Analysis of the Application of "Most Favored Nation Treatment" in the Field of Private Equity Investment

2023-04-25 16:06:20 · Yang Chunbao, Sun Tian

Preface

Most Favored Nation Treatment (MFN), also known as "non discriminatory treatment", was originally a commonly used system in international economic and trade relations. It usually refers to the preferential, privileged, or exempt treatment that contracting parties grant to each other in terms of trade, navigation, tariffs, legal status of citizens, etc., which is no lower than that currently or in the future given to any third country. Nowadays, the most favored nation treatment is widely used in the field of private equity investment to ensure that investors in this round can enjoy treatment that is not inferior to those in other rounds (including front and rear wheels). The question is, once an investment dispute arises, how does the judicial authority determine the application of "MFN"? This article intends to select one of the few relevant judicial precedents and provide some suggestions based on a deep analysis of the judgment viewpoints, in order to provide useful references for private equity investment institutions and relevant professionals.

Basic facts of the case

Dacheng Innovation Company and Jintou Enterprise respectively increased their capital to Soku Company in March and December 2016, and signed gambling agreements with the controlling shareholders of Soku Company, as shown in the table below:

	Dacheng Innovation Company Capital Increase	Capital increase of financial investment enterprises
Date of capital increase	March 3, 2016	December 5, 2016
Contracting entity	Dacheng Innovation Company, Soku Company	Jintou Enterprise, Soku Company, Zhu Mingfei (controlling shareholder)
Protocol	Capital increase agreement, shareholder agreement	Capital increase agreement, supplementary agreement, confirmation letter
Capital increase plan	(1) According to the dynamic PE capital increase of 8 times after Soku Company's investment, the pre investment valuation is 70 million yuan, and the registered capital is 8 million yuan; (2) Dacheng Innovation Company invested 5 million yuan, of which 571400 yuan was included in the registered capital, and the remaining 4.4286 million yuan was included in the capital reserve; After the capital increase is completed, Dacheng Innovation Company holds 6.25% of the equity of Soku Company; (3) After the completion of this capital increase, if Soku Company grants any subsequent investors (excluding equity incentives) shareholder rights that are superior to the rights enjoyed by Dacheng Innovation Company in this agreement, Dacheng Innovation Company will automatically enjoy this right. (Article 4.10 of the Capital Increase Agreement, which refers to the most favored nation treatment)	Jintou Enterprise subscribed a new capital contribution of 2.5 million yuan to Soku Company for 20 million yuan, accounting for 20% of the registered capital of the company after the capital increase; After the completion of this capital increase, the shareholding ratio of Jintou Enterprise is 20%.
Performance Commitment	The actual net profit after tax of Soku Company in 2016 shall not be less than 10 million yuan.	Soku Company achieved a consolidated net profit of no less than 5 million yuan in 2016; In 2017, the consolidated net profit was no less than 15 million yuan; The total consolidated net profit from 2016 to 2017 shall not be less than 20 million yuan.
Valuation adjustment	(1) If Soku's non net profit deduction in 2016 is less than 8 million yuan (i.e. less than 80% of the committed profit for the year), the first valuation adjustment will be triggered; (2) If the annual operating performance of Soku Company triggers valuation adjustments, Zhu Mingfei should refund the excess investment amount of Dacheng Innovation Company in the form of cash compensation, so that the investment price of Dacheng Innovation Company reaches the P/E multiple of Soku Company after this capital increase, and pay the fund occupancy fee at an annual interest rate of 10%.	(1) If the consolidated performance of Soku Company from 2016 to 2017 is lower than 90% of the promised performance indicators, Jintou Enterprise has the right to demand cash or equity compensation from Zhu Mingfei; (2) If the consolidated performance of Soku Company from 2016 to 2017 is lower than 90% of the promised performance indicators, Jintou Enterprise has the right to request Zhu Mingfei to provide cash compensation to Jintou Enterprise. (As stipulated in Article 1.3 of the Supplementary Agreement for Financial Investment)
Validity period of valuation adjustment	(a) The actual net profit after tax of Soku Company in 2016 shall not be less than 80% of the promised net profit; (b) Soku Company was listed on the New Third Board in 2016; (c) The next round of financing or market making trading price of Soku Company shall not be lower than the valuation of 80 million yuan after this round of investment. As long as any of the above clauses (a), (b), and (c) are met, the valuation adjustment authority of Dacheng Innovation Company will automatically expire from the time Soku Company meets the conditions.	(1) The "Capital Increase Agreement" and "Supplementary Agreement" do not set a validity period for valuation adjustments; (2) On October 25, 2018, Jintou Enterprise issued a confirmation letter to Soku Company to increase the validity period of valuation adjustment: (a) The combined net profit of Soku Company in 2017 and 2018 shall not be less than 4 million yuan; (b) Soku Company will be listed on the New Third Board before December 30, 2019; (c) The next round of financing or listing transaction price of Soku Company shall not be lower than the valuation of 100 million yuan after this round of investment. As long as any of the above clauses (a), (b), and (c) are met, the valuation adjustment authority of Jintou Enterprise will automatically expire from the time Soku Company meets the conditions.
