At the end of the article, [M&A and Reorganization] legal documents will be presented.
Problem introduction:
Mobike and Ele.me sold themselves to other owners, did the founding team make wedding dresses for others?
Behind the hunt for unicorns, where should the entrepreneurial team go?
What role does a lawyer play in equity mergers and acquisitions?
1. The concept of equity mergers and acquisitions
(1) The concept of mergers and acquisitions
The connotation of mergers and acquisitions is very broad, generally refers to the merger of two or more enterprises into one enterprise, usually by a dominant enterprise to absorb one or more companies.
(2) Classification of mergers and acquisitions
1.Equity mergers and acquisitions
Corporate equity mergers and acquisitions refer to the fact that investors become shareholders of the target enterprise by purchasing the equity of the target enterprise or subscribing to the capital increase of the target enterprise, so as to achieve the purpose of participating in and controlling the target enterprise.
Equity mergers and acquisitions can be divided into two types: equity transfer and capital increase mergers and acquisitions
Equity transfer, capital increase and mergers and acquisitions.
2.Asset mergers and acquisitions
M&A of corporate assets refers to the purpose of obtaining the profit creation ability of the target enterprise by purchasing the valuable assets of the target enterprise and operating the assets.
(3) Legal characteristics of equity mergers and acquisitions
1.An equity merger is a transaction between an investor and a former shareholder2Equity mergers and acquisitions are aimed at achieving control or participation in the target company3The acquirer can pay the consideration in a variety of ways.
2. M&A workflow
According to the general model, the workflow of equity mergers and acquisitions will go through the following steps:
1) Determine the target company, (2) Contact and negotiate with the target company, (3) Issue a letter of intent to acquire, a term list of investment intentions, (4) Hire a lawyer, an accountant to conduct due diligence, (5) Internal review of the company, (6) Further business negotiations, (7) Preparation of audit and evaluation reports, (8) Negotiations, and (9) Formation of transaction documents.
The main tasks of a lawyer throughout the process are:
1.Drafting and signing a letter of intent or term sheet of intent 2Legal Due Diligence and Reporting3Drafting, revising and formulating transaction documents45Other.
3. M&A transaction text
Depending on the choice of M&A method, the M&A transaction text will be divided into a capital increase agreement, an equity transfer agreement, and a combination of a capital increase agreement and an equity transfer agreement.
(1) Key terms of the capital increase agreement
1.Transaction** Terms
It is the main clause of business negotiations, and from a legal point of view, it is necessary to pay attention to the digital connection between the following three aspects:
1.The company is valued at 2Capital increase 3Registered capital.
For the valuation of the company will involve the issue of pre-investment valuation and post-investment valuation, the purpose of calculating the pre-investment valuation and post-investment valuation is that these contents should be reflected in the terms of the capital increase agreement.
Example of clause: The two parties confirm that the total investment of the investor is RMB 10,000 yuan, which will be contributed in cash to subscribe for the company's newly issued registered capital of 10,000 yuan, of which 10,000 yuan will be included in the company's registered capital and [10,000 yuan] will be included in the company's capital reserve. After the completion of this investment, the investor holds the equity of the company, that is, the capital contribution of 10,000 yuan of registered capital.
2.Closing Terms
Regarding the delivery terms, it generally involves two aspects: equity delivery and payment delivery, and there are four operation points that need to be paid attention to:
1) The time when the agreement takes effect, (2) the time of equity delivery, (3) the time of payment delivery, and (4) the time of industrial and commercial change.
3.Investor Rights Clause
This clause is one of the terms that investors are most concerned about, and it is also one of the most important clauses in the agreement, which can generally be summarized into the following four categories:
1) Entry Clause (2) Corporate Governance Clause (3) Exit Clause (4) Miscellaneous Clause.
4.Dividend Rights Clause
The law stipulates that Article 34 of the Company Law stipulates that shareholders shall receive dividends in accordance with the proportion of their paid-in capital contributionsWhen the company adds new capital, shareholders have the right to subscribe for capital contributions in accordance with the proportion of paid-in capital contributions. However, all shareholders agree not to distribute dividends in accordance with the proportion of capital contribution or do not subscribe for capital contribution in priority according to the proportion of capital contribution.
