After the spread of the novel coronavirus pneumonia (COVID-19), strict prevention and control measures have been adopted in various places. Many cities in Hubei have implemented "city closures", and most provinces and cities across the country have launched a first-level response mechanism for major public health emergencies. , On the basis of the extension of the Spring Festival holiday by the General Office of the State Council, all localities require companies to delay the resumption of work. Many companies have not been able to resume work so far and have no hope of resuming work in the short term. Under the new crown epidemic, not only the catering, tourism, film and television, transportation and other industries have encountered unprecedented operational difficulties, but many small and medium-sized enterprises in other industries have also been unable to sustain themselves due to a series of problems such as business interruption or sudden reduction and increased debt. For start-ups that have successfully raised funds, they may not face the risk of capital supply being cut off soon, but the risk of failing to achieve the goals agreed in the VAM agreement is increasing.

In recent years, as a valuation adjustment mechanism, the VAM agreement has almost become a necessary clause in the investment agreement signed between the investor and the financier or its founding shareholder. Disputes arising from the failure to achieve the VAM target have also emerged. The epidemic has already had a large negative impact on the normal operations of many companies, and the impact will continue. It is not yet known when it will end. Therefore, it will inevitably have a great impact on the realization of the gambling goals promised by startup companies. Enterprises must plan ahead and deal with it prudently.

1. Whether the epidemic constitutes force majeure and whether it can be exempted from liability

Whether the epidemic constitutes force majeure has been a hot topic in the legal circle recently. Zang Tiewei, spokesman for the Legal Affairs Committee of the Standing Committee of the National People's Congress and director of the Research Office, also specifically affirmed it to the media. In fact, the purpose of discussing whether the epidemic constitutes force majeure is to confirm whether the enterprises affected by the epidemic can be exempted from liability. Article 117 of my country's "Contract Law" stipulates that "if the contract cannot be performed due to force majeure, part or all of the liability shall be exempted according to the influence of force majeure, but the law Unless otherwise specified”, therefore, if the epidemic has not affected the party’s performance of specific contractual obligations (such as monetary payment obligations under normal circumstances), the party cannot claim immunity because the epidemic constitutes force majeure. Only when there is a direct causal relationship between the current epidemic or the government orders and administrative measures to prevent the epidemic (such as prohibition of resumption of work, government requisition, transportation interruption, etc.) and the contractual obligations cannot be fulfilled or the contractual purpose cannot be achieved, can a partial or total claim due to force majeure exist Disclaimer. So, can startups claim to be exempt from liability due to the unfulfilled gambling goals caused by the epidemic?

Investors and financiers usually set one or more of the following three kinds of gambling goals in the gambling terms: (1) Financial indicators, that is, it is agreed that the start-up enterprise will have a certain period in the future (usually 2-3 years) ) the profit target (or operating income target, or the growth rate of profit or operating income, etc.) that should be achieved; (2) non-financial targets, that is, the specific goals agreed to be completed by the entrepreneurial enterprise within a certain period of time in the future or before certain specific time points , such as KPI indicators, output, sales, market share, daily activity, technology research and development milestones, specific product launch, system online operation, new drug clinical phase III registration, etc.; Listed on domestic or overseas stock exchanges.

Whether the epidemic will affect the above-mentioned different gambling targets and the extent of the impact need to be analyzed in detail. For example, the failure to resume work for a long period of time, to deliver products to customers, to suspend purchases by customers, etc., may cause the company to be unable to complete the financial targets for the whole year. However, if the agreed target of gambling is to go public, and the company’s profitability is very strong, and although it is affected by the epidemic in 2020, it still maintains a certain scale of profit, then the epidemic may not have a great impact on the realization of the listing target. If the technology research and development milestone is the gambling goal, the core technicians will be ill or be quarantined or restricted from entering and leaving the country, the product experimenter will be quarantined, and the main experimental materials will not arrive due to traffic interruption. However, these situations do not necessarily have a significant impact on the company's financial indicators. Of course, the above analysis is only based on assumptions. It is not yet known when the epidemic will end and the extent to which the epidemic will negatively affect companies. Start-ups need to take necessary countermeasures while actively saving themselves.

2. Coping strategies of entrepreneurial enterprises

In the face of the sudden outbreak, we suggest that start-ups should adopt the following strategies:

1. Actively self-help

Although the topic of this article is how startups should review and face the risks that their gambling goals cannot be achieved due to the epidemic, active self-help is the most fundamental solution. Only by working hard to survive, control and even reduce the negative impact of the epidemic, Only then can you truly avoid the risk that the betting goal cannot be achieved. Of course, self-rescue measures still need to be legal and compliant, and only in this way can they be stable and far-reaching (for details, please refer to Lawyer's Advice: How to Legally "Rescue" and "Others" under the NCP Epidemic by Yang Chunbao's lawyer team ?").