Repurchase right (including repurchase price)	(1) Trigger repurchase situation: (a) The actual net profit after tax of Soku Company in 2016 was lower than 80% of the promised net profit, (b) Suoku Company failed to list on the New Third Board within the year 2016; (c) The substantial adjustment of Soku Company's main business has resulted in a significant adverse change in net profit, without the written consent of Dacheng Innovation Company. (2) Repurchase price: (a) The investment amount of Dacheng Innovation Company plus a fixed income simple interest of 10% per year, with an interest period of Dacheng Innovation Company's funds remitted to the designated account of the company until the repurchase party pays off the repurchase amount; (b) Dacheng Innovation Company deducted all dividends received from the company from the repurchase price payable before this; (c) The final execution repurchase price shall be determined based on the principle of the higher of the above price and the net equity assets of Dacheng Innovation Company, and the compensation income (if any) obtained from the valuation adjustment shall be deducted from the execution repurchase price.	(1) Trigger repurchase situation: The actual performance of Soku Company is below 70% of the promised performance indicators, or the profit indicators for any year increase by less than 10% year-on-year; (2) Repurchase price: Repurchase price=capital increase × (1+10%) to the nth power - the dividend income that the financial investment enterprise has received from Soku Company - the income that the financial investment enterprise has obtained from the transfer of a portion of Soku Company's equity; Repurchase price=the number of shares required by the financial investment enterprise to be purchased by Soku Company × The net assets per share of Soku Company at the end of the previous month at the time of transfer, in the above formula, n represents the time when the financial investment enterprise held the equity, accurate to months, such as two years and three months, n=2.25; The calculation method for the two repurchase prices mentioned above takes the higher one. (Article 2.1 of the Supplementary Agreement for Financial Investment)
Validity period of repurchase rights	Same as the effective period of valuation adjustment.	(1) The "Capital Increase Agreement" and "Supplementary Agreement" do not set an effective period for the repurchase right; (2) On October 25, 2018, Jintou Enterprise issued a confirmation letter to Soku Company to increase the validity period of the repurchase right: (a) The combined net profit of Soku Company in 2017 and 2018 shall not be less than 4 million yuan; (b) Soku Company will be listed on the New Third Board before December 30, 2019; (c) The next round of financing or listing transaction price of Soku Company shall not be lower than the valuation of 100 million yuan after this round of investment. As long as Soku Company meets any of the above terms (a), (b), and (c), the repurchase terms of the financial investment enterprise will automatically become invalid from the time the target company meets the conditions
Anti-Dilution Right	(a) Within the scope permitted by Chinese law and subject to necessary approvals from Chinese government departments, if Soku Company issues any new shares and the subscription price per share of such new shares is lower than the transaction price per share under the Dacheng Capital Increase Agreement, Dacheng Innovation Company may choose to adjust the equity ratio or compensate in cash; The way to adjust the shareholding ratio of Dacheng Innovation Company is to adjust the shareholding ratio of Dacheng Innovation Company according to the new investment price, so that it is consistent with the new investor price, and transfer the corresponding shareholding ratio from Zhu Mingfei to Dacheng Innovation Company; The method of cash compensation for the investor is: Zhu Mingfei compensates Dacheng Innovation Company's investment difference and the difference by 10% per year, calculated as simple interest per day, in cash; (b) After the completion of this capital increase, if Soku Company grants any subsequent investors shareholder rights that are superior to those enjoyed by Dacheng Innovation Company, Dacheng Innovation Company will automatically enjoy such rights; (c) The provisions of (a) and (b) in the above anti dilution rights do not apply to equity incentives. (Article 4.2 of the Dacheng Shareholders' Agreement)	After the signing of the supplementary agreement, if Soku Company issues additional shares or increases its registered capital, or if Zhu Mingfei sells its equity, the subscription price or transfer price of the new shareholders shall not be lower than the consideration for this capital increase by Jintou Enterprise; On the contrary, Zhu Mingfei should return the difference between them and the annualized interest of 20% during the period to the Jintou Enterprise, or transfer his equity to the Jintou Enterprise for free to adjust the equity ratio of the Jintou Enterprise until it is consistent with the subscription price or capital increase consideration of the new shareholders. (Article 7 of the Supplementary Agreement of Jintou)