Example of clause: The company and the actual controller guarantee and procure the other shareholders to agree that after the completion of the investment under this agreement, the company shall pay dividends to the investor every year, and the investor shall enjoy the right to dividends not lower than the standard of the original shareholders of the company. If the investor does not request dividends in the current year, the dividend amount will be rolled over to the next year.
5.Right to Information Clause
Legal provisions: Article 33 of the Company Law: Shareholders have the right to inspect and copy the articles of association, minutes of shareholders' meetings, resolutions of board of directors, resolutions of board of supervisors and financial and accounting reports.
Shareholders may request to inspect the company's accounting books. If a shareholder requests to inspect the company's accounting books, he or she shall submit a written request to the company stating the purpose. If the company has a reasonable basis to believe that the shareholder's inspection of the accounting books has an improper purpose and may harm the legitimate interests of the company, it may refuse to provide the inspection, and shall reply to the shareholder in writing and explain the reasons within 15 days from the date of the shareholder's written request. If the company refuses to provide access, the shareholders may request the people's court to require the company to provide access.
Example of terms:The Company submits the following information to the Investor:
1) The company shall provide investors with the financial report, operating report and bank statement of the previous month before the 15th of each month(2) Provide quarterly financial statements within 5 working days after the end of each quarter;(3) Within 90 days after the end of the year, the business report and the consolidated financial statements audited and confirmed by the accounting firm approved by the investor shall be provided(4) Before December 15 of each financial accounting year, provide the financial budget of the next year;(5) All financial statements must be prepared in accordance with Chinese Accounting Standards;(6) Company information that is applicable to industry practices in the field of venture capital at the request of investors.
The CFO or CFO of the company shall be responsible for providing the above information to shareholders and the board of directors in a timely manner. In addition, investors have the right to inspect the facilities, accounts, and records of the company and its affiliates. In order to reduce the company's financial risk, investors have the right to verify the company's financial status at any time, conduct audits if necessary, and put forward reasonable suggestions for financial management.
6.Anti-dilution rights
Clause Example 1:
Prior to the Company's initial public offering, if the Company issues shares at a valuation lower than the Transaction after the Closing of the Transaction, the Transaction will be adjusted accordingly to the Newly Issued Shares.
Clause Example 2:
During the period when the investor is a shareholder of the company, if the company increases its registered capital, and its subscription ** (new low**" is lower than the investor's equity subscription** (except for the employee equity incentive plan approved by the board of directors), the investor has the right to choose to execute it in any of the following ways:
1) To further obtain part or all of the company's new registered capital with the same **;(2) The investor has the right to request the actual controller of the company to provide the investor with the following amount of compensation, and the compensator shall fulfill the obligation to pay the compensation in cash in a lump sum within [] working days after receiving the written notice from the investor:
Compensation amount = ([] yuan new low**) registered capital held by the investor (1 + [] the investor's actual investment days (i.e., the number of days between the date of receipt of the investment funds and the actual payment date of the compensation) 360 days.
7.Valuation Adjustment Provisions
Commonly referred to as a VAM clause, the original shareholders of the company should be the original shareholders of the company and not the company. If the company is to be the subject of the signing, the company will not be liable for VAM according to the case trend of the Supreme People's Court (Supreme People's Court (2012) Min Ti Zi No. 11).
8.Pre-emptive stock options
Example of terms: After the completion of the investment, if the company intends to increase the registered capital, the investor has the right to subscribe to the company's new registered capital first, and the terms and conditions of the purchase should be the same as those of other potential capital increasers. Specifically: ......
9.Right of first refusal and joint right
Example of Clause: After the completion of the investment, if the actual controller intends to give any third party its equity interest in the company, it must first notify the investor in writing of the detailed conditions ("Transfer Notice") and shall give the investor the following rights.
