Case Analysis: From the "Shuoshi Biotech Case", the VAM clause of the linked market value that has not been cleared by the IPO is invalid

Recently, the Shanghai Higher People's Court ("Shanghai High Court") filed a lawsuit against Nanjing Hi-Tech New Venture Investment Co., Ltd. ("Hi-Tech New Venture") and Nanjing Hi-Tech Xinjun Growth Phase I Equity Investment Partnership (Limited Partnership) ("Xinjun Phase I", together with "Hi-Tech Xinchuang", collectively referred to as the "Hi-Tech Department") against Fang Yongsheng, Liang Xilin, and Shaoxing Runkang Biomedical Equity Investment Partnership (Limited Partnership) ("Shaoxing Runkang") The final judgment of the second instance was rendered in the VAM dispute, and this two-year-long case that caused great repercussions in the market has come to an end for the time being. The second-instance judgment upheld the first-instance judgment of the Shanghai No. 2 Intermediate People's Court ("Shanghai No. 2 Intermediate People's Court"), that is, the rejection of the high-tech department's request for Jiangsu Shuoshi Biotechnology Co., Ltd. (688399. Fang Yongsheng and Liang Xilin, the actual controllers of SH) and Shaoxing Runkang, the controlling shareholder of Shuoshi Biotech, repurchased their shares of Shaoxing Runkang Partnership and paid a total of RMB767,729,800 (hereinafter referred to as RMB) for the repurchase price, interest losses on the overdue payment of the buyback price, and litigation costs. Judging from the judgment of the case, the court held that the VAM clause on the linked market value that had not been liquidated by the IPO was invalid.

1

Basic information about the case

The first-instance and second-instance judgments of the case have not been made public, and the author searched through public channels to obtain information from Nanjing Hi-Tech Co., Ltd. (600064. SH) ("Nanjing Hi-Tech"), a series of announcements on the progress of the case issued by Shuoshi Biotech, an article entitled "The First Case in China: The Linked Market Value VAM Agreement Uncleared by the IPO is Invalid|Zhizheng-On the Case" published by the WeChat official account of the Shanghai Second Intermediate People's Court, as well as the prospectus of Shuoshi Biotech and other materials speculate that the general situation of the case is as follows:

1. Relevant subjects

As can be seen from the above figure, the main subjects involved in this case are:

Plaintiff and appellant of the first instance: Gaoke Xinchuang and Xinjun Phase I. According to the information of the National Enterprise Credit Information Publicity System, the company is a wholly-owned subsidiary of Nanjing Hi-Tech, a listed company, and a limited partner of the first phase of the Xinjun of Nanjing Hi-Tech, holding 69.65% of the property share.

Defendants and appellees of the first instance: Fang Yongsheng and Liang Xilin. Fang Yongsheng is the general partner of Shaoxing Runkang, Liang Xilin is the limited partner of Shaoxing Runkang, and Fang Yongsheng, Liang Xilin and Wang Guoqiang, who is not involved in this case, are the actual controllers of Shuoshi Biotech because they signed a concerted action agreement.

Defendant in the original trial: Shaoxing Runkang. Shaoxing Runkang is a shareholding platform of Shuoshi Biotech and the controlling shareholder of Shuoshi Biotech, which held 35.49% of the company's shares when Shuoshi Biotech was listed. As of the third quarter of 2022, Shaoxing Runkang held 26.61% of the shares of Shuoshi Biotech. It is worth noting that at the time of appeal, the Department of Hi-Tech did not list Shaoxing Yankang as the appellee, but only to Fang Yongsheng, Liang Xilin appealed, speculating that it may be due to the fact that there is no clear legal provision for the repurchase of partnership shares by the partnership, and if the method of withdrawal is adopted, it is still necessary to go through the formalities such as the withdrawal of the partners through the relevant meeting resolution in accordance with the partnership agreement; Therefore, the main appeal of the high-tech department is that Fang Yongsheng and Liang Xilin transfer the partnership share to achieve withdrawal.

