve the uncertainty, information asymmetry and agency costs of the future development of the target company when reaching an equity financing agreement, including equity repurchase, monetary compensation, etc. to adjust the valuation of the future target company."

Main body composition

The two parties in a VAM agreement are the investor and the financier. The investors are mainly private equity funds, such as Goldman Sachs and Morgan Stanley. The financiers are general enterprises, such as Mengniu, but most of them are private enterprises in the People's Republic of China, and only a few are state-owned enterprises.

Nature of contract

A VAM agreement is a contract signed between two parties for financing arrangements. According to Article 124 of the Contract Law of the People's Republic of China, "For contracts not expressly provided for in the specific provisions of this Law or other laws, the general provisions of this Law shall apply, and the specific provisions of this Law or other laws that are most similar may be referred to." A VAM agreement is an unnamed contract.

Examples of gambling agreements in the cross-border e-commerce circle

• The bet between Youkeshu and its parent company (Tianze Information) ultimately ended in failure. ^[1]

The net profit attributable to the shareholders of the parent company (Tian Ze Information) of Youkeshu Company after deducting non-recurring gains and losses from 2018 to 2020 was RMB 973.7379 million, which was RMB 26.2621 million less than the total amount of RMB 100,000.00 million promised in the "Profit Forecast Compensation Agreement", and the completion rate was 97.37%.

According to the agreement, Xiao Siqing shall bear the compensation obligation for the unfinished promised performance items of Youkeshu Company with the share consideration he obtained in the restructuring transaction in priority to other compensation obligors. Specific compensation plan: Mr. Xiao Siqing shall be compensated with 1,624,694 shares in priority, and other compensation obligors do not need to compensate shares.

• Jiazhilian made a bet with its parent company (Xunxing Shares) on its three-year performance ^[2]

In June 2020, Xunxing Co., Ltd. announced the performance of Jiazhilian: the net profit attributable to the parent company's shareholders achieved by Jiazhilian in 2017, 2018, and 2019 was not less than RMB 100 million, RMB 160 million, and RMB 250 million, respectively, and the cumulative promised net profit was RMB 510 million. However, Jiazhilian has not fulfilled its performance commitments for three consecutive years.

Jiazhilian's cumulative net profit from 2017 to 2019 was -41.1243 million yuan, and it failed to complete the performance commitment of 510 million yuan in cumulative net profit in three years, which has triggered the relevant agreement on performance compensation. According to the performance compensation principle agreed in the "Profit Compensation Agreement", Gan Qingcao, Zhu Ling and Common Dream need to pay the performance commitment compensation amount and impairment test compensation amount to Xunxing Shares in cash, which needs to pay 1 billion yuan.

• Yibai Network and its parent company (Huakai Creative) are making a bet on their performance between 2019 and 2023, which is still ongoing. ^[3]
  

Pursuant to the Profit Forecast Compensation Agreement and its supplementary agreement, the performance commitment party promises that the net profit attributable to the parent company's owners after deducting non-recurring gains and losses in the consolidated financial statements achieved in 2019, 2020, 2021, 2022 and 2023 will not be less than RMB 141 million, RMB 170 million, RMB 204 million, RMB 251 million and RMB 290 million, respectively.

At present, in 2019 and 2020, Yibai Network has achieved net profits attributable to the parent company's owners of RMB 175.2814 million and RMB 363.5601 million after deducting non-recurring gains and losses, both exceeding the performance commitments in the bet. The net profit in 2020 is even higher than its estimated net profit in 2023!

• Zebao Technology and its parent company (Xinghui Shares) successfully bet on three-year performance ^[4]

The committed net profit of Zebao Technology during the performance commitment period is: no less than RMB 108 million in 2018, no less than RMB 145 million in 2019, and no less than RMB 190 million in 2020.

In 2018, the total net profit after tax attributable to the parent company's common shareholders plus the amount of share-based payments was RMB 109.6043 million, completing the bet for the year. The net profit after tax attributable to the parent company's common shareholders in 2019 was RMB 154.2787 million, which was RMB 9.2787 million higher than the promised amount, completing 106.40% of the promised net profit for the year. The net profit after tax attributable to the parent company's common shareholders in 2020 was RMB 246.9912 million, which was RMB 56.9912 million higher than the promised amount, completing 130% of the promised net profit for the year.

References

• 1. Tianze Information: Announcement on the completion of the repurchase and cancellation of performance commitment compensation shares: Juchao.com
• 2. Xinghui Shares: Pre-disclosure announcement on the reduction of shares by shareholders holding more than 5% of the shares and their persons acting in concert: Juchao.com
• 3. Xunxing Shares: Announcement on the reply to the Shenzhen Stock Exchange's inquiry letter on the 2019 annual report: Juchao.com
• 4. Huakai Creative: Hunan Huakai Cultural and Creative Co., Ltd. Acquisition Report: Juchao.com