Investors often turn to analyst reports for insights, but for companies, mergers and acquisitions remain a fast track to growth or finding a new business line. However, the risks are substantial, and a single misstep can drain cash reserves or even cripple the firm. This is why many public companies approach M&A cautiously. Yet, avoiding deals out of fear is not the solution; the key lies in structuring deals wisely and having a clear path to recourse if things go wrong.
A recent case involving Shenzhen Cdl Precision Technology Co.,Ltd. (stock code: 300686) offers a textbook example. Over the past two years, the company has been entangled in two lawsuits, both of which have now reached a final appellate judgment. In one case, the company, as plaintiff, sued an individual named Zhou Guike, seeking compensation of approximately 150 million yuan for the impairment of assets from a former acquisition target. In the other, the company was the defendant, with Zhou Guike suing to recover unpaid equity purchase funds from the same deal.
These disputes stem from a 2020 acquisition, where the company, which already held a 51% stake, sought to buy the remaining 49% of its subsidiary, Guangdong Atesi Technology Co., Ltd., from Zhou Guike for 343 million yuan. The deal was structured as a cash payment, divided into five installments. Crucially, it included a dual safeguard: performance-based compensation and impairment-based compensation, a common strategy to prevent target companies from failing after the performance period ends.
Zhou Guike had promised that the target would achieve net profits of at least 73 million yuan in 2020 and 79 million yuan in 2021, excluding non-recurring items. The target met these goals, but just barely. However, in 2022, after the performance period expired, the company's profits collapsed, with a loss of 69.71 million yuan. Since the performance commitment period was over, no performance-based compensation was due. But the deal's impairment clause came into play.
In September 2024, the company formally sued, demanding compensation of 150 million yuan for the asset impairment. Meanwhile, the payment schedule was as follows: 1) 30% (102.9 million yuan) after the business registration change; 2) 5% (17.15 million yuan) within 120 days after the 2020 annual report; 3) 35% (120.05 million yuan) due by July 27, 2022; 4) 10% (34.3 million yuan) due by October 16, 2023; and 5) 20% (68.6 million yuan) due by May 17, 2024, after Zhou bought company shares. The company paid only the first three installments, totaling 237.05 million yuan, leaving 105.95 million yuan unpaid. This shortfall formed the basis of Zhou Guike's counterclaim.
By the time the third payment was due, the company had already noticed the target's performance faltering and asset impairment looming. It halted further payments and hired an intermediary to assess the impairment, which confirmed a 150 million yuan compensation obligation. The court's final judgment ruled that Zhou Guike must compensate the company 150 million yuan plus interest, while the company must pay Zhou 105.95 million yuan plus interest. This netted the company a receivable of over 40 million yuan, protecting shareholder interests. The company had already provisioned for the asset impairment, so any recovery could positively impact its earnings.