2. Litigation claims

In the first instance, the Hi-Tech Department required Fang Yongsheng, Liang Xilin and Shaoxing Runkang to repurchase their partnership shares of Shaoxing Runkang in accordance with the VAM agreement based on the arithmetic average of the closing price of Shuoshi Biotech in the secondary market 30 trading days before the date on which the Hi-Tech Department issued the post-listing resale notice, among which Hi-Tech Xinchuang demanded payment of RMB 268,706,600 for the resale price, interest losses on the overdue payment of the resale price, and litigation costs, and Xinjun Phase I demanded payment of RMB 499,023,200 for the resale price. Loss of interest and litigation costs for late payment of the resale price.

3. Historical evolution of the case

According to the prospectus of Shuoshi Biotech, Shuoshi Biotech is a leading provider of in vitro diagnostic products in China, focusing on the R&D, production and sales of in vitro diagnostic products such as in vitro diagnostic reagents and supporting testing instruments. The company was established on April 12, 2010 with the name of Jiangsu Shuoshi Biotechnology Co., Ltd. ("Shuoshi Co., Ltd."), and underwent shareholding restructuring on April 10, 2017.

According to the first supplementary legal opinion on June 21, 2019 after Shuoshi Biotech applied for IPO on the Science and Technology Innovation Board of the Shanghai Stock Exchange, Shaoxing Runkang was established on May 19, 2015, and at the time of its establishment, the capital contribution was 50 million yuan, of which Fang Yongsheng as a general partner, contributed 5 million yuan, with a capital contribution ratio of 10%, and Liang Xilin, as a limited partner, contributed 45 million yuan, with a capital contribution ratio of 90%. The amount of such capital contribution has not changed until the listing of Shuoshi Biotech. In June 2015, Shaoxing Runkang became a shareholder of Shuoshi Co., Ltd. by transferring old shares, and subscribed and contributed 3.2 million yuan to Shuoshi Co., Ltd., with a shareholding ratio of 16%, and a total price of 4.164704 million yuan. In December 2015, Shaoxing Runkang subscribed for the new registered capital of Shuoshi Co., Ltd. of 12.4 million yuan for 62 million yuan.

In December 2016, the capital contribution of Shaoxing Runkang increased from 50 million yuan to 62,600,321 yuan, and the new 12,600,321 yuan was all subscribed by the first phase of Gaoke Xinchuang and Xinjun, with a total subscription price of 100 million yuan, of which Gaoke Xinchuang subscribed to Shaoxing Runkang with an additional capital of 4,410,112 yuan, with a subscription price of 35 million yuan, and Xinjun subscribed to Shaoxing Runkang with an additional capital of 8,190,209 yuan and a subscription price of 65 million yuan. As of the time of the lawsuit, Hi-Tech Xinchuang accounted for 7.0449% of Shaoxing Runkang, corresponding to 1,099,004 shares of Shuoshi Biotech, and Xinjun Phase I accounted for 13.0833% of Shaoxing Runkang, corresponding to 2,040,995 shares of Shuoshi Biotech.

During the shareholding period, the Department signed the Revised Subscription Agreement, the Revised Partnership Agreement and the Supplemental Agreement with Fang Yongsheng, Liang Xilin and Shaoxing Yankang (collectively referred to as the "Resale Obligor"), and set up the terms of resale after listing and resale after listing. The "post-listing resale right" is further divided into the resale right during the lock-up period and the resale right at the expiration of the lock-up period. During the lock-up period, the right of resale gives Hi-Tech New Venture and Xinjun Phase I the right to claim the right to sell back the partnership shares to the "resale obligor" during the lock-up period of the listing and trading of shares of Hi-Tech and Xinjun Phase I. After the expiration of the lock-up period of the above-mentioned share interest listing transaction, Xinjun Phase I may, on any day, notify Shaoxing Runkang of the right to sell the shares held by the corresponding partnership shares of the high-tech department after the expiration of the lock-up period. In this case, the Hi-Tech Department asserted the "post-listing resale right" of the shares and interests of Shuoshi Biotech corresponding to the share of the partnership held by it during the lock-up period of listing transactions, that is, Article 4.2 of the Revised Partnership Agreement stipulates that on the date of the expiration of 6 months from the date of completion of the qualified initial public offering of Shuoshi Biotech, the Hi-Tech Department has the right to notify Fang Yongsheng, Liang Xilin, Shaoxing Runkang requested to repurchase its partnership shares, and the arithmetic average of the closing price of Shuoshi Biotech in the secondary market 30 trading days before the date of the post-listing resale notice issued by the Hi-Tech Department was used as the basis for calculating the resale price.

