February** Dynamic Incentive Program
Foreword
At present, China's private equity investment mainly includes: initial public offering and listing (IPO); Merger; Share buybacks and liquidations. At the same time, the development of S** provides more possibilities for the exit of private equity investors.
1. Exit from the IPO** of the enterprise
Exit through IPO means that after the company meets certain conditions, it is approved by the China Securities Regulatory Commission for an initial public offering** and listed on the ** exchange, and the private equity investment ** through the transaction of ** shares to achieve exit.
(1) Advantages and limitations of IPO withdrawal
On the one hand, IPO exit is the most ideal exit method for both investors and target companies. Due to the amplification effect of the capital market, IPO is the most profitable exit method, and data from China Venture Group shows that the exit return of IPO can often reach more than 10 times. At the same time, strict supervision of listed companies ensures that the exit of private equity investment** is compliant and orderly, and the legal risk is small. In addition, the exit through IPO means that the target company's operating conditions have reached the expected level, which is an affirmation of the ability of private equity investment, and can be used as a performance improvement of private equity investment in the market and industry.
On the other hand, IPO exit has the limitation of high listing threshold and long investment cycle. Due to the interests of public investors, the company to be listed needs to meet higher norms and requirements such as entity qualifications, operating years, and corporate governance, and there is a high degree of uncertainty as to whether the target company can finally achieve an IPO. In particular, the cycle of private equity investment is usually long, and during the period from the initial investment to the listing application of the target company, even if the company is operating normally, changes in regulatory rules and policies may bring uncertainties to whether the company can achieve the IPO. After the company is successfully listed, the investment** still needs to wait for a long lock-up period before it can be exited, and the longer investment cycle increases the opportunity cost of private equity investment**, which may lead to the investment** missing out on better investment opportunities.
(2) Provisions on private equity investment
For the shares held by the listed company before the IPO, the private equity investment must comply with the restrictions of the relevant laws and regulations on the restriction period and rhythm.
1. Restricted period.
Private equity investment**As a financial investor, it usually does not have control over the company, and the lock-up period is usually 12 months from the date of the company's initial public offering and listing, but there are also special circumstances where the lock-up period exceeds 12 months, as follows:
2. Proportion limit.
According to the "Several Provisions on the Shareholders, Directors, Supervisors and Senior Executives of Listed Companies", "Special Provisions on the Shares of Venture Capital Shareholders of Listed Companies" and other relevant laws and regulations, after the restriction period, the shares issued by private equity investment before the initial public offering shall be subject to certain restrictions, as follows:
2. M&A exit
M&A exit refers to the transfer of equity in the target company held by private equity investment** to a third party, thereby achieving an exit.
(1) Advantages of mergers and acquisitions
Compared with IPO exit, M&A exit has the advantages of high efficiency, flexibility and clear returns. M&A is dominated by market-oriented negotiations, the process is simple, eliminating the lengthy and complicated application procedures for IPO, and there is no restriction on the lock-up period and proportion. At the same time, the return on M&A exit is clear, and there is no need to consider the company's stock price fluctuations after listing. Under the mature capital market, the secondary trading market is more fair, and the income from M&A exit will not be significantly lower than that of IPO exit, so M&A exit in countries such as the United Kingdom and the United States is the main way to exit.
(2) Limitations of M&A exit
China's current capital market is still immature, and the benefits obtained through IPO exit are often much higher than those obtained through M&A exit, so M&A exit is usually the second choice after the target company's IPO is blocked. In addition, since M&A is dominated by market-oriented negotiations, the valuation of enterprises is prone to deviations. At the same time, the number of potential buyers in the market is limited, and it is often difficult to find suitable potential buyers.
3. Equity repurchase withdrawal
Equity repurchase exit refers to the repurchase of the shares held by the private equity investment ** by the target company or the controlling shareholder or the company's management, so as to achieve the exit of **. **Those who exit through equity buybacks can usually only obtain basic income.
(1) Active repurchase
There are usually two types of equity repurchases: active repurchases and negative repurchases. An active buyback is a situation where a company takes the initiative to request a buyback. For example, when investing in companies such as industry guidance, their purpose is to attract investment and promote the development of the local economy and industry, rather than to obtain profits, so the requirements for the rate of return are not high. This type of ** usually encourages the company or its controlling shareholders and management to repurchase shares, so as to achieve better control and management of the company, and give certain preferential treatment to the repurchase of shares when the company achieves its performance targets.