2. Actively interact with investors

As long as the normal operation of the company may be affected by the epidemic, the investor should be informed in a timely and proactive manner, which can not only protect the investor's right to know (as the company's shareholder, the investor has the right to know; usually the investment agreement or capital increase agreement will also be specific The investor's right to know is agreed), and the investor can also be mobilized to use all possible resources to help the financier get out of the predicament. More importantly, if the epidemic situation may cause the goal of gambling to be unrealized, actively interacting with investors can not only strengthen existing friendly relations with investors, create a friendly atmosphere for future negotiations, and promptly and proactively inform investors of the impact of the epidemic on operations. It is also the duty of entrepreneurial enterprises.

Article 118 of my country's "Contract Law" stipulates: "If one party is unable to perform the contract due to force majeure, it shall notify the other party in a timely manner to reduce the losses that may be caused to the other party, and shall provide proof within a reasonable period of time." Obviously, the financing party performs the notice. The meaning of the obligation is to mitigate the loss of the investor, regardless of whether and how the investor acts to mitigate the loss. As mentioned above, many investors will try their best to help financiers get out of the predicament. However, if the financier fails to fulfill the obligation of notification, the investor can believe that the epidemic has not affected the operation of the financier, and the financier has no right to claim force majeure and exempt from liability, regardless of whether the court or arbitration institution accepts the investor's opinion, but finds that The financier’s negligence in the performance of the agreement is almost certain, and this factor will be taken into account when determining whether the epidemic has negatively affected the financier’s operations and the extent of the negative impact, and will eventually be determined by the court or arbitration institution. Whether and to what extent the financier is exempted from its compensation obligations or repurchase obligations has an impact.

It should be noted that when notifying the investor, the financier should clarify the negative impact of the epidemic on the failure to achieve the goal of VAM, and then claim exemption from liability based on force majeure, so as to meet the requirements of Article 118 of the Contract Law. For start-ups, it is indeed a technical task to actively interact with investors and to make disclaimer claims in a timely manner, and it is recommended to carry out under the guidance of professional lawyers.

3. Assess the impact of the epidemic and actively collect relevant evidence

While we recommend that startups engage actively with their investors, it is also important to actively gather evidence. Of course, the premise is that the epidemic has indeed or may affect the realization of the goal of gambling. Therefore, start-ups should first assess this, and if the answer is yes, start collecting evidence. This is not only to fulfill the obligations stipulated by law, but also to prepare for the future negotiation with investors to change the terms of gambling or to be forced to go to court if the negotiation fails. As far as the former is concerned, Article 118 of my country's "Contract Law" requires that the parties who cannot perform the contract due to force majeure "should provide proof within a reasonable period of time". We understand that the proof here should include two aspects: first, the proof of the occurrence of force majeure; The second is the proof that the contract cannot be performed due to force majeure.

Although the outbreak of the epidemic is a well-known fact, it does not necessarily exempt the financiers from the burden of proof, especially the financiers outside Hubei should provide proof of the local epidemic and government orders not to resume work. Entrepreneurs should pay attention to collecting government announcements or notices, reports from credible news media, and certificates from non-interested third parties (such as notarization, factual certificates from industry associations and/or China Council for the Promotion of International Trade).

It is not enough to just prove the occurrence of force majeure. It is also necessary to prove the causal relationship between force majeure and the inability to achieve the gambling target, and the company actively rescues itself and strives to reduce losses caused by the epidemic. Of course, at the current stage, it is impossible to achieve the goal of proving causality, but only by actively collecting relevant evidence will it be possible to prove that the goal of gambling cannot be achieved in the future. At this stage and for a long period of time in the future until the negative impact of the epidemic is basically eliminated, it is recommended that start-up companies continue to collect the following evidence under the guidance of professional lawyers:

(1) The specific time period during which the production and operation are suspended due to the prohibition or restriction of resumption of work, and the specific situation that the company cannot deliver products to customers;

(2) Unable to produce and operate as originally planned due to government requisition, and the resulting losses;

(3) Loss of idle production capacity due to shortage of raw material supply due to traffic interruption or control;

(4) The price of raw materials has risen due to the epidemic, resulting in an increase in production costs;

(5) The sales volume and sales revenue decreased due to traffic interruption or control, the inability to open stores, and the blockage of the network layout plan;

(6) The specific circumstances of the customer's cancellation of the order or contract due to force majeure;

(7) Senior managers and core technicians are sick or are quarantined or restricted from entering and leaving the country, and they fail to participate in technical demonstrations, exchanges and discussions directly related to the R&D plan, resulting in the failure of the R&D plan to be completed;

(8) The research and development plan cannot be completed due to the isolation of product experimenters and the failure of the main experimental materials to arrive due to traffic interruption;

(9) The established financing plan is delayed or cancelled because the investor cannot enter the site for due diligence, negotiation, etc.;

(10) The negative impact on the main business of the company caused by changes in government policies and measures, changes in the market environment, and changes in consumption habits directly caused by the epidemic;

(11) The overall situation of the industry affected by the epidemic and the process of gradual recovery;

(12) The company actively rescues itself and strives to take concrete measures to reduce losses caused by the epidemic.