On December 5, 2019, Shuoshi Biotech was listed on the Science and Technology Innovation Board of the Shanghai Stock Exchange, with an opening price of 52.33 yuan on the same day. In the 30 trading days from June 2, 2020 to July 13, 2020, the stock price of Shuoshi Biotech rose by 155.7%, and the intraday stock price reached 476.76 yuan in July 2020.

On July 13, 2020, Hi-Tech Xinchuang and Xinjun Phase I issued a "Buyback Notice" to the three defendants in accordance with the agreement, requiring them to purchase all the partnership shares held by Hi-Tech Xinchuang and Xinjun Phase I in accordance with the agreement. According to the agreed price calculation method, the buyback price of the share of Hi-Tech Xinchuang Partnership is 268.7066 million yuan, and the buyback price of the first phase of Xinjun partnership share is 499.0232 million yuan. Fang Yongsheng, Liang Xilin and Shaoxing Yankang shall pay the corresponding price within 3 months after they issue the notice of resale. However, the three parties did not pay the return price for a long time, so Hi-Tech Xinchuang and Xinjun Phase I filed a lawsuit with the Shanghai No. 2 Intermediate People's Court.

Since the relevant circumstances of this case were disclosed by the listed company, and the VAM clauses that were not disclosed at the declaration stage and needed to be cleaned up were made public, the Shanghai Stock Exchange issued a regulatory warning to the lawyers, sponsor representatives, and listing announcements of the relevant intermediaries, and circulated a notice of criticism to the actual controller involved in the case.

2

The verdict of the case

According to the article entitled "The First Case in China: The Invalidity of the Linked Market Value VAM Agreement Uncleared by the IPO" published by the WeChat official account of the Shanghai Second Intermediate People's Court and the Announcement of Nanjing Hi-Tech Co., Ltd. on the Progress of Litigation Matters (No. 2021035) issued by Nanjing Hi-Tech Co., Ltd. on September 17, 2021, the first-instance judgment of the case is as follows (it should be noted that the second-instance judgment of this case did not publish the reasons for the judgment, and the reasons for the first-instance judgment are temporarily analyzed in this article):

1. It is called the resale of partnership shares, but it is actually the resale of shares of listed companies

The facts of this case show that the real purpose of the contract is to invest in Shaoxing Yankang, a partnership established by Fang Yongsheng and Liang Xilin, in order to obtain a high return on investment after the completion of the initial public offering of shares and the listing of shares through Shuoshi Biotech.

In this case, the Hi-Tech Department asserted the "post-listing right to resell" the shares and interests of Shuoshi Biotechnology corresponding to the shares of the partnership held by it during the lock-up period of listing and trading, and its essence was to make a profit after the transfer of the rights and interests of Shuoshi Biotechnology corresponding to the shares of the partnership shares corresponding to the shares of the partnership by way of corresponding claims to sell back the shares of Shaoxing Runkang Partnership.

2. Generally speaking, VAM is valid

At present, in the practice of judicial adjudication, the legal application of VAM agreements and VAM clauses refers to the relevant provisions of the Contract Law of the People's Republic of China and the Company Law of the People's Republic of China. Interests between companies. There is no controversy in judicial practice that the VAM or VAM clause entered into between the investor and the shareholder or actual controller of the target company shall be deemed valid and supported by the actual performance if there are no other reasons for invalidity. However, there is still controversy over the validity of the VAM agreement and VAM clause entered into between the investor and the target company.

