Regarding the VAM agreement, at the judicial level, the current comprehensive regulations are the "Minutes of the National Court Work Conference for Civil and Commercial Trials" (Law [2019] No. 254, hereinafter referred to as the "Ninth Minutes"), which emphasizes the effectiveness and performance of VAM agreements. The "Ninth Minutes" emphasize that in terms of legal application, “When hearing disputes over VAM agreements, the people's court should not only apply the relevant provisions of the Contract Law, but also the relevant provisions of the Company Law. It should not only adhere to the principle of encouraging investors to invest in entity enterprises, especially technological innovation enterprises, in order to alleviate the difficulty of enterprise in financing to a certain extent, but also implement the principles of capital maintenance and protecting the legitimate rights and interests of creditors, and balance the interests of investors, company creditors, and the company in accordance with the law. For the VAM agreement concluded between the investor and the shareholders or actual controllers of the target company, if there are no other reasons for invalidity, it shall be deemed valid and supported for actual performance, and there is no dispute in practice. However, there is controversy over the validity and actual performance of the VAM agreement between the investor and the target company.”We need to consider both equity buybacks and monetary compensation.

Regarding the VAM agreement, at the judicial level, the current comprehensive regulations are the "Minutes of the National Court Work Conference for Civil and Commercial Trials" (Law [2019] No. 254, hereinafter referred to as the "Ninth Minutes"), which emphasizes the effectiveness and performance of VAM agreements. The "Ninth Minutes" emphasize that in terms of legal application, “When hearing disputes over VAM agreements, the people's court should not only apply the relevant provisions of the Contract Law, but also the relevant provisions of the Company Law. It should not only adhere to the principle of encouraging investors to invest in entity enterprises, especially technological innovation enterprises, in order to alleviate the difficulty of enterprise in financing to a certain extent, but also implement the principles of capital maintenance and protecting the legitimate rights and interests of creditors, and balance the interests of investors, company creditors, and the company in accordance with the law. For the VAM agreement concluded between the investor and the shareholders or actual controllers of the target company, if there are no other reasons for invalidity, it shall be deemed valid and supported for actual performance, and there is no dispute in practice. However, there is controversy over the validity and actual performance of the VAM agreement between the investor and the target company.”We need to consider both equity buybacks and monetary compensation.

In this article, we conducted a summary and analysis of different types of VAM agreements based on the search for examples and relevant information related to "VAM agreements in the film and television industry", as follows: Typical Cases

（1） Huayi Brothers acquires Dongyang Meila Media

In the film and television industry, the most discussed case is the "Huayi Brothers VS Feng Xiaogang Betting Agreement".