(2) Negative repurchase
A negative buyback is a private equity investment** that requires the target company or controlling shareholder or the company's management to buy back the shares held by the private equity investment**. In this case, the buyback is an undesirable exit method, and the requirement for buyback by private equity investment** often means that the company is not operating well and has not achieved the objectives of the investment, which in turn triggers the mandatory exit channel of the buyback clause set up in the investment contract to ensure the safety of the capital. When exiting through passive buybacks, private equity investments** are subject to higher risk.
From the perspective of capital security, it is doubtful whether the repurchase obligor has sufficient ability to pay the repurchase price when the company's operating conditions are unsatisfactory and the repurchase clause is triggered. From the perspective of legal risk, if the company is only required to perform the repurchase obligation, it must consider whether the repurchase complies with the requirements of the Company Law and the articles of association. If the company loses money, the capital reduction without the consent of creditors may constitute a withdrawal of capital contribution. In practice, the controlling shareholder or management is usually required to fulfill the repurchase obligation, and the company bears joint and several guarantee liability, which can avoid certain risks at present, but it is still necessary to pay attention to the change of attitude of the regulator.
4. Liquidation and withdrawal
Liquidation and exit is the ultimate choice for private equity investment** to withdraw from the company and recover part of the losses when the target company is unsustainable, the continuous operation will lead to greater losses or substantial bankruptcy reasons, and other investors, original shareholders and management are unwilling to take over.
The initiation of liquidation proceedings means that the investment fails, the private equity investment** will suffer losses, and the ability to invest will be negatively evaluated.
5. S** withdrawal
For investors, if they want to obtain investment returns, in addition to the private equity investment** from the target company, another way is to transfer their own **shares. However, private equity investment is a market that lacks liquidity, due to the information asymmetry between the two parties to the transaction, the number of projects, the number of industries involved, etc., it is difficult to reach a share of the transaction, and the development of the first share provides a new channel for this way of exiting.
S** is the secondary fund, which is a product that focuses on the secondary market of private equity and specializes in second-hand shares or investment project portfolios from investors. The difference between S** and traditional private equity investment** is that the traditional ** directly acquires the equity of the enterprise, and the object of the transaction is the enterprise; S**, on the other hand, is the acquisition of equity or ** shares of the enterprise from investors, and the transaction object is other investors.
The main value of S** is to improve the liquidity of private equity investments**. For investors, selling their shares at a discount can quickly replenish the cash flow of the main business, which is an effective channel to alleviate the pressure of tight funds, actively manage the current asset portfolio and dispose of problems. However, at present, S** is still in the initial stage of development, the overall scale is small, and the opportunity to exit through S** is also limited. At the same time, exiting through S** means giving up part of the income in order to obtain liquidity, and the investment often does not achieve a high return on investment.
2020 is considered to be the first year of my country's s**. In 2020, Shenzhen Capital Group set up the first S**. On December 10, 2020, the Beijing Equity Exchange Center was officially approved by the China Securities Regulatory Commission to carry out the pilot project of equity investment and venture capital share transfer, and in April 2021, the Beijing Equity Exchange Center issued 11 business rules related to equity investment and venture capital share transfer, taking the lead in providing normative guidance for the transfer of S** shares. In November 2021, the China Securities Regulatory Commission (CSRC) approved the launch of a pilot project for the transfer of private equity and venture capital shares in Shanghai's regional equity market. Shanghai has become the second city after Beijing to have a domestic S** public trading platform.
With a large number of ** in the domestic market into the exit period and the pressure of tight liquidity in the adjustment of the overall economic environment, LP hopes to get more exit options, and GP is also willing to find more exit channels in addition to IPO and mergers and acquisitions.
6. The exit of LPs of partnership private equity investments
(1) Typical cases
1. [(2018) Chuan 0191 Min Chu No. 14969].
Adjudication's opinion: The GP of the limited partnership type has fulfilled its investment obligations agreed in the contract and completed the equity investment in the target company, and the inability of the LP to recover the investment and obtain the income should be a commercial risk that it should foresee, rather than the failure to achieve its contractual purpose. Therefore, the claim of **LP that it could not achieve the purpose of the contract and requested to terminate the agreement was not accepted.
Analysis: According to Article 563 of the Civil Code, if the contract is terminated on the grounds that the purpose of the contract cannot be achieved, the result of "the purpose of the contract cannot be realized" must be caused by the other party's delay in performing its obligations or other breach of contract, therefore, two matters must be proved: the other party's breach of contract + the breach of contract causes the purpose of the contract to be unable to be realized. For the "blind pool", it is very difficult to prove not only the fact of breach of contract by GP, but also the fact of breach of contract that makes it impossible to achieve the purpose of the partnership agreement. For special projects, it is relatively easy to adduce evidence, because there are indeed situations where the GP does not invest in a specific project as agreed in the partnership agreement, or there is a major fault in the investment, etc., and the LP can claim that the purpose of the agreement cannot be achieved, so the partnership agreement should be terminated. In addition, in such a case, the LP may also invoke the provisions of Article 45 of the Partnership Enterprise Law to claim withdrawal from the partnership.