On September 4, 2018, Dacheng Innovation Company believed that the shareholder rights (repurchase) enjoyed by Jintou Enterprise were superior to Dacheng Innovation Company, and Dacheng Innovation Company had the right to automatically enjoy the equity repurchase rights stipulated in the Jintou Supplementary Agreement. Moreover, due to the audited net profit of Soku Company in 2016 being 70% lower than the promised net profit of 5 million yuan, a repurchase has been triggered. Therefore, a letter was sent to Zhu Mingfei, the controlling shareholder of Soku Company, requesting it to fulfill its repurchase obligation. On September 27, 2018, Dacheng Innovation Company believed that there was no "valuation adjustment validity period" restriction on valuation and performance commitment clauses in the "Financial Investment Supplementary Agreement", and Dacheng Innovation Company should not be subject to the "valuation adjustment validity period" restriction; Suoku Company's audited net profit in 2016 was lower than 80% of the promised net profit, which triggered a valuation adjustment. Therefore, a letter was sent to Zhu Mingfei requesting him to refund the excess investment amount and fund occupation fees. Zhu Mingfei did not agree to Dacheng Innovation Company's request, and Dacheng Innovation Company sued, demanding that Zhu Mingfei fulfill his equity repurchase obligations and refund excess investment funds and fund occupation fees. In the end, both the first and second instance courts rejected the plaintiff's application. On the basis of careful study of the judgment in this case, we have summarized the opinions of the two levels of courts as follows:

The performance commitments of the gambling agreements involved in the previous and subsequent rounds of investment are made based on the operating conditions of the target company in different periods, and are not necessarily superior or inferior. The court of first instance held that the "Dacheng Shareholders' Agreement" was signed in March 2016, and Soku Company's annual operations in 2016 had just begun, while the "Financial Investment Supplementary Agreement" was signed in December 2016. Soku Company's annual operations in 2016 were approaching the end, and the business situation was gradually becoming clear. In 2016, Soku Company made different performance commitments to Dacheng Innovation Company and Jintou Enterprise based on different operating periods and market conditions, which is in line with the laws of the market economy. Therefore, the performance commitments of the two agreements mentioned above are only different, not superior or inferior. The court of second instance also held that Dacheng Innovation Company and Jintou Enterprise, as investors, made different predictions on the performance of the target company based on different market environments over a period of 9 months, and signed gambling agreements with different performance commitments, valuation adjustment mechanisms, and repurchase price determination methods.

Lawyer's points

The following statement can be added to the most favored nation clause of the investment agreement. If the promised performance of the target company under the rear wheel investment agreement is higher than that of the current round investment agreement, and the performance commitment period of the current round investment agreement has not yet expired, the promised performance of the target company under the rear wheel investment agreement will automatically apply to the current round investment party.

2. The valuation adjustment methods and repurchase rights of the gambling agreements involved in the two rounds of investment are different, and it is not the best or the worst. The first instance court held that there was no cash compensation for the valuation adjustment method in the Dacheng Shareholders' Agreement, and the valuation adjustment method in the Financial Investment Supplementary Agreement also did not include excess investment funds and fund occupation fees. In addition, the conditions and circumstances of the repurchase rights stipulated in the Dacheng Shareholders' Agreement and the Supplementary Agreement of the Financial Investment are different. Although the conditions and circumstances stipulated in the latter are more stringent than those of the former, and the repurchase price is relatively higher than that of the former, the principle of proportionality between rights and obligations is also in line with common sense.

