Legal effect of minimum guarantee undertaking

When a listed company makes a private placement, the majority shareholder or actual controller will often give an undertaking of minimum guaranteed returns to the placement targets in order to ensure the success of the placement, i.e. if the sales price after the expiration of the lockup period for the privately placed stocks fails to reach the promised price, the majority shareholder or actual controller will be responsible for making up the difference.

The parties executing a minimum guarantee undertaking are usually the subscribers for the private placement and the majority shareholder of the listed company, and the entity liable for damages is also the majority shareholder, not the listed company. This point is quite similar to a valuation adjustment mechanism in a private equity (PE) investment. There are a variety of ways for realizing such an undertaking, such as a buyback at the higher price by the majority shareholder, or the provision of security for the undertaking by the majority shareholder in the form of a mortgage, structured product creation or direct cash compensation.

Minimum guarantee undertakings are usually private agreements. When making the private placement, the listed company usually will not include such an undertaking among the documents it submits to the regulator, keeping mum as to its existence. Such undertakings will generally only come to light in the event of a legal action, and hence have strong confidentiality.

Jiang Fengtao is the managing partner and Liu Bing is a partner at Hengdu Law Firm