UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐
OR
☒
For the fiscal year ended December 31, 2019.
OR
☐
For the transition period from to
OR
☐
Date of event requiring this shell company report
REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-38751
Tencent Music Entertainment Group
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
17/F, Matsunichi Building, Kejizhongyi Road
Midwest District of Hi-tech Park, Nanshan District
Shenzhen, 518057, the People’s Republic of China
(Address of principal executive offices)
Ms. Min Hu, Chief Financial Officer
17/F, Matsunichi Building, Kejizhongyi Road
Midwest District of Hi-tech Park, Nanshan District
Shenzhen, 518057, the People’s Republic of China
Tel: +86-755-8601 3388
E-mail: ir@tencentmusic.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
American depositary shares, each ADS represents two Class A ordinary
shares, par value US$0.000083 per share*
Trading Symbol(s)
TME
Name of each exchange on which registered
The New York Stock Exchange
____________
* Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
3,355,065,938 ordinary shares, comprised of 1,325,454,335 Class A ordinary shares, par value US$0.000083 per share, and 2,029,611,603 Class B ordinary shares, par value US$0.000083 per share, as of December 31, 2019.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards † provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes ☐ No ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
TABLE OF CONTENTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
INTRODUCTION
FORWARD-LOOKING INFORMATION
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
ITEM 16.B.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16.C.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
ITEM 16.D.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16.E.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16.F.
ITEM 16.G.
CORPORATE GOVERNANCE
ITEM 16.H. MINE SAFETY DISCLOSURE
PART III
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
Page
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75
75
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109
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122
122
124
124
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125
125
126
126
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127
127
127
Except where the context otherwise indicates and for the purpose of this annual report only:
INTRODUCTION
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
“ADSs” refers to the American depositary shares, each representing two Class A ordinary shares;
“AI” refers to artificial intelligence;
“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong and
Macau;
“CMC” refers to China Music Corporation;
“DJ” refers to disc jockey, a person who hosts recorded music for an audience;
“Group” refers to our company, its subsidiaries, its controlled structured entities (“Variable interest entities”, or “VIE”) and their subsidiaries
(“Subsidiaries of VIEs”);
“HK$” or “Hong Kong dollars” refers to the legal currency of the Hong Kong SAR;
“IFRS” refers to International Financial Reporting Standards as issued by the International Accounting Standards Board;
“MCSC” refers to the Music Copyright Society of China;
“music publishing rights” refer to, with respect to a piece of music work, the copyright of the lyricist and the composers;
“monthly ARPPU” of each of our online music services and social entertainment services for any given period refers to the monthly average of
(i) the revenues of the respective services for that period divided by (ii) the number of paying users of the respective services for that period;
“ordinary shares” refers to our ordinary shares of par value US$0.000083 per share;
“paying ratio” for a given period is measured by the number of paying users as a percentage of the mobile MAUs for that period;
“paying users” for our online music services (i) for any given quarter refers to the average of the number of users whose subscription packages
remain active as of the last day of each month of that quarter; and (ii) for any given year refers to the average of the total number of paying users
of the four quarters in that year. The number of paying users for our online music services for any given period excludes the number of users
who only purchase digital music singles and albums during such period because these purchasing patterns tend to reflect specific releases, which
may fluctuate from period to period;
“paying users” for our social entertainment services (i) for any given quarter refers to the average of the number of paying users for each month
in that quarter; (ii) for any given year refers to the average of the total number of paying users of the four quarters in that year. The number of
paying users of our social entertainment services for a given month refers to the number of users who contribute revenues to our social
entertainment services (primarily through purchases of virtual gifts or premium memberships) during that month;
“RMB” or “Renminbi” refers to the legal currency of the People’s Republic of China;
“Spotify” refers to Spotify Technology S.A., one of our principal shareholders;
“Tencent” refers to Tencent Holdings Limited, our controlling shareholder;
“US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States;
i
•
•
“we,” “us,” “our company,” and “our” refer to Tencent Music Entertainment Group (or, where the context requires, its predecessor), its
subsidiaries and, in the context of describing our operations and consolidated financial information, its VIEs;
with respect to MAU data used in this annual report:
―
―
―
―
―
―
“mobile MAUs” or “PC MAUs” for a given month (i) with respect to each of our products (except WeSing) is measured as the
number of unique mobile or PC devices, as the case may be, through which such product is accessed at least once in that month; and
(ii) with respect to WeSing, is measured as the number of user accounts through which WeSing is accessed at least once in that month;
“mobile MAUs” for a given period refers to the monthly average of the sum of the mobile MAUs for that period;
“online music mobile MAUs” for a given month refers to the sum of mobile MAUs of our music products, namely QQ Music, Kugou
Music, and Kuwo Music, for that month; duplicate access of different services by the same device is not eliminated from the
calculation;
“social entertainment mobile MAUs” for a given month refers to the sum of mobile MAUs that have accessed the social
entertainment services offered by (i) WeSing; (ii) Kugou’s Live Streaming services; and (iii) Kuwo’s Live Streaming services;
duplicate access of different services by the same user account or device is not eliminated from the calculation;
“social entertainment mobile MAUs” for a given period refers to the monthly average of the sum of the social entertainment mobile
MAUs for that period; and
our MAUs are calculated using internal company data, treating each distinguishable user account or device as a separate MAU even
though some users may access our services using more than one user account or device and multiple users may access our services
using the same user account or device.
