CHINA Law and Practice Contributed by: Wei Chen, Yue Zhang, Hao Peng and Yi Sun, JunHe LLP
4.3 Liquidity Event: Form of Consideration
seas-listed company typically offers diverse payment methods and more flexible transaction structures, allowing both parties to design more adaptable deal arrangements. 4. Sale as a Liquidity Event (Sale of a Privately Held Venture Capital- Financed Company) 4.1 Liquidity Event: Sale Process If the sale of the company is chosen as a liquid- ity event, in most cases, the seller(s) would run the sale through bilateral negotiation and agree- ment with the potential buyer, for more flexibility and to avoid being restricted by the procedural requirements of an auction. 4.2 Liquidity Event: Transaction Structure The typical transaction structure of a sale as a liquidity event in China involves the following. • The sale of all equity interest in the com- pany held by all shareholders (including the founder(s) and the VC investors) in one go. • The sale of all of the equity interest in the company in two steps: (a) the sale of the controlling equity interest in the company held by all sharehold- ers (including the founder(s) and the VC investors) as the first part of the transac- tion, with the management to remain as a minority shareholder after closing to keep the company as a going concern during the handover and transitional period; and (b) the sale of the minority equity interest retained by the management after the transitional period. • The sale of the equity interest held by the VC investors only, with the founder(s) to continue to operate the company.
While the entire company can be sold for cash only, stock only or a combination of stock and cash, it is becoming more and more popular for VC investors to pay in cash only, in the case of a sale as a liquidity event. 4.4 Liquidity Event: Certain Transaction Terms Founders’ Representations and Warranties In China, founders are believed to have all knowledge and full de facto control of the com- pany before the sale, and it is therefore believed necessary, reasonable and fair for founders to be liable (through eg, an obligation to act and/or indemnity) to the buyer for representations and warranties in respect of the company (including its assets, operation, capabilities and liabilities) for certain periods of time after closing. How- ever, the length of time may differ for different representations and warranties. VC Investors’ Representations and Warranties VC investors usually only give representations and warranties on their legal standing to sell the equity interest they hold in the company (includ- ing those in respect of their own capacity and authority to sell and those about the equity inter- est they hold) without touching upon the assets, operation and other aspects of the company (as An escrow arrangement is always advisable and commonly seen in cross-border transac- tions, but less used for domestic deals, as it is thought to be costly, both financially and pro- cedurally, by domestic players. Holdbacks are more accepted and used by domestic buyers and sellers for domestic deals, as it does not it is run by the founders). Escrow and Holdback
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