The investor has the right to decide whether to exercise or not to exercise the following rights within fifteen (15) working days after receiving the transfer notice of the transferor's transfer of equity:
1) Purchase all or part of the equity to be transferred by the transferor in accordance with the ** and conditions of equity transfer recorded in the transfer notice;
2) The investor can exercise the joint sale of equity, that is, in accordance with the conditions of the equity transfer recorded in the transfer notice, to the transferee ** all or part of the equity of the company it holds. If the third party is unwilling to purchase all or part of the equity of the company held by the investor, the other shareholders shall not transfer all or part of the equity ...... of the company held by the other shareholders to any third party
10.Right to Restrict
Example of clause: Without the written permission of the investor, the original shareholders of the company shall not transfer the equity held by the company to other enterprises, otherwise the actual controller shall repurchase all the equity held by the investor at an annual interest rate of []% (the interest calculation period shall be calculated from the date when each investment of the investor is paid to the company's account to the date when the actual controller returns and pays all the equity repurchase money).
11.Liquidation priority
At present, the law does not stipulate the division of preferred shares and ordinary shares, and if in practice, each round of investors sets up preferential liquidation rights, the liquidation order needs to be specified in the capital increase agreement.
12.Right to Sell
Example of terms: If, n years after the closing of this round of financing, more than 2 3 of the shareholders of Class A preferred shares and the board of directors agree to give all or part of the shares to a bona fide third party, and the acquisition per share is not less than n times the share price of this round of financing, then this preferred shareholder has the right to demand that other shareholders are also obligated to follow the same terms and conditions ** their shares (in whole or in the same proportion), and if there are shareholders who are unwilling, then these shareholders should be paid at a price not less than that of the third party ** and terms for the purchase of shares of other shareholders.
IV. Key Points of Lawyers' Practice
Question 1: Is it valid to stipulate in the equity transfer agreement that "the company's creditor's rights and debts shall be borne by the original shareholders before the equity transfer reference date"?
In practice, such an agreement clause usually appears when the equity transferor holds 100% of the equity of the target company and transfers it in full. Since due diligence cannot be done thoroughly, this clause is not only valid, but should further require the original shareholders to make more commitments under the premise of validity, such as the assumption of tax risks, undisclosed guarantees, etc.
Question 2: Do shareholders of shares have the right of first refusal?
The shareholders of a limited liability company who are not shares have the right of first refusal, but if they are restructured from a limited liability company to shares*** and the articles of association do not modify the provisions of the preemptive right, the autonomy effect of the articles of association should be respected.
However, the investor's lawyer should pay attention to the verification of various legal documents of the acquired company to avoid unnecessary legal risks.
5. Struggle between investors and original shareholders for control of the company
The struggle for control of the company is mainly reflected in the arrangement of three aspects of the agreement, namely the shareholders' meeting, the board of directors and the senior management.
(1) Shareholders' meeting
1.Equity ratio design
The law stipulates that Article 34 of the Company Law stipulates that shareholders shall receive dividends in accordance with the proportion of their paid-in capital contributionsWhen the company adds new capital, shareholders have the right to subscribe for capital contributions in accordance with the proportion of paid-in capital contributions. However, all shareholders agree not to distribute dividends in accordance with the proportion of capital contribution or do not subscribe for capital contribution in priority according to the proportion of capital contribution.
Article 42 of the Company Law: Shareholders shall exercise their voting rights in accordance with the proportion of their capital contributions at the shareholders' meetingHowever, unless otherwise provided in the Articles of Association.
Article 43 of the Company Law: The manner of deliberation and voting procedures of the shareholders' meeting shall be stipulated in the articles of association of the company, except as provided for in this Law. Resolutions made at the shareholders' meeting to amend the articles of association, increase or decrease the registered capital, as well as resolutions on the merger, division, dissolution or change of the form of the company, must be passed by shareholders representing more than two-thirds of the voting rights.
Paragraph 3 of Article 16 of the Company Law: Shareholders specified in the preceding paragraph or shareholders under the control of the actual controller specified in the preceding paragraph shall not participate in the voting of the matters specified in the preceding paragraph. The vote shall be passed by a majority of the voting rights held by the other shareholders present at the meeting.
Question 1: What is the difference between the "paid-in capital contribution ratio" stipulated in Article 34 and the "capital contribution ratio" stipulated in Article 42?
The right to dividends involves the interests of shareholders, so the proportion of paid-in capital contribution is a relatively fair dividend consideration given by law, but at the same time, it does not exclude the autonomy of will between the parties, giving civil subjects the space to agree independently.
Question 2: Article 34 stipulates that "all shareholders agree. Except" and Article 42 of the "Except as otherwise provided in the Articles of Association"?