Regarding the evidence collected above, we suggest that start-up companies should keep an open mind and notify investors in a timely and proactive manner, which will not only allow investors to understand the real situation of the company and the efforts made by the company, but also enable investors to participate in self-rescue and participation. Some major decisions are made to overcome difficulties together, and can also make investors realize that the occurrence of losses and the causal relationship are objective facts, win the initiative for future negotiations, and at least prevent investors from lightly initiating litigation or arbitration to a certain extent.

4. Timely and actively negotiate with investors to change the terms of gambling

If the negative impact of the epidemic does make the VAM target unattainable, it is necessary to negotiate with the investor to adjust the VAM target and/or compensation/repurchase obligations. Of course, this is not necessary or possible at the current stage, and start-ups should propose to investors in a timely manner after the negative impact of the epidemic is basically eliminated.

When negotiating and adjusting the VAM target, specific and well-founded adjustment suggestions shall be made according to the specific circumstances of the VAM target agreed in the investment agreement or the capital increase agreement. If the target of gambling is a financial indicator, it is recommended to lower specific performance indicators according to the impact of the epidemic; if the target of gambling is a non-financial indicator, the relevant indicators can be lowered or the time to achieve a specific target can be extended; The goal is to go public, and the time to market can be extended.

On the other hand, start-ups should also make plans to make it difficult to adjust their gambling targets. In this case, they should strive to adjust their compensation/repurchase obligations. Under normal circumstances, if the goal of gambling fails to be achieved, the founding shareholder or actual controller of the startup company (or even the startup company) must compensate the investor in cash or shares or repurchase the investor's equity (or shares). If the target of gambling cannot be achieved due to the epidemic, the start-up company has reason to request to change this compensation obligation or repurchase obligation. Specifically, adjustment suggestions can be made from the following perspectives: If it is a cash or share compensation obligation, it is recommended to adjust the valuation calculation method of the start-up enterprise or consider the specific impact of the epidemic when calculating, so as to narrow the valuation difference and reduce the compensation obligation, or use cash All or part of the compensation obligation is adjusted to the share compensation obligation; if it is an equity repurchase obligation, it is recommended to reduce the annual rate of return for calculating the repurchase price or set an upper limit on the repurchase price, or exempt from calculating the return during the period affected by the epidemic, and extend the performance of the repurchase Duration of obligations, etc.

The purpose of negotiating and adjusting the betting target and/or the compensation/repurchase obligation is to exempt or partially exempt the compensation/repurchase obligor from the legal liability and prevent investors from filing lawsuits or arbitrations. We believe that as long as the financier proposes a fair and reasonable adjustment plan in the spirit of overcoming the difficulties together, it should receive a positive response from the investor. No matter how the betting target and/or the compensation/repurchase obligations are adjusted in any way, a supplementary agreement shall be signed in a timely manner according to the negotiation results. However, financiers also need to be prepared for tough negotiations. If the negotiation does not go well, the bottom line of the negotiation should be set based on the outcome of possible litigation or arbitration. The Supreme People's Court clarified in the "Minutes of the National Courts' Civil and Commercial Trial Work Conference" (called "Nine People's Minutes" in the industry) that the people's courts should not only apply the relevant provisions of the Contract Law when hearing disputes over "VAM agreements", but also apply the relevant provisions of the Contract Law. The relevant provisions of the Company Law should be applied; it is necessary to adhere to the principle of encouraging investors to invest in real enterprises, especially scientific and technological innovation enterprises, so as to alleviate the financing difficulties of enterprises to a certain extent, and to implement the principle of capital maintenance and the principle of protecting the legitimate rights and interests of creditors. Balance the interests of investors, company creditors, and companies, and further propose specific adjudication rules on this basis. Financiers can refer to these principles and adjudication rules when negotiating with investors.

Epilogue

Think for the worst and work hard for the best. At a time when the epidemic continues to spread, start-ups can only work hard to move forward, and while doing everything possible to save themselves, actively interact with investors, actively collect evidence of the impact of the epidemic, and overcome difficulties together with investors. The rainbow is always after the storm. Of course, only by making full preparations can we seize the opportunity to get out of the business crisis, resolve the gambling crisis, and welcome the gorgeous rainbow after the storm.