Based on the principle of lawfulness in the above-mentioned judicial practice, under the circumstance that Shaoxing Runkang, as a partnership, has made procedural arrangements for the partnership shares claimed to be sold back, such as agreeing to withdraw from the partnership and corresponding to the capital reduction and liquidation, and there are no other invalid reasons, the resale matters involved in the case as agreed with Fang Yongsheng, Liang Xilin and Shaoxing Runkang as advocated by the Gaoke Department should be deemed valid and the judgment should be rendered for performance.

3. In this case, the calculation method of the resale price is linked to the market value, which is invalid because it may cause damage to the public interest and even endanger public order and good customs such as endangering national financial security

The problem in this case is that, in addition to the controversy over the validity of the transfer of the corresponding shares and interests of Shuoshi Biotech in advance during the lock-up period, and whether there is a serious impact on the issuer's ability to continue operations, the most important thing is that the calculation method of the resale price claimed by the company is linked to the market value of the stock trading after the issuance and listing of Shuoshi Biotech, and the content of such a VAM agreement was originally a VAM matter that should be cleared up in accordance with regulations before the application for the issuance and listing of shares on the Science and Technology Innovation Board. The original intention of the regulations to deal with the requirements was to prevent investors from deliberately manipulating the stock trading price in the secondary market during the exercise period in order to pursue their own investment interests, causing the stock trading price in the secondary market to deviate from the normal market trading valuation of the target company, causing other public investors in the stock trading market to suffer improper losses due to their participation in the trading of the stock, and then affecting the trading order of the stock market. The property rights and interests of public investors and other public interests constitute harm, and may even involve issues that endanger public order and good customs such as national financial security. According to the trading price trend of Shuoshi Biotech's shares before and after July 13, 2020 (i.e., the date when the Hi-Tech Department issued the "Resale Notice" to Fang Yongsheng, Liang Xilin, and Shaoxing Yankang), this case does not rule out the possibility of artificially manipulating the stock price of Shuoshi Biotech in the secondary stock trading market. Therefore, the price calculation method clause on which the Hi-Tech Department relied to claim the right of resale in this case should be found invalid because it is linked to the market value of the stock transaction. Accordingly, the Hi-Tech Department used the arithmetic average of the closing price of Shuoshi Biotech in the secondary market 30 trading days before the date (including that date) of the post-listing resale notice as agreed in the agreement as the basis for calculating the buyback price involved in the case, and requested Fang Yongsheng, Liang Xilin, and Shaoxing Yankang to jointly pay the buyback price of the partnership share to it, which was not supported by this court. In addition, on the premise that Shaoxing Runkang has not made procedural arrangements such as agreeing to withdraw from the partnership and corresponding to the liquidation of capital reduction in respect of the partnership share claimed by the Hi-Tech Department to bear the joint resale obligation, the Hi-Tech Department's claim to Shaoxing Runkang to bear the resale obligation of its partnership share cannot be established in accordance with the law.

4. You can request a repurchase, but the price needs to be renegotiated to determine, and if the negotiation fails, it will be calculated according to the fixed compound interest of the unlisted repurchase price

According to the above-mentioned determination opinions, during the lock-up period of the equity interest in the shares of Shuoshi Biotechnology held by the partnership, namely Shaoxing Runkang, Hi-Tech can claim that Fang Yongsheng and Liang Xilin jointly bear the obligation to sell back the shares of the partnership held by them, but the corresponding resale price shall be renegotiated and determined by the parties in accordance with the law. If the negotiation fails, based on the "unlisted resale right" and "post-listing resale right" granted to the Hi-Tech Department in the "Revised Subscription Agreement" involved in the case, the Hi-Tech Department may choose to claim that Fang Yongsheng and Liang Xilin shall jointly bear the obligation to pay the corresponding resale price, and may also choose to notify Shaoxing Runkang to perform the corresponding selling obligation in the secondary stock market and pay the proceeds on the date of expiration of the lock-up period of the shares of Shuoshi Biotech held by the partnership, regarding the rights and interests of the shares held by the partnership based on the shares of the partnership. The calculation method of the unlisted buyback price agreed in the agreement is as follows: the total transaction price paid by the investor and compound interest calculated at an annual interest rate of 12% (of which the interest for less than one year is calculated according to the corresponding part of the interest of the current year) and all undistributed profits that should be paid to the investor but not paid by the corresponding partnership every year (including the undistributed profits of the equity of Shuoshi Biotech corresponding to the resold shares).

