Research On Performance Commitment Agreement Applied In M&A Risks Prevention

With the development of China's capital market,more and more enterprises tend to choose mergers and acquisitions to optimize resource allocation and realize strategic transformation.However,due to the existence of information asymmetry,M&A activities are usually faced with great risks,which can easily lead to the failure of mergers and acquisitions.How to prevent M&A risks and improve the success rate of M&A activities has become an urgent concern for enterprises.The application of Performance Commitment Agreement in China originated in 2008,when the time CSRC first put forward the idea:the counter-party to the transaction shall sign a clear and feasible compensation agreement with the listed company on the situation that the actual profit of the relevant assets is insufficient to the predicted profit,so as to prevent M&A risks.In fact,Performance Commitment Agreement is a double-edged sword for the prevention of M&A risks.If it is applied reasonably,Performance Commitment Agreement can play a significant role in alleviating the degree of information asymmetry,adjusting the transaction consideration,safeguarding the interests of minority shareholders and encouraging managers to do their best to achieve performance goals,so as to prevent mergers and acquisitions risks.However,if it is applied unreasonably,it will also lead to a variety of problems,such as:performance goals can not be achieved,performance compensation responsibility can not be fulfilled,etc.The application of Performance Commitment Agreement is not always effective in preventing M&A risks,but due to the existence of Performance Commitment Agreement,it will lead to the unequal rights and obligations of both parties in M&A activities,the delayed integration and the excessive valuation and so on,which in turn will cause or aggravate M&A risks.Based on the case of CNFC Overseas Fisheries Co.,Ltd.mergers Xin Yangzhou,this paper combines theory and case study methods.Firstly,the paper sorts out the process of merger and acquisition and identifies the possible risks in each stage.Secondly,the paper discusses the effect of Performance Commitment Agreement in the process of preventing mergers and acquisitions risks.At the same time,it points out that the application of Performance Commitment Agreement in this M&A activity can not effectively prevent risks.Through analysis,we find that the main reasons for the failure of Performance Commitment Agreement to play an effective role in preventing M&A risks are blind mergers and acquisitions of high-risk enterprises,inadequate due diligence,unreasonable cash payments,defects in terms of performance compensation agreement and poor integration of M&A activities.This paper mainly draws the following conclusions:the application of Performance Commitment Agreement in M&A can serve as the basis of value negotiation,alleviate the risk of information asymmetry,adjust the valuation of the target enterprises,encourage the managers of the target enterprise to improve their performance and promote M&A integration,so as to ensure the orderly development of capital market.However,the effectiveness of Performance Commitment Agreement to prevent M&A risks is based on certain preconditions.If the preconditions can not be satisfied,Performance Commitment Agreement can not play an effective role in preventing M&A risks.At the same time,based on the above research,this paper puts forward the following suggestions on how to improve the effectiveness of Performance Commitment Agreement to prevent risks in different stages of M&A:In the preparatory stage,merger and acquisition enterprises should clearly define their strategic objectives and carefully select the target enterprise.It is unreasonable to rely too much on performance compensation agreement as a bottoming point.At the same time,merger and acquisition enterprises should make a full investigation of the target enterprise,so as to reasonably judge the future development ability of the target enterprise and the performance ability of the person who makes promises.In the transaction stage,merger and acquisition enterprises should make rational valuation by means of professional institutions and various valuation methods,and then design appropriate performance goals on this basis.At the same time,merger and acquisition enterprises should choose reasonable payment methods to promote the management of the target enterprise to strive to achieve performance goals and ensure the implementation of compensation responsibilities.Besides,the merger and acquisition enterprises should carefully design performance compensation clauses to ensure the compensation effect of Performance Commitment Agreement on M&A risks.In the integration stage,merger and acquisition enterprises should pay attention to post-merger integration to prevent the decline of performance and the failure of performance objectives.In addition,the innovation of this paper lies in that through the research on the preventive effect of Performance Commitment Agreement on M&A risks,this paper not only points out that Performance Commitment Agreement plays a dual role in preventing M&A risks,but also reveals the preconditions of the preventive effect of Performance Commitment Agreement on M&A risks.