This annual report on Form 20-F includes our audited balance sheets as of December 31, 2018 and 2019 and our audited consolidated income
statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for the years ended December 31, 2017,
2018 and 2019.
Our reporting currency is the Renminbi. This annual report on Form 20-F also contains translations of certain foreign currency amounts into U.S.
dollars for the convenience of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at RMB6.9618 to US$1.00, the
noon buying rate on December 31, 2019 set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the
Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be,
at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of
Renminbi into foreign exchange and through restrictions on foreign trade.
We completed an initial public offering of our ADSs on December 14, 2018. The ADSs, each representing two Class A ordinary shares, are traded on
the New York Stock Exchange under the symbol “TME.”
ii
FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are
forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,”
“plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategies and
financial needs. These forward-looking statements include, but are not limited to, statements about:
•
•
•
•
•
•
•
•
our growth strategies;
our future business development, financial condition and results of operations;
our ability to retain, grow and engage our user base and expand our music entertainment content offering;
expected changes in our revenues, content-related costs and operating margins;
our ability to retain key personnel and attract new talent;
competition landscape in China’s online music entertainment industry;
general economic, political, demographic and business conditions in China and globally; and
the regulatory environment in which we operate.
We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction
with the risk factors disclosed in “Item 3. Key Information—3.D. Risk Factors.” Other sections of this annual report include additional factors which could
adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge
from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-
looking statements. We qualify all of our forward-looking statements by these cautionary statements. We do not undertake any obligation to update or
revise the forward-looking statements except as required under applicable law. You should read this annual report and the documents that we reference in
this annual report completely and with the understanding that our actual future results may be materially different from what we expect.
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-
looking statements, whether as a result of new information, future events or otherwise.
iii
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not applicable.
ITEM 3. KEY INFORMATION
3.A.
Selected Financial Data
The following selected consolidated statement of operations data for the years ended December 31, 2017, 2018 and 2019, selected consolidated
balance sheet data as of December 31, 2018 and 2019, and selected consolidated cash flow data for the years ended December 2017, 2018 and 2019 have
been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statement of operations
data for the year ended December 31, 2016, our selected consolidated balance sheet data as of December 31, 2016 and 2017 and our selected consolidated
cash flow data for the year ended December 31, 2016 have been derived from our audited consolidated financial statements not included in this annual
report.
The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Item 5.
Operating and Financial Review and Prospects” included elsewhere in this annual report. The consolidated financial statements are prepared and presented
in accordance with IFRS. Our historical results are not necessarily indicative of our results for any future periods.