5. The requested share pledge is also not supported because the aforesaid buyback price clause is invalid

It should also be noted that regarding the litigation request of the Hi-Tech Department to order Shaoxing Runkang to assist the Hi-Tech Department in handling the registration procedures for the pledge of the shares of Shuoshi Biotechnology held by Shaoxing Runkang. Amendment to the Subscription Agreement 4.2 It is stipulated that the post-listing resale right (a) post-listing share pledge, from 15 trading days after the date of completion of the initial public offering of shares of Shuoshi Biotech, the partnership shall pledge the shares of Shuoshi Biotech (the shares pledged by the investor) to each investor, and complete the registration of such share pledge (including but not limited to registration with China Securities Depository and Clearing Co., Ltd.) within 30 trading days from the date of completion of the qualified initial public offering of Shuoshi Biotech, and the pledged shares of the investor pledged to each investor shall be calculated according to the following formula: S=P* C, S = the number of shares that the partnership should pledge to the investor, P = the equity ratio corresponding to the investor's partnership share after listing, and C = the total number of shares of the company within 15 trading days from the date of completion of the initial public offering. The above agreement is an expression of the true intention of the parties and is not contrary to the law. Accordingly, if the Hi-Tech Department sues Shaoxing Yankang for assistance in handling the pledge registration procedures for the corresponding shares of Shuoshi Biotechnology held by it indirectly for the purpose of protecting the rights and interests of the shares of Shuoshi Biotechnology indirectly held by it, it can be supported. However, in this case, the reason for the Gaoke Department to apply for the above-mentioned share pledge registration formalities is to provide pledge guarantee for the resale price and interest losses paid by Fang Yongsheng, Liang Xilin and Shaoxing Yankang. Similarly, the litigation claim of the Hi-Tech Department for the above-mentioned request for an order to go through the pledge registration formalities is discounted through an agreement or to be compensated in the scope of the resale price and interest losses to be paid to the Hi-Tech Department by auction or sale price within the scope of the resale price and interest losses to be paid by the Hi-Tech Department.

3

Case analysis and enlightenment

First of all, in this case, Shaoxing Runkang is the shareholding platform of the actual controller and is the controlling shareholder of the listed company, and the arrangement of the Hi-Tech Department as a financial investor to invest in the target company through the controlling shareholder is relatively rare in equity investment, given that the lock-up period of the shares of the listed company held by the controlling shareholder is 36 months, and Shaoxing Runkang is only an SPV, it is likely that this investment approach will also require all partners of the SPV, including the high-tech department, to comply with the 36-month lock-up period in the listing review, which is two years longer than the 12-month lock-up period of ordinary financial investors。 From the public information, we do not know the reason for this investment arrangement of the Hi-Tech Department, whether it reached some kind of arrangement with the actual controllers Fang Yongsheng and Liang Xilin, or whether Fang Yongsheng and Liang Xilin needed to expand their control over Shuoshi Biotech with the help of the funds of the Hi-Tech Department at that time. However, the author speculates that the 36-month lock-up period brought about by the unusual investment arrangement was one of the reasons for the VAM agreement between the two parties. From the perspective of the VAM setting, the "post-listing resale right" during the lock-up period gives Hi-Tech the right to request the repurchase of partnership shares upon the expiration of 6 months after the listing of Shuoshi Biotech, and the price is the arithmetic average of the closing price of Shuoshi Biotech in the secondary market 30 trading days before the date of the post-listing resale notice issued by Hi-Tech Biotech. The Hi-Tech Department has a greater initiative and decision-making power in the investment exit, and even its lock-up period is actually shorter than the 12 months of ordinary financial investors. Different from the general market value-linked VAM clauses, this case is not a VAM clause that is made up by the actual controller when the stock price cannot reach the preset price after listing, but a safeguard mechanism for investors to withdraw after the stock price reaches the preset price, which is a relatively rare VAM setting in practice.