In November 2015, Huayi Brothers acquired 70% of the equity of Dongyang Meila Company for 1.05 billion yuan. The latter was established only two months ago, and 99% of the shares were held by Feng Xiaogang. At the same time as the acquisition, both parties also entered into a VAM agreement. According to the agreement, from 2016 to 2020, Dongyang Meila's annual net profit shall be no less than 100 million yuan, and if it fails, Huayi Brothers shall be compensated with 168 million yuan. Subsequently, Feng Xiaogang submitted his "homework" at the rate of one film per year. Over the past five years, Feng Xiaogang failed to meet the net profit requirement for two years, and the accumulated compensation was 235 million yuan. Based on this calculation, Feng Xiaogang "earned" 800 million yuan. However, with the tax turmoil in the film and television industry caused by the "Yin Yang Contract" of "Mobile Phone 2" in 2018, as well as the shutdown of the film industry caused by the epidemic in 2020, the subsidiary's revenue also faces pressure, and the significant impairment of assets such as goodwill caused by the failure of the target  performance has pushed Huayi Brothers into an incalculable financial dilemma. Its market value has evaporated by more than 80% since its peak in 2015, with a cumulative loss of 6.197 billion yuan in the past three years, and it has fallen into operational difficulties. On May 26, 2021, "Feng Xiaogang has paid 168 million performance compensation to Huayi" hit the Weibo hot search. Huayi Brothers released a notice on the completion of the 2020 performance commitment compensation for Zhejiang Dongyang Meila Media Co., Ltd., showing that Zhejiang Dongyang Meila Media Co., Ltd. and its old shareholders Feng Xiaogang and Lu Guoqiang have paid performance compensation of 168.0429 million yuan in cash according to the Equity Transfer Agreement.From the above introduction, it can be seen that there is obvious irrationality in this VAM agreement. According to the requirements of the VAM agreement, the net profit after tax of Dongyang Meila needs to be no less than RMB 100 million after the audit in 2016. In each subsequent year, it will increase by 15% from the previous year, which is 115 million yuan, 132 million yuan, 152 million yuan, 175 million yuan, and a total of 674 million yuan for five years. If Dongyang Meila fails to achieve its target performance, it will need to make up the difference in cash. However, even if Dongyang Meila has zero profits within five years, it only needs to compensate Huayi Brothers with 674 million yuan. Compared to the purchase price of 1.05 billion yuan, it can still make a net profit of 376 million yuan, which is still without considering interest income. Even though Dongyang Meila achieved a target performance of 674 million yuan within 5 years, due to Feng Xiaogang holding 30% of the company's equity, he can still receive 200 million yuan out of this 674 million yuan net profit. This VAM agreement lost its significance of protecting the interests of the acquirer from being damaged from the beginning.（2） Wanda Film and Television Performance Bet On the evening of June 9th this year, Wanda Film announced that due to the impact of the epidemic, Wanda Film and Television Media Co., Ltd. was unable to fulfill its performance commitment for 2021. The compensation obligation subject will perform stock compensation according to relevant agreements, and the company will repurchase and cancel the corresponding compensation shares at a total price of 1 yuan. After consultation among all parties, and referring to the 2019 performance compensation method, it is determined that Wanda Film and Television's 2021 performance commitment compensation responsibility will be borne by Beijing Wanda Investment Co., Ltd. (hereinafter referred to as "Wanda Investment"), that is, 51.3563 million shares will be compensated by Wanda Investment. The shares compensated above will be repurchased and cancelled by the company at a total price of 1.00 yuan. After the repurchase and cancellation are completed, the registered capital of the company will be reduced.Regarding the reasons for not fulfilling performance commitments in 2021, Wanda Film stated that the impact of the epidemic on the film industry continues to exist, and the industry situation has undergone significant changes in the short term. Wanda Film strives to operate and generate revenue. Although Wanda Film successfully turned losses into profits in 2021 and the net profit attributable to shareholders of the listed company increased from a loss of 6.668 billion yuan to a profit of 106 million yuan, it is still difficult to fulfill performance commitments due to the impact of the epidemic.