Lawyer's points

The following statement can be added to the most favored nation clause of the investment agreement. If there are differences between the gambling terms (including but not limited to valuation adjustment methods, triggering repurchase situations, and repurchase prices) in the rear wheel investment agreement and the current round investment agreement, the current round investor has the right to choose to continue applying the gambling terms of the current round investment agreement, or choose to apply the gambling terms of the rear wheel investment agreement, However, each counterparty shall be notified in writing within thirty (30) days after the signing of the rear wheel investment agreement.

3. If the front wheel investment agreement imposes restrictions on valuation adjustment and repurchase rights, but the rear wheel investment agreement does not set such restrictions, it can be considered that when signing the rear wheel investment agreement, the rear wheel investor does indeed have better rights than the front wheel investor, but this priority right can be extinguished by supplementary agreements between the parties to the rear wheel investment agreement. The first instance court held that the "Dacheng Shareholders' Agreement" stipulated the validity period of valuation adjustment and repurchase rights, that is, if any of the three conditions of meeting the relevant net profit indicators, listing on the New Third Board, or post investment valuation reaching a certain amount are met, the valuation adjustment rights and repurchase rights of Dacheng Innovation Company will automatically become invalid from the time Soku Company meets the conditions. The Supplementary Agreement on Financial Investment does not specify the valuation adjustment and the validity period of repurchase rights. But in October 2018, Jintou Enterprise issued a confirmation letter to Soku Company, adding valuation adjustment and repurchase option validity terms with the same conditions in the "Jintou Supplementary Agreement". Compared to the valuation adjustment validity period and repurchase right validity period of Dacheng Innovation Company and Jintou Enterprise, there is no difference between the two. The court of second instance held that Dacheng Innovation Company did not make a restrictive agreement in the "Dacheng Shareholders Agreement" on whether the next round of financing could be changed within the performance period, nor did it provide evidence to prove that Jintou Enterprise and Zhu Mingfei maliciously colluded to damage their interests. Therefore, in the case of Jintou Enterprise's valuation adjustment and repurchase rights being subject to the validity period, The valuation adjustment and repurchase right validity period of the Dacheng Shareholders Agreement should continue to be effective for Dacheng Innovation Company.

Lawyer's points

In this case, Dacheng Innovation Company sued the founder of Soku Company to fulfill the repurchase obligation first, while Jintou Enterprise issued a confirmation letter to Soku Company to increase the valuation adjustment and the validity period of the repurchase right. Dacheng Innovation Company believes that there is suspicion of malicious collusion in the confirmation letter, which is understandable. But the perspective of the second instance court undoubtedly inspires us that in order for the front wheel investor to avoid such risks, they can consider adding a restriction to the most favored nation treatment clause under the investment agreement, that is, during the period when the current round investor serves as a shareholder of the target company and during the performance period of the rear wheel investment agreement, No adverse adjustment shall be made to the rights of the rear wheel investor that are superior to the current round investor (including but not limited to reducing or deleting any or all of the rights of the rear wheel investor that are superior to the current round investor, or imposing any restrictions on any or all of the rights of the rear wheel investor that are superior to the current round investor).

The gambling agreement signed between the controlling shareholder of the target company and the rear wheel investor on the target company is not in line with the interests of the target company, and its changes do not need to be approved through procedures at the target company level. The court of second instance held that although it is explicitly stipulated in the "Capital Increase Agreement of Jintou" that "any modification, amendment or supplement to this agreement must be made through written documents signed by all parties." However, under the "Supplementary Agreement of Jintou", the subject entitled to cash compensation, equity compensation, and repurchase rights is Jintou Enterprise, and the subject making business performance commitments and fulfilling the aforementioned obligations to Jintou Enterprise is the controlling shareholder of Soku Company, The confirmation letter is an adjustment to the aforementioned rights and obligations between the Golden Investment Enterprise and the controlling shareholders of Soku Company, and is a limitation of the rights of the Golden Investment Enterprise. It is not directly related to the interests of Soku Company as the subject of rights, and its effectiveness does not require special resolution and approval by the shareholders' meeting of Soku Company. This gambling agreement is also not a related party transaction.