Second, the VAM clause in this case was a VAM clause that should be cleaned up in accordance with the Listing Rules. As stated in the judgment, although it is a dispute over the repurchase of partnership shares, "the real purpose of the contract is to invest in Shuoshi Biotech, with a view to obtaining a high return on investment through the initial public offering of shares and the listing of shares of Shuoshi Biotech. The terms of the agreement can be confirmed by the terms of the agreement that each investor shall enjoy the equity interest of Jiangsu Shuoshi corresponding to its investment partnership share, the equity interest of Jiangsu Shuoshi corresponding to the investment partnership share of each partnership enterprise, the commitment of each partnership party that the use of the transaction price obtained by the partnership under this agreement shall be limited to the paid-in capital contribution of the partnership to Jiangsu Shuoshi, and the commitment of each partnership party that the purpose of the partnership is to make equity investment in Jiangsu Shuoshi. The essence is a dispute over the validity of the VAM clause to adjust the valuation of Shuoshi Biotech.

Question 10 of the Q&A on the Review of the Issuance and Listing of Stocks on the Science and Technology Innovation Board of the Shanghai Stock Exchange (II) stipulates that "some investment institutions have agreed to have a valuation adjustment mechanism (VAM) at the time of investment, how should issuers and intermediaries grasp it? If VC or other institutions agree on a valuation adjustment mechanism (generally known as a VAM) at the time of investment, in principle, the issuer is required to clean up the VAM before filing, but at the same time, the VAM agreement may not be liquidated if it meets the following requirements: (1) the issuer does not act as a party to the VAM, (2) the VAM does not have an agreement that may lead to a change in the company's control, (3) the VAM is not linked to market value, and (4) the VAM does not seriously affect the issuer's ability to continue operating or other circumstances that seriously affect the rights and interests of investors. The sponsor and the issuer's lawyer shall issue a special verification opinion on whether the VAM agreement meets the above requirements. The issuer shall disclose in the prospectus the specific content of the VAM agreement, the possible impact on the issuer, etc., and provide a risk warning. Obviously, the VAM clause at issue in this case is obviously a VAM clause linked to market value, which is based on the arithmetic average of the closing price of Shuoshi Biotech in the secondary market 30 trading days prior to the date of the post-listing resale notice. It is a VAM clause for listing liquidation.

In the "Decision on Issuing Regulatory Warnings to Jiangsu Shuoshi Biotechnology Co., Ltd." (SSE Keshen (Self-Regulatory Supervision) [2021] No. 14) issued by the Shanghai Stock Exchange, it was mentioned that "in December 2016, Fang Yongsheng, Liang Xilin, the actual controllers of Shuoshi Biotech, and Shaoxing Runkang Biomedical Equity Investment Partnership (Limited Partnership) (hereinafter referred to as Runkang Biotechnology), the controlling shareholder of Shuoshi Biotech, and Nanjing Hi-Tech New Venture Investment Co., Ltd., Nanjing Hi-Tech Xinjun Growth Phase I Equity Investment Partnership (Limited Partnership) (hereinafter referred to as the Hi-Tech Investors) signed an investment agreement, stipulating that the Hi-Tech Investors will join Runkang Biotech and make arrangements for special rights and obligations such as resale rights, anti-dilution rights, and valuation adjustments before and after the listing of Shuoshi Biotech. The above-mentioned matters are VAM agreements that should be disclosed and cleared up in the Q&A on the Review of the Issuance and Listing of Stocks on the Science and Technology Innovation Board of the Shanghai Stock Exchange (II). On April 22, 2019, the Shanghai Stock Exchange (hereinafter referred to as the "Exchange") accepted the application for the initial public offering of shares and listing on the Science and Technology Innovation Board of Shuoshi Biotech, and the prospectus and other application documents did not mention the above-mentioned VAM agreement. On May 21, the firm issued the first round of review inquiry letters, requiring Shuoshi Biotech to fully disclose the signing and clean-up of historical VAM agreements, as well as the specific contents, trigger conditions, and consequences of the remaining VAM agreements or VAM clauses, and to disclose the risks. On October 25, the China Securities Regulatory Commission (CSRC) inquired about whether the actual controller of Shuoshi Biotech has large debts and share pledges, and whether there is an agreement or arrangement to use Shuoshi Biotech's shares to repay debts. Shuoshi Biotech did not mention the relevant VAM agreement in the reply to the relevant inquiry. This also proves that the VAM in this case is a VAM that should be disclosed and needs to be cleaned up.