This is not the first time that Wanda Film failed to bet on its performance. In 2020, Wanda Film failed to meet its 2019 performance commitments, as a result, Wanda Investment repurchased 43754000 shares at a total price of RMB 1.00 and cancel them. （3） Huace Film and Television acquires Kedun MediaHuace Film and Television was established in October 2005 with a registered capital of 1.77 billion yuan.It was listed on the Shenzhen Stock Exchange in October 2010, focusing on creating three major contents: TV dramas, movies, and variety shows, with a scale of production, network broadcast volume, market share, and overseas export volume firmly ranking among the top in the country. And with the content as the core, Huace has comprehensively deployed the pan-entertainment industry, deeply promoted industrial innovation and ecological upgrading, and formed outstanding industry advantages. Kedun Media, founded in Shanghai in 2003, has gained widespread recognition in the field of television dramas. Its representative works include popular TV dramas such as "Tian Sheng Chang Ge", "Old Boy", and "Eternal Love". It has become an important partner for top domestic satellite TV and top video websites.In 2013, Huace Film and Television acquired Kedun Media. In its VAM agreement, the two parties agreed that Kedun Media needs to achieve corresponding performance goals in the next four years and compensation plans if it fails to meet the agreed performance goals. The original shareholders of Kedun Media promised to achieve a consolidated financial statement and net profit of 182 million yuan, 233 million yuan, and 243 million yuan after deducting non-recurring gains and losses in the next three years, from 2014 to 2016. If the final compensation amount of Kedun Media exceeds the compensation price of the compensation obligor and the total number of shares issued by the compensation product, Huace Film and Television Company will be compensated for asset depreciation. In addition, the company and key management personnel have also signed a "Equity Lockout Commitment Letter", which clearly stipulates the compensation for key management personnel's employment service period, industry prohibitions, and other behaviors. When the labor contract is signed for less than 36 months, key management personnel cannot unilaterally terminate the labor contract with the company, or there may be a violation of the agreement in the industry prohibition agreement. Otherwise, key management personnel need to compensate Huace Film and Television for the losses with their shares. When their shares are insufficient to make up for the losses, they should be compensated in cash until the compensation is completed.The execution results of the VAM agreement: In the three years after the signing of the corporate merger and acquisition contract, from 2014 to 2016, according to the publicly disclosed consolidated financial statements of Huace Film and Television, the net profit achieved by Kedun Media over the three years showed an upward trend. Among them, in 2014, Kedun Media achieved a net profit of 216 million yuan, which was 176 million yuan after deducting non recurring gains and losses, exceeding the promised profit of 162 million yuan during the corporate merger and acquisition. During this period, the four executives of the company, including Wu, Liu, Meng, and Sun, sold a total of 52 million shares according to the agreement, of which 898870 shares were the shares of Huace Film and Television acquired this time. In 2015, due to the rapid and vigorous development of China's market economy, the scale of the film and television industry showed explosive growth. However, the quality of movies and TV dramas is uneven, with an increasing demand for high-quality works from audiences. In addition, the speed of industry integration has accelerated and the degree of centralization has increased. The Internet has sparked a major trend, bringing huge changes to the entire media and entertainment industry. In order to actively respond to industry changes, Huace Film and its subsidiary, Kedun Media, launched the S.I.P strategy, which resulted in Kedun Media achieving a net profit of 266 million yuan that year, a year-on-year increase of 30.17%, and achieving the performance commitment stipulated in the VAM agreement. In addition, due to Kedun Media fulfilling its commitment in the VAM agreement, the four key managers of the company can lift the relevant ban after 12 months from the date of Huace Film and Television's merger of its shares registration, and the proportion of shares reduced each year thereafter shall not exceed 20% of the total shares they obtained in this transaction. Therefore, in April 2015, Huace Film and Television lifted the ban on shareholders holding 20% of the total shares. In 2016, the overall growth rate of China's film and television industry slowed down, and most of the film and television works were unable to meet the audience's taste and high-quality requirements for the level of film and television. Although the net profit growth rate of Kedun Media decreased to 16.4% in 2016 due to the overall decline of the industry, the strategy formulated is continuously implemented and updated, resulting in a net profit of 280 million yuan in 2016 after deducting non recurring gains and losses of the year. Due to the fact that Kedun Media had already achieved the performance targets promised in the VAM agreement in the previous year, 2015, in 2016, Huace Film and Television lifted the shares of four key managers of Kedun Media according to prior agreements. This time, the number of shares lifted accounted for 20% of the total shares of Huace Film and Television obtained in the enterprise merger and acquisition.（3） VAM Agreement between Beijing Jingxi Cultural Tourism Co., Ltd. and Shanghai Ruyi Film and Television Production Co., Ltd As mentioned earlier, the movie "Hi,Mom" also had a box office bet. Hello Li Huanying "performed particularly well during the Spring Festival season, and Jia Ling became the highest-grossing female director in China. The main producer, and issuer, Beijing Jingxi Cultural Tourism Co., Ltd. (referred to as "Beijing Culture"), as a listed company, had the limit-up on the first A-share trading day after the holiday (February 18).Beijing Culture had already signed a VAM agreement with Shanghai Ruyi Film and Television Production Co., Ltd. (referred to as "Shanghai Ruyi"), the second producer of the film, before its release. The guaranteed box office was 1.5 billion yuan, and if it exceeds 1.5 billion yuan, Shanghai Ruyi would receive the majority of the box office revenue. The VAM agreement between Huace Film and Television and Li Huanying is a relatively successful VAM case. Of course, there are also less successful and even criminal VAM. （4） Guangdong Media's Acquisition of XiangxieliThe acquisition of Xiangxieli by Guangdong Media has become the first criminal case involving gambling mergers and acquisitions in China. In the process of signing and fulfilling asset purchase agreements and profit forecast compensation agreements with Guangdong Media, Champs Elysee and Ye Mei, among others, fraudulently obtained cash and shares from Guangdong Media by concealing the fact that company assets were used as collateral for shareholders' personal debts, falsely increasing profits. Guangdong Media, as the acquiring party, was established in December 1992 and completed its initial public offering in November 2007. In June 2012, its major asset restructuring plan was completed through private placement and equity issuance, resulting in a significant increase in the company's operating revenue and a surge in net profit. It successfully developed into the only media group company in Guangdong Province, with numerous subsidiary companies, over 2200 employees, and total assets exceeding 4.4 billion yuan. The company's main business includes advertising, distribution logistics, e-commerce, new media, printing, series of media operations, and various new businesses that continue to be deployed. Against the backdrop of the policy of strong national support for the development of the cultural industry, the company continuously strengthens its brand value, regional user agglomeration, marketing channels, distribution logistics network, and service outlets, expands the business scope and development space of the cultural industry, deeply promotes media integration strategies, vigorously promotes industrial structural reform, and enhances the company's core competitiveness. Xiangxieli, as the acquired party, has developed into a Chinese outdoor LED network operation giant since entering the LED advertising market in 2006, rooted in the first tier city of Shanghai, and continuously expanding the market to second and third tier cities. On August 15, 2012, a meeting resolution was passed to change the company as a whole into a limited liability company. With high-quality platforms, including outdoor print media platforms and outdoor media platforms, the company paid close attention to marketing creativity, and achieved steady growth in operating revenue and net profit year by year through activity planning and brand management. During the three-year period from 2011 to 2013, the company's operating revenue reached 174 million yuan, 240 million yuan and 270 million yuan respectively, with net profits of 36.4728 million yuan, 46.8543 million yuan and 36.9535 million yuan respectively.In capital operations, buyers will judge and bid based on the returns of the underlying assets. Xiangxieli is an unlisted company with no stock market price, and the purchase price is a variable number. Therefore, improving the profit presented in the financial statements is the most important factor to increase the purchase price. Xiangxieli has adopted three "value-added" methods: the first method is to forge company seals and electronic signatures, and collaborate with other companies to create false cooperation contracts. For example, to find relevant staff of media companies to sign and create false cooperation contracts, and then replace valid contracts with cancelled contracts, or replace formal contracts that have not yet been officially signed with scanned documents; The second method is to sign a Yin Yang contract, which means canceling the cooperation after signing the contract with an advertising media company, but still treating the cancellation of the contract as an actual contract during financial accounting; The third method is to adjust the percentage of contract discounts, that is, to increase profits by increasing contract discounts according to the predetermined contract discounts. By using these ignominous methods to eliminate operating income, costs, and profits, the astonishing losses were covered up. After the concealment, the net profits of each fiscal year from 2011 to 2013 were 50.01 million yuan, 102.95 million yuan, and 162.12 million yuan, totaling a false increase of 306 million yuan. After conducting corresponding audits, asset evaluations, and legal evaluations by accounting firms, asset evaluation companies, and law firms, the updated statements were recognized one by one. Subsequently, Guangdong Media acquired the company under the income method at a premium of 10 times the net assets of Xiangxieli. In the end, Xiangxieli was sold to Guangdong Media Company for a high price of 540 million yuan.