Selected Consolidated Statement of Operations Data
2016(4)
2017
2018
RMB
%
RMB
%
RMB
%
RMB
2019
US$
%
(in millions, except for percentages, share and per share data)
For the Year Ended December 31,
Revenues
Online music services
Social entertainment service
and others
Total revenues
Cost of revenues(1)
Gross profit
Operating expenses
Selling and marketing
expenses(1)
General and administrative
expenses(1)
Total operating expenses
Interest income
Share-based payments in
respect of issuance of ordinary
shares to music label partners
Other (losses)/gains, net
Operating profit
Share of net profit/(loss) of
investments accounted for
using equity method
Finance cost
Profit before income tax
Income tax expenses
Profit for the year
Attributable to
Equity holders of the company
2,144
2,217
4,361
(3,129)
1,232
(365)
(783)
(1,148)
32
-
(13)
103
11
-
114
(29)
85
82
49.2
50.8
100.0
(71.7)
28.3
(8.3)
(18.0)
(26.3)
0.7
-
(0.3)
2.4
0.2
-
2.6
(0.7)
1.9
1.9
3,149
7,832
10,981
(7,171)
3,810
(913)
(1,521)
(2,434)
93
-
124
1,593
4
-
1,597
(278)
1,319
1,326
28.7
71.3
100.0
(65.3)
34.7
(8.3)
(13.9)
(22.2)
0.9
-
1.1
14.5
0.0
-
14.5
(2.5)
12.0
12.1
1
5,536
13,449
18,985
(11,708)
7,277
(1,714)
(2,258)
(3,972)
282
(1,519)
(29)
2,039
(1)
(35)
2,003
(171)
1,832
1,833
29.2
70.8
100.0
(61.7)
38.3
(9.0)
(11.9)
(20.9)
1.5
(8.0)
(0.2)
10.7
(0.0)
(0.2)
10.5
(0.9)
9.6
9.7
7,152
18,282
25,434
(16,761)
8,673
(2,041)
(2,703)
(4,744)
615
-
78
4,622
(18)
(64)
4,540
(563)
3,977
3,982
1,027
2,626
3,653
(2,408)
1,246
(293)
(388)
(681)
88
-
11
664
(3)
(9)
652
(81)
571
572
28.1
71.9
100.0
(65.9)
34.1
(8.0)
(10.6)
(18.7)
2.4
-
0.3
18.2
(0.1)
(0.3)
17.9
(2.2)
15.6
15.7
2016(4)
2017
2018
RMB
%
RMB
%
RMB
%
RMB
2019
US$
%
3
0.1
(7)
(0.1)
(1)
(0.0)
(5)
(1)
(0.0)
(in millions, except for percentages, share and per share data)
For the Year Ended December 31,
0.04
0.04
1,831,604,053
1,899,419,825
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.51
0.50
2,593,157,207
2,639,466,412
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.60
0.58
3,076,314,670
3,159,220,888
1.19
1.16
-
1,538,157,335
1,579,610,444
-
-
-
-
-
-
-
-
-
1.22
1.19
0.17
0.17
3,272,754,403
3,347,572,338
3,272,754,403
3,347,572,338
2.43
2.38
0.35
0.34
-
1,636,377,201
1,673,786,169
-
1,636,377,201
1,673,786,169
-
-
-
-
-
-
-
-
-
426
9.8
1,904
17.3
4,174
22.0
4,903
704
19.3
Non-controlling interests
Earnings per share for Class
A and Class B ordinary
shares
Basic
Diluted
Shares used in earnings per
Class A and Class B
ordinary share computation
Basic
Diluted
Earnings per ADS(2)
Basic
Diluted
ADS used in earnings per
ADS computation(2)
Basic
Diluted
Supplemental information(3)
Adjusted profit for the year
Notes:
(1)
Share-based compensation expenses were allocated as follows:
Cost of revenues
Selling and marketing expenses
General and administrative expenses
Total
2016
RMB
10
6
154
170
2017
RMB
For the Year Ended December 31,
2018
RMB
(in millions)
2019
RMB
US$
27
12
345
384
22
13
452
487
41
12
466
519
6
2
67
75
(2)
(3)
(4)
Each ADS represents two of our Class A ordinary shares.
See “Non-IFRS Financial Measure” below.
Tencent’s acquisition of CMC was completed on July 12, 2016. As a result, historical results of operations of CMC before July 12, 2016 are not included in our consolidated
financial statements presented in this annual report and our historical selected financial information for the years ended December 31, 2016, 2017, 2018 and 2019 may not be
directly comparable. See “Item 3. Key Information—3.D. Risk Factors—Our historical financial information for the years ended December 31, 2016, 2017, 2018 and 2019
may not be directly comparable due to our consolidation of CMC’s financial results since July 2016, which may make it difficult for you to evaluate our business and
prospects.”
The following table presents our selected consolidated balance sheet data as of December 31, 2016, 2017, 2018 and 2019.
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents
Term deposits
Total current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Equity attributable to equity holders of the Company
2016
RMB
2017
RMB
As of December 31,