2. [(2020) Lu 14 Min Zhong No. 2320].
Adjudication's opinion: If the partnership term of the partnership agreement is long-term, it should be deemed that the partnership term has not been agreed. The partnership and GP did not submit sufficient evidence to the court to prove that the LP's withdrawal had an adverse impact on the partnership, so the LP should be allowed to withdraw from the partnership.
Analysis: Article 46 of the Partnership Enterprise Law stipulates that if the partnership agreement does not stipulate the term of the partnership, the partners may withdraw from the partnership without adversely affecting the execution of the affairs of the partnership, but shall notify the other partners 30 days in advance. In this case, if the agreed term of the partnership is long-term, it should be deemed that the term of the partnership has not been agreed, and the above provisions may apply. Of course, in judicial practice, the court will determine whether there is an adverse impact based on whether the party claiming to withdraw from the partnership participates in the operation and other circumstances.
3. [(2019) Zhe 0521 Min Chu No. 2599].
Adjudication's opinion: the executive partner failed to perform the relevant obligations to the partner, harming the legitimate rights and interests of the partner, and in the case that the partner lost trust in him, lost confidence in continuing the partnership and proposed to withdraw from the partnership, the choice of the withdrawing partner should be respected, so the LP's withdrawal claim was supported.
Analysis: According to Article 45 of the Partnership Enterprise Law, if the other partners seriously violate the obligations stipulated in the partnership agreement, the partners may withdraw from the partnership. As far as the limited partnership is concerned, the executive partner has a fiduciary duty to LP, and if it fails to perform its due diligence obligations and damages the rights and interests of LP, LP should be able to withdraw from the partnership in accordance with the provisions of Article 45 of the Partnership Enterprise Law. Similarly, in the dispute between Yang Jingui and Ningbo Dingji Mingfu Investment Center (Limited Partnership) and others [(2021) Jing 0116 Min Chu No. 5610], the court found after trial that due to the failure of the ** executive partner in the execution of partnership affairs, **LP lost confidence in the business prospects, and its claim for withdrawal from the partnership was based on law and should be supported.
4. [(2021) Yue 0306 Min Chu No. 18361].
Adjudication's opinion: This case is a dispute over withdrawal from the partnership, and the plaintiff asserts that it has reached an agreement with all parties to withdraw from the partnership in early 2017, and the plaintiff should bear the burden of proof for this. In this case, the plaintiff did not submit evidence to prove that the plaintiff and the other partners had reached an agreement to withdraw from the partnership, nor did there be any evidence to show that there were statutory or partnership agreement conditions for withdrawal. Therefore, the court held that the plaintiff's evidence was insufficient to prove its claim, and the plaintiff should bear the adverse consequences of failing to provide evidence, and did not support its claim.
Brief comment: In this case, the plaintiff could not prove that there were statutory reasons for withdrawal (i.e., the relevant provisions of the above-mentioned Partnership Enterprise Law), or that the conditions for withdrawal stipulated in the partnership agreement had been fulfilled, or that the plaintiff had reached an agreement with other partners on the withdrawal of the partnership, so its claim for withdrawal from the partnership was not supported. This also reminds the LPs that they should make clear and specific provisions on the conditions for withdrawal in the partnership agreement, and in addition, they should also pay attention to collecting relevant evidence to occupy a favorable position in the relevant litigation or arbitration as much as possible.
(2) How to withdraw by way of capital reduction
Article 34 of the Partnership Enterprise Law of the People's Republic of China (hereinafter referred to as the "Partnership Enterprise Law") stipulates that a partner may increase or decrease his capital contribution to a partnership enterprise in accordance with the provisions of the partnership agreement or as decided by all partners.
The Partnership Enterprise Law only provides a legal basis for the legality of the capital reduction of a partnership enterprise, and does not provide a clear guidance and path for the operation of the capital reduction of a partnership enterprise compared to the Company Law for the capital reduction of a corporate enterprise, but Article 2 of the Partnership Enterprise Law stipulates that the general partner shall be jointly and severally liable for the debts of the partnership enterprise without limit. Based on the foregoing provisions and taking into account the "human compatibility" of the partnership, the capital reduction of the partnership will not harm the interests of creditors and fully respect the autonomy of the partners.