Lawyer's points

In the case where the counterparty is not the target company, the adjustment of the rear wheel counterparty terms is indeed not directly related to the interests of the target company. As a shareholder of the target company, the front wheel investor attempts to limit or prohibit such adjustments through the decision-making process at the target company level, which is naturally unreasonable. As mentioned earlier, a more feasible approach is to add restrictive provisions on the rear wheel betting clause in the most favored nation treatment clause under the front wheel investment agreement.

Conclusion

From the perspective of the judgment in this case, it can be seen that the judicial authorities not only rely on the content of the terms themselves in the application of the most favored nation treatment in private equity investment, but also comprehensively consider the signing time of different rounds of investment agreements, the actual operating status and investment valuation of the target company at the time of signing the investment agreement, and relevant obligors (including but not limited to gambling obligors), And based on this, draw conclusions on whether and how it can be applied. Therefore, it is recommended that private equity investment institutions take into account factors related to the treatment of investors, including the aforementioned content, when drafting the "MFN" clauses of investment agreements, and reflect them as much as possible in the final investment agreement to avoid the "MFN" clauses becoming empty words.

Author

Lawyer Yang Chunbao

First level lawyer

Senior Partner of Dentons (Shanghai) Law Firm

Email:

chambers.yang@dentons.cn

The leader of the private equity and investment fund professional group and TMT industry group at Beijing Dacheng (Shanghai) Law Firm, the deputy director of the Dacheng China Science and Technology Culture Leisure and Entertainment Professional Committee, and a member of the Shanghai Foreign Legal Talent Pool. Bachelor of Law from Fudan University (1992), Master of Law from Sydney University of Science and Technology (2001), and Master of Law from East China University of Political Science and Law (2001).

Lawyer Yang has been practicing for 28 years and has been engaged in legal services for private equity, investment and financing, and mergers and acquisitions, covering industries such as TMT, big finance, big health, real estate and infrastructure, exhibition industry, and manufacturing. Since 2004, he has been repeatedly recommended or commented on by The Legal 500 and Asia Law Profile. Since 2016, he has been selected as one of the "100 Outstanding Lawyers in Chinese Business" by the internationally renowned legal media China Business Law Journal, and has been awarded the title of "China's Annual Corporate Law Expert" by Leaders in Law -2021 Global Awards; Ranked in the recommended list of excellent lawyers and law firms recommended by the First China Famous Enterprise Law Association; Received multiple awards such as the "China TMT Lawyer Award" and "China Mergers and Acquisitions Lawyer Award" by Lawyer Monthly and Finance Monthly. Qualified as an independent director of a listed company, he is a part-time professor at the School of Law at East China University of Science and Technology, a part-time supervisor at the School of Law at Fudan University, a part-time graduate supervisor at East China University of Political Science and Law, a lecturer in the private equity CEO class at Shanghai Jiao Tong University, and a lecturer in the multinational business talent training class at the Shanghai Municipal Commission of Commerce. Published There are 16 monographs including "Practical Operations and Case Analysis of Full Legal Risk Prevention and Control in Enterprises", "Complete Operation Guidelines for Corporate Investment and Financing Model Processes", and "Practical Operations of Risk Prevention and Control in Private Equity Investment Funds". Lawyer Yang's practice areas include companies, investment mergers and private equity funds, capital markets, TMT, real estate and construction engineering, as well as dispute resolution in the aforementioned fields.

Author

Lawyer Sun Yan

Partner of Dacheng (Shanghai) Law Firm

Email:

sun.zhen@dentons.cn

Prior to his practice, Sun has successively served as the president or executive assistant to vice presidents in the global, Asia Pacific or China regions in Fortune 500 companies such as Watts, Ingersoll Rand and Alcatel Lucent, and has accumulated rich experience in enterprise operation and management, and has excellent bilingual communication and coordination capabilities in both Chinese and English. Lawyer Sun has published 'Practice in Risk Prevention and Control of Private Equity Investment Funds' and published dozens of articles in the fields of mergers and acquisitions, funds, and e-commerce. Lawyer Sun specializes in areas such as private equity investment, corporate mergers and acquisitions, e-commerce, and labor legal affairs.