Conclusion

In summary, the following processing rules should be followed to determine whether the "VAM agreement" signed between the investor and the target company is valid and whether it can be actually fulfilled:

1. If the investor advocates actual performance, the people's court shall examine whether it complies with the mandatory provisions of the Company Law on "shareholders shall not withdraw their capital contributions" and share buybacks, and make a judgment on whether it supports its claims.

2. If the investor requests the target company to repurchase its equity, the people's court shall review it in accordance with the mandatory provisions of Article 35 of the Company Law on "shareholders shall not withdraw their capital contributions" or Article 142 of the Company Law on share repurchase. After examination, if the target company has not completed the capital reduction procedure, the people's court shall reject its claims.3. If the investor requests the target company to bear the obligation of monetary compensation, the people's court shall review it in accordance with the mandatory provisions of Article 35 of the Company Law on "shareholders shall not withdraw their capital contributions" and Article 166 of the Company Law on profit distribution. After examination, if the target company has no profits or if there are profits but they are insufficient to compensate the investors, the people's court shall reject or partially support its claim. This means that in the case of a bet between the investor and the target company, major shareholders or actual controllers, the court will make a judgment based on the target company's profits at that time, provided that it does not violate the provisions of Articles 35 and 166 of the Company Law regarding the supplementary compensation obligations of the target company to the VAM terms. According to the principle of maintaining company capital, the funds used by the target company for cash compensation are limited to the remaining after-tax profits after making up for losses and withdrawing public reserve funds in accordance with Article 166 of the Company Law. So, if the target company has no profits or if there are profits but they are insufficient to compensate the investor at that time, in the absence of legal grounds for invalidity, the people's court usually recognizes the effectiveness of the VAM agreement itself. However, for the investor's lawsuit request for cash compensation from the target company based on the VAM agreement, the people's court has the right to reject or partially reject it. When the target company has profits in the future, The investor shall file a separate lawsuit based on this fact.It can be seen that although the VAM has been controversial as a financial innovation tool with the nature of equity-debt integration, its effectiveness has finally been justified. There are various forms of business innovation, and the law serves business. Contract effectiveness is of utmost importance in commercial transactions, and its effectiveness and enforceability are also in a continuous line. We also expect that more financial innovation tools will emerge in the civil code era of "civil and commercial integration" to promote the high-quality development of Chinese films. reference

[1] XIE Haixia, Analysis of the Legal Nature of VAM Agreement, Legal Journal, 2010 (1)

[2] Pan Lin, The Law and Economics Analysis of “The First Case of VAM”,  Legal System and Social Development, 2014 (4)[3] Huang Hua and Liu Xin, The Analysis of the Application of VAM Agreements Based on the Huace Film and Television Merger and Acquisition Case, 2022 (3)