The capital reduction of a limited partnership does not need to go through relatively strict procedures like the capital reduction, but in order to ensure that the LP withdraws from the ** in a legal and compliant manner, the following procedures need to be fulfilled:
1. Internal resolution.
According to Article 34 of the Partnership Enterprise Law, a limited partnership** must first make an internal resolution on the capital reduction, and the resolution can only be passed after the voting consent of all partners.
2. Capital reduction arrangement.
When LP withdraws from ** by way of capital reduction, according to the withdrawal amount of LP, it can be divided into full subscribed capital withdrawal, full paid-in capital withdrawal and partial paid-in capital withdrawal; According to the exit ratio of LP, it can be divided into capital reduction according to the proportion of capital contribution and capital reduction in different proportions. Among them, the same proportion of capital reduction means that each LP reduces its capital contribution synchronously according to the proportion of capital contribution, and the existing capital contribution ratio of LPs will continue to remain unchanged after the capital reduction; Different proportions of capital reduction means that each LP does not reduce synchronously according to the proportion of capital contribution, the amount of capital reduction can be different in the case of the same proportion of capital contribution, and the amount of capital reduction can be the same in the case of different proportions of capital contribution, or some partners reduce their capital, and some partners do not reduce their capital, so that the capital contribution ratio of each partner changes accordingly after the capital reduction.
3. Sign the "Withdrawal Agreement".
If the LP requires the withdrawal of all subscribed capital contributions or all the paid-in funds, after the limited partnership type reaches an agreement on the capital reduction matters ** and passes an internal resolution, all partners shall sign the "Withdrawal Agreement" to agree to the LP's withdrawal from the partnership.
4. Amend the Partnership Agreement
Further, the existing partners also need to make partial amendments to the corresponding content of the Partnership Agreement or re-enter into a new partnership agreement to make arrangements and adjustments for subsequent affairs.
5. Industrial and commercial changes.
According to Article 6 of the Administrative Measures for the Registration of Partnership Enterprises, the amount of capital contribution subscribed or actually paid by the partners belongs to the scope of the registration of the partnership enterprise. In addition, according to Article 18 of the Administrative Measures for the Registration of Partnership Enterprises, if there is a change in the registration item, the partner who executes the partnership affairs shall apply to the enterprise registration authority for modification of the registration within 15 days from the date of making the decision to change the change or the cause of the change.
Addendum:
Special Provisions on the Shares of **Shareholders** of Venture Capital of Listed Companies
Revised 2020).
Article 1In order to implement the "Several Opinions on Promoting the Sustainable and Healthy Development of Venture Capital-2016".9.20" requirements, focusing on long-term investment and value investment of venture capital *** its holdings of listed companies before the initial public offering of shares to give policy support, better play the role of venture capital in supporting small and medium-sized enterprises, science and technology enterprises entrepreneurship and innovation, in accordance with the "People's Republic of China Company Law", "People's Republic of China ** Law" and other laws and regulations and the provisions of the China Supervision and Administration Commission, these provisions are formulated.
Article 2For venture capital companies filed with the China Investment Association (hereinafter referred to as the Association), the following proportion restrictions shall apply to the shares issued before the initial public offering of the issuer held by the company through centralized bidding on the exchange through centralized bidding on the exchange
1) As of the date of the issuer's initial public offering, if the investment period is less than 36 months, the total number of ** shares within 3 months shall not exceed 1% of the total number of shares of the company;
2) As of the date of the issuer's initial public offering, if the investment period is more than 36 months but less than 48 months, the total number of ** shares within 2 months shall not exceed 1% of the total number of shares of the company;
3) As of the date of the issuer's initial public offering, if the investment period is more than 48 months but less than 60 months, the total number of ** shares within 1 month shall not exceed % of the total number of shares of the company;
4) As of the date of the issuer's initial public offering, if the investment period is more than 60 months, the total number of shares is no longer subject to the proportion limit.
The investment period is from the cumulative amount of venture capital** investment in the IPO enterprise3 millionOn the date of the yuan, or the cumulative amount of investment reaches the total investment amount of the IPO enterprisedate.
Article 3Venture Capital**Eligible enterprises are those that meet one of the following conditions:
1) The enterprise has been established for less than 60 months when the investment is first accepted;
2) When accepting investment for the first time, the number of employees of the enterprise shall not exceed 500, and the annual sales shall not exceed 200 million yuan and the total assets shall not exceed 200 million yuan according to the annual consolidated accounting statements audited by the accounting firm;
3) As of the date of acceptance of the issuance application materials, the enterprise shall comply with the Administrative Measures for the Identification of High-tech Enterprises - 20161.29 (Guoke Fa Huo 2016 No. 32) has obtained the high-tech enterprise certificate.