PE&TMTLawBridge

Presiding lawyer: Yang Chunbao, first-class lawyer

Phone/WeChat: 1390 182 6830

Business contact and submission email:

chambers.yang@dentons.cn

Address: 9/24/25/F, Shanghai World Financial Center, No. 100, Century Avenue, Shanghai

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Analysis of the Application of "Most Favored Nation Treatment" in the Field of Private Equity Investment

UDF-Space · Yang Chunbao, Sun Tian

1Years Ago

Preface

Basic facts of the case

	Dacheng Innovation Company Capital Increase	Capital increase of financial investment enterprises
Date of capital increase	March 3, 2016	December 5, 2016
Contracting entity	Dacheng Innovation Company, Soku Company	Jintou Enterprise, Soku Company, Zhu Mingfei (controlling shareholder)
Protocol	Capital increase agreement, shareholder agreement	Capital increase agreement, supplementary agreement, confirmation letter
Capital increase plan	(1) According to the dynamic PE capital increase of 8 times after Soku Company's investment, the pre investment valuation is 70 million yuan, and the registered capital is 8 million yuan; (2) Dacheng Innovation Company invested 5 million yuan, of which 571400 yuan was included in the registered capital, and the remaining 4.4286 million yuan was included in the capital reserve; After the capital increase is completed, Dacheng Innovation Company holds 6.25% of the equity of Soku Company; (3) After the completion of this capital increase, if Soku Company grants any subsequent investors (excluding equity incentives) shareholder rights that are superior to the rights enjoyed by Dacheng Innovation Company in this agreement, Dacheng Innovation Company will automatically enjoy this right. (Article 4.10 of the Capital Increase Agreement, which refers to the most favored nation treatment)	Jintou Enterprise subscribed a new capital contribution of 2.5 million yuan to Soku Company for 20 million yuan, accounting for 20% of the registered capital of the company after the capital increase; After the completion of this capital increase, the shareholding ratio of Jintou Enterprise is 20%.
Performance Commitment	The actual net profit after tax of Soku Company in 2016 shall not be less than 10 million yuan.	Soku Company achieved a consolidated net profit of no less than 5 million yuan in 2016; In 2017, the consolidated net profit was no less than 15 million yuan; The total consolidated net profit from 2016 to 2017 shall not be less than 20 million yuan.
Valuation adjustment	(1) If Soku's non net profit deduction in 2016 is less than 8 million yuan (i.e. less than 80% of the committed profit for the year), the first valuation adjustment will be triggered; (2) If the annual operating performance of Soku Company triggers valuation adjustments, Zhu Mingfei should refund the excess investment amount of Dacheng Innovation Company in the form of cash compensation, so that the investment price of Dacheng Innovation Company reaches the P/E multiple of Soku Company after this capital increase, and pay the fund occupancy fee at an annual interest rate of 10%.	(1) If the consolidated performance of Soku Company from 2016 to 2017 is lower than 90% of the promised performance indicators, Jintou Enterprise has the right to demand cash or equity compensation from Zhu Mingfei; (2) If the consolidated performance of Soku Company from 2016 to 2017 is lower than 90% of the promised performance indicators, Jintou Enterprise has the right to request Zhu Mingfei to provide cash compensation to Jintou Enterprise. (As stipulated in Article 1.3 of the Supplementary Agreement for Financial Investment)
Validity period of valuation adjustment	(a) The actual net profit after tax of Soku Company in 2016 shall not be less than 80% of the promised net profit; (b) Soku Company was listed on the New Third Board in 2016; (c) The next round of financing or market making trading price of Soku Company shall not be lower than the valuation of 80 million yuan after this round of investment. As long as any of the above clauses (a), (b), and (c) are met, the valuation adjustment authority of Dacheng Innovation Company will automatically expire from the time Soku Company meets the conditions.	(1) The "Capital Increase Agreement" and "Supplementary Agreement" do not set a validity period for valuation adjustments; (2) On October 25, 2018, Jintou Enterprise issued a confirmation letter to Soku Company to increase the validity period of valuation adjustment: (a) The combined net profit of Soku Company in 2017 and 2018 shall not be less than 4 million yuan; (b) Soku Company will be listed on the New Third Board before December 30, 2019; (c) The next round of financing or listing transaction price of Soku Company shall not be lower than the valuation of 100 million yuan after this round of investment. As long as any of the above clauses (a), (b), and (c) are met, the valuation adjustment authority of Jintou Enterprise will automatically expire from the time Soku Company meets the conditions.