Voting rights reflect the pattern of equity ratio among shareholders, and the paid-in capital contribution often cannot reflect the institutional arrangement of the equity structure, which is not conducive to the exercise of voting. Of course, the articles of association may stipulate that the voting rights shall be proportional to the paid-in capital contribution, which does not violate the provisions of the law.
Question 3: What is the significance of agreeing on a one-third equity ratio?
For example, the third paragraph of Article 16 stipulates that after excluding the restricted shareholders stipulated by law, the shareholders who own one-third of the equity shares are likely to become the majority of the remaining shareholders, which is decisive for voting matters.
2.AB strand design
The essence of AB shares is the separation of dividend rights and voting rights, and the legal basis for the so-called weighted voting rights actually comes from the exceptions of Articles 34 and 42 of the Company Law.
Case illustration 1: Xiaomi's prospectus.
Class A shares have 10 times the voting power of Class B shares, and Lei Jun, the founder of Xiaomi, owns Class A shares, and through a dual-class share structure, Lei Jun holds 3141%, but the proportion of voting rights is about 5379%。Case 2: JD.com's shareholding structure.
In JD.com's shareholding structure, the voting rights of Class B shares are 20 times that of Class A shares, and Liu Qiangdong holds Class B;Class A shares may be listed for trading, while Class B shares may not be listed for trading;Class A cannot be converted into Class B at any time, and Class B shares are free to convert into Class A shares at any time.
3.Voting rights commissioned design
Usually from angel rounds, when investors demand strong voting power, the founder's voting rights will be transferred to the investor's side.
4.Concerted Action Protocol Design
In order to protect their own interests, the original shareholders can reach a concerted action agreement, and the lawyer usually needs to confirm whether there is a concerted action agreement in the process of doing due diligence.
5.Employee stock ownership platform design
It is mostly used by the original shareholders and founders in order to obtain more voting rights.
(2) Board of Directors
It is mainly reflected in the fight for seats on the board of directors, because the voting power of the board of directors is one person, one vote, and the more seats, the greater the voting rights. Investors will demand a certain number of voting seats in the fight for seats on the board of directors.
(3) Management
Founders often want to gain more management authority, and will fight the board of directors to grant them more authority.
The intention of the investor needs to be taken into account here, and if the investor wishes to master the operation and management, the agreement should make arrangements for the operation and management.
6. Exercise of the right of defense of the acquired party
1.The directors voted against it
Example of an article: "The following matters shall be approved only with the unanimous consent of all directors.
2.Shareholders vetoed it with one vote
Since the one-vote veto by shareholders violates the principle of majority capital, it is more reasonable for professional lawyers to avoid using such clauses for their clients as much as possible, and instead set up a mechanism for a high proportion of voting rights to pass major matters.
3.Shareholders' right to dissolve
The law stipulates that Article 183 of the Company Law stipulates that if serious difficulties arise in the operation and management of the company, and the continued existence will cause significant losses to the interests of shareholders, and cannot be resolved by other means, shareholders holding more than 10% of the voting rights of all shareholders of the company may request the people's court to dissolve the company.
It should be noted that more than 10% here refers to voting rights rather than the proportion of capital contribution, and the specific dissolution matters can be found in Interpretation II of the Company Law.
4.The executive's golden parachute
Example of clause: "China Baoan Group Shares" (June 2016 Edition).
Article 10 Paragraph 2 When the company is taken over by mergers and acquisitions, if it is really necessary to terminate or dismiss the duties of the company's directors, supervisors, presidents and other senior management personnel before the expiration of their term of office, they must be approved by themselves, and the company must pay them a one-time economic compensation equivalent to more than ten times the sum of their annual salary and benefits, and if the above-mentioned directors, supervisors, presidents and other senior management personnel have signed labor contracts with the company, the company shall also comply with the "Labor Contract Law of the People's Republic of China" when the labor contracts are terminated In addition, severance or compensation is paid.
7. Design of dispute resolution
1.Arbitration. 2.Litigation 3Other non-conflict resolution.
Arbitration or litigation can usually only be used to resolve disputes, but lawyers should actively seek other non-conflict resolution methods, such as timely and active communication and consultation, with the aim of seeking maximum benefits for clients and avoiding greater risks and losses.
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