In fact, the judgment in this case also made it quite clear that "the original intention of the regulations is to prevent investors from deliberately manipulating the stock trading price in the secondary market during the exercise period in pursuit of their own investment interests, causing the stock trading price in the secondary market to deviate from the normal market trading valuation of the target company, causing other public investors in the stock trading market to unduly cause damage due to their participation in the trading of the stock, and then affecting the trading order of the stock market, The property rights and interests of public investors and other public interests constitute harm, and may even involve issues that endanger public order and good customs such as national financial security. "The essence is to prevent investors from manipulating the market, thereby harming the interests of the majority of investors and even endangering the financial order. From the beginning of June 2020 to the beginning of September 2020 after the listing of Shuoshi Biotech, the share price of Shuoshi Biotech experienced a sharp rise to a sharp fall, and in the 30 trading days from June 2, 2020 (up to 185.58 yuan) to July 13, 2020, the stock price of Shuoshi Biotech rose by 155.7%, and on July 13, 2020 (that is, the date when the high-tech department issued a buyback notice), the intraday stock price reached a maximum of 476.76 yuan, and then, in early September, it fell back to around 200 yuan. On July 13, 2020, at the high point of the stock price, the high-tech department requested a buyback and withdrawal, which inevitably led the court to think that "the possibility of artificially manipulating the stock price of Shuoshi Biotech in the secondary stock trading market cannot be ruled out".

In addition, from the perspective of investment logic, after the lock-up period, investors can completely withdraw through the reduction of holdings, so the VAM clause that withdraws by way of repurchase shares and is linked to the market value of the stock is more likely to appear during the lock-up period. The solvency of the actual controller will have a serious impact on the solvency of the actual controller, and may even affect the ability of the target company to continue as a going concern.

Third, in this case, the court did not deny the validity of the repurchase itself, but only held that the agreement on the price was invalid. In fact, this is consistent with the trend of judgments on the validity of VAM agreements in recent years. From the perspective of legal provisions and judicial practice, referring to the adjudication viewpoint on the validity of VAM agreements in the Minutes of the National Conference on Civil and Commercial Trial of Courts, the VAM and "VAM clauses" entered into between the investor and the shareholders or actual controllers of the target company are generally deemed valid and supported by actual performance; In this case, the court even supported the resale of the partnership shares, but the price of the resale needs to be reconfirmed, and in addition to withdrawing at the price after the lifting of the ban (understood as a normal reduction), it can also be repurchased at the fixed interest rate price agreed before listing. Therefore, it can be seen that although there is a conflict with the regulatory rules of the regulator (i.e., breaking through the limit of the lock-up period), it may still be supported by judicial decisions, but the repurchase price cannot be linked to the market value, and the repurchase at a relatively fixed price is more likely to be supported by the court.

4

brief summary

The "Shuoshi Biotech Case" is known as the first case in China to determine the validity of a post-listing VAM agreement, in which the adjudication view was determined that the VAM clause linked to the market value that had not been liquidated by the IPO was invalid. Generally speaking, VAM agreements are not necessarily invalid, but they may be found invalid because the price calculation method linked to market value may lead to market manipulation, affect the interests of investors, and damage the financial order. However, the mere invalidity of the calculation method does not mean that the resale itself is invalid, as long as the price is set appropriately, it may still be supported by the judiciary. In addition, the case also reminds intermediaries that, when conducting due diligence, in addition to conventional means, they should pay special attention to the motives behind the abnormal investment channels of the investors, when the contents of the occupation agreement and the partnership agreement signed by the financial investors are relatively simple and general, and the transaction amount, payment account, delivery conditions and other contents are missing, and cannot fully reflect the investor's investment background, transaction situation and specific rights and obligations arrangements, it should pay special attention to the motives behind the investment and the non-compliant arrangements that may be hidden.