Repurchase right (including repurchase price)	(1) Trigger repurchase situation: (a) The actual net profit after tax of Soku Company in 2016 was lower than 80% of the promised net profit, (b) Suoku Company failed to list on the New Third Board within the year 2016; (c) The substantial adjustment of Soku Company's main business has resulted in a significant adverse change in net profit, without the written consent of Dacheng Innovation Company. (2) Repurchase price: (a) The investment amount of Dacheng Innovation Company plus a fixed income simple interest of 10% per year, with an interest period of Dacheng Innovation Company's funds remitted to the designated account of the company until the repurchase party pays off the repurchase amount; (b) Dacheng Innovation Company deducted all dividends received from the company from the repurchase price payable before this; (c) The final execution repurchase price shall be determined based on the principle of the higher of the above price and the net equity assets of Dacheng Innovation Company, and the compensation income (if any) obtained from the valuation adjustment shall be deducted from the execution repurchase price.	(1) Trigger repurchase situation: The actual performance of Soku Company is below 70% of the promised performance indicators, or the profit indicators for any year increase by less than 10% year-on-year; (2) Repurchase price: Repurchase price=capital increase × (1+10%) to the nth power - the dividend income that the financial investment enterprise has received from Soku Company - the income that the financial investment enterprise has obtained from the transfer of a portion of Soku Company's equity; Repurchase price=the number of shares required by the financial investment enterprise to be purchased by Soku Company × The net assets per share of Soku Company at the end of the previous month at the time of transfer, in the above formula, n represents the time when the financial investment enterprise held the equity, accurate to months, such as two years and three months, n=2.25; The calculation method for the two repurchase prices mentioned above takes the higher one. (Article 2.1 of the Supplementary Agreement for Financial Investment)
Validity period of repurchase rights	Same as the effective period of valuation adjustment.	(1) The "Capital Increase Agreement" and "Supplementary Agreement" do not set an effective period for the repurchase right; (2) On October 25, 2018, Jintou Enterprise issued a confirmation letter to Soku Company to increase the validity period of the repurchase right: (a) The combined net profit of Soku Company in 2017 and 2018 shall not be less than 4 million yuan; (b) Soku Company will be listed on the New Third Board before December 30, 2019; (c) The next round of financing or listing transaction price of Soku Company shall not be lower than the valuation of 100 million yuan after this round of investment. As long as Soku Company meets any of the above terms (a), (b), and (c), the repurchase terms of the financial investment enterprise will automatically become invalid from the time the target company meets the conditions
Anti-Dilution Right	(a) Within the scope permitted by Chinese law and subject to necessary approvals from Chinese government departments, if Soku Company issues any new shares and the subscription price per share of such new shares is lower than the transaction price per share under the Dacheng Capital Increase Agreement, Dacheng Innovation Company may choose to adjust the equity ratio or compensate in cash; The way to adjust the shareholding ratio of Dacheng Innovation Company is to adjust the shareholding ratio of Dacheng Innovation Company according to the new investment price, so that it is consistent with the new investor price, and transfer the corresponding shareholding ratio from Zhu Mingfei to Dacheng Innovation Company; The method of cash compensation for the investor is: Zhu Mingfei compensates Dacheng Innovation Company's investment difference and the difference by 10% per year, calculated as simple interest per day, in cash; (b) After the completion of this capital increase, if Soku Company grants any subsequent investors shareholder rights that are superior to those enjoyed by Dacheng Innovation Company, Dacheng Innovation Company will automatically enjoy such rights; (c) The provisions of (a) and (b) in the above anti dilution rights do not apply to equity incentives. (Article 4.2 of the Dacheng Shareholders' Agreement)	After the signing of the supplementary agreement, if Soku Company issues additional shares or increases its registered capital, or if Zhu Mingfei sells its equity, the subscription price or transfer price of the new shareholders shall not be lower than the consideration for this capital increase by Jintou Enterprise; On the contrary, Zhu Mingfei should return the difference between them and the annualized interest of 20% during the period to the Jintou Enterprise, or transfer his equity to the Jintou Enterprise for free to adjust the equity ratio of the Jintou Enterprise until it is consistent with the subscription price or capital increase consideration of the new shareholders. (Article 7 of the Supplementary Agreement of Jintou)