Article 4For the shares issued by the company before the initial public offering held by venture capital through block trading, the share transferor and transferee shall comply with the regulations of the exchange on the number and holding time.
Article 5Private equity investment filed with the industry association shall be implemented with reference to these provisions.
Article 6If it does not meet the conditions of these provisions and is carried out by means of fraud and fraud, the China Securities Regulatory Commission may take administrative supervision measures in accordance with the relevant regulations.
Article 7For matters concerning the ** shares of shareholders of listed companies that are not specified in these provisions, the "Several Provisions on the Shares, Directors, Supervisors and Senior Executives of Listed Companies-2017" shall apply5.26 (CSRC Announcement No. 9, 2017) and other relevant provisions.
Article 8These Provisions shall come into force on March 31, 2020. The "Special Provisions on the Shares of **Shareholders** of Venture Capital of Listed Companies" (CSRC Announcement No. 4 2018) shall be repealed at the same time.
Explanation of the amendment to the "Special Provisions on the Shares of **Shareholders** of Venture Capital of Listed Companies".
I. Background to the Revision
In September 2016, the "Several Opinions on Promoting the Sustainable and Healthy Development of Venture Capital-2016" was issued9.20", requiring venture capital (** enterprises, "study the establishment of institutional arrangements for the listing release period of the invested enterprises and the length of the pre-listing investment period". In March 2018, the Commission issued the "Special Provisions on the Shares of **Shareholders** of Venture Capital of Listed Companies" (hereinafter referred to as the "Special Provisions") to clarify the reverse linkage policy of venture capital. The promulgation of the "Special Provisions" is conducive to the market-oriented exit of venture capital and promotes the formation of a virtuous circle of "investment-exit-reinvestment", with good results. Since last year, the private equity and venture capital industry has generally faced problems such as fundraising difficulties and exit difficulties, and the industry has reflected that the "Special Provisions" have strict requirements for the application of reverse linkage policies for venture capital, and it is recommended to increase the preferential measures. After research, in order to further encourage and guide long-term funds to participate in venture capital, promote the formation of venture capital, and help the development of small and medium-sized enterprises and science and technology enterprises, the Commission will start to make corresponding adjustments to the content of the "Special Provisions".
2. The main content of the revision
The first is to simplify the criteria for applying the reverse peg policy.
The original "Special Provisions" required that venture capital** applicants for the reverse linkage policy need to meet two conditions: in addition to meeting the requirements of "early-stage small and medium-sized enterprises" or "high-tech enterprises" at the time of project investment, it is also required that "the total investment amount of early-stage small and medium-sized enterprises and high-tech enterprises accounts for more than 50%". The amendment simplifies and optimizes, only requiring that the project applying for reverse linkage meet one of the three requirements of "early investment", "investment in small and medium-sized enterprises" and "investment in high-tech" at the time of investment, and deletes the requirement of "the total investment amount of early-stage small and medium-sized enterprises and high-tech enterprises accounts for more than 50%" at the ** level.
The second is to cancel the lock-up period restriction of the transferee under the block transaction method.
In order to activate the trading momentum of the transferee under the block trading method, the exchange revised the implementation rules and cancelled the lock-up period restriction of the venture capital transferee.
The third is to cancel the restriction on venture capital with an investment period of more than five years.
The inverse peg policy is designed to encourage those who are genuinely engaged in long-term investments** to exit more easily, thereby enabling reinvestment. In order to guide long-term capital investment in venture capital** and promote long-term capital formation, the proportion of venture capital with an investment period of more than 5 years will no longer be limited after the expiration of the lock-up period, so as to better reflect differentiated support and guidance.
Fourth, the calculation method of the investment period should be reasonably adjusted.
The deadline for adjusting the investment period is revised from "the date of acceptance of issuance application materials" to "the date of the issuer's initial public offering", which is conducive to the continuous calculation of the investment time.
Fifth, private equity investment is allowed to apply the reverse linkage policy by reference
In practice, the investment targets of some private equity investments** also meet the requirements of "early investment", "small and medium-sized investment" and "high-tech investment". As a result, the amendments allow for private equity investments** to apply by reference.
Sixth, clarify the legal responsibility for fraudulent application policies.
For those who do not meet the conditions but apply for the application of the reverse linkage policy through fraud and other means, the China Securities Regulatory Commission (CSRC) may take administrative supervision measures against them.
*: Capital Records.
Author: Capital Records.
*Editor: Mu Lin Financial News.