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Author	Mr LU JIARUN
Organisation/Institution	The Chinese University of Hong Kong (CUHK)
Country	HONG KONG (SAR OF CHINA)
Panel	Corporate Law and Governance
Title	Regulatory Approval and Suboptimal Contracting: The Stickiness of PCAs in China’s Listed-Company M&A
Abstract	One of the most controversial rules in China’s M&A market is the requirement that related-party transactions and control-shifting deals must include performance compensation agreements (PCAs). Although PCAs resemble earnouts as contingent payment mechanisms, their prevalence in China has been shaped far more by regulatory intervention than by transactional efficiency. Existing studies mainly analyze the economic outcomes of transactions subject to mandatory PCA requirements, yet pay far less attention to voluntary PCA adoption—even though voluntary PCAs accounted for nearly 60% of all PCA clauses between 2015 and 2025. Moreover, few studies employ contract theory to assess whether voluntary PCAs may reflect suboptimal or even irrational contracting. This gap raises a central question: why do parties adopt simplified and sometimes inefficient PCA clauses when they are not required to do so? Drawing on contract-production literature, this paper argues that PCAs in China illustrate a distinctive form of non-optimal contracting driven by regulatory approval incentives, path dependence, and market expectations. Instead of choosing potentially more efficient staged-payment arrangements, parties in voluntary transactions frequently adopted PCAs because regulators had long signaled a preference for such clauses in the approval process. This regulatory-driven convergence pushed parties toward simplified, regulator-pleasing PCA terms that left key contingencies unresolved, thereby planting contractual “landmines” that later surfaced in judicial disputes. The 2025 reform—which now allows both PCAs and staged-payment arrangements to satisfy regulatory requirements—provides a natural experiment to examine whether regulatory relaxation reduces contractual stickiness or whether non-optimal PCA usage will persist. This study makes three contributions. First, it demonstrates how regulatory preferences and approval-based oversight can shape contracting behavior, producing non-optimal terms and contractual stickiness. Second, it reveals how mandatory regulatory tools can generate unintended spillover effects that influence voluntary transactions. Third, by analyzing China’s approval-driven contracting environment, the study provides insights applicable to other transaction types and to other Asian jurisdictions characterized by strong regulatory intervention. Keywords: Contract production; suboptimal contracting; performance compensation; regulatory approval; China; M&A
Biography	Jiarun LU is a PhD candidate in Law at The Chinese University of Hong Kong (CUHK), funded by the Hong Kong PhD Fellowship Scheme (HKPFS), and is expected to complete his doctorate in 2027. His research focuses on corporate law, securities regulation, and contract theory, with a particular emphasis on how approval-based regulatory mechanisms shape contract production, shareholder behavior, and the evolution of legal institutions in China’s capital market. He is supervised by Professor Xi Chao. Before joining CUHK, Jiarun received both his LLB and LLM from the China University of Political Science and Law in Beijing. During his master’s studies, he specialized in guarantee law and bank letters of guarantee, developing a solid doctrinal foundation that now supports his transition into empirical research. At CUHK, his current projects examine performance compensation agreements in listed-company M&A, institutional investor voting mechanisms, and the broader implications of regulatory intervention for contract stickiness in high-regulation Asian jurisdictions. He actively participates in research seminars on corporate governance, empirical legal studies, and law-and-economics approaches to regulatory design, and is committed to contributing to comparative discussions on how Asian regulatory environments shape business behavior.