Performance commitments in listed firms’ M&A

In recent years, numerous listed companies have boosted their share values on the secondary market through company mergers, acquisitions and restructurings. With share values sharply spurred by promises of large profits, the market has been frequent witness to high multiple performance commitments. However, due to regulation flaws, insufficient punishment and a lack of honesty and transparency in the market, a significant number of performance commitments ultimately turn out not to be worth the paper they are written on.

Catch me if you can

In May 2008, the China Securities Regulatory Commission (CSRC) issued the Administrative Measures for Material Asset Restructurings of Listed Companies, specifying that when a listed company acquires assets, it is required to provide a profit forecast report for the proposed assets and execute a performance compensation agreement with the transaction counterparty. However, in reality, once a high multiple performance commitment is announced, the share value on the secondary market will skyrocket, allowing the committed party to obtain profits high enough to cover the costs it incurs due to a breach of contract. This results in exaggerated performance commitments. In December 2013, the CSRC issued Guidelines on the Regulation of Listed Companies No. 4 to regulate commitments and performance thereof by listed companies and their actual controllers, shareholders, connected parties and acquirers. The guidelines set out the procedure that a listed company and its acquirer are required to carry out in the event of a change in their commitments.

The amended restructuring measures in October 2014 specify that where a listed company purchases assets from a specific counterparty other than its controlling shareholder, actual controller or a connected party controlled thereby, and such purchase does not result in a change of control, the listed company and the transaction counterparty may negotiate at their own discretion as to whether to adopt performance compensation and earnings per share remedial measures and related specific arrangements.

Du Lili is a partner and Wang Xiaoxing is a paralegal at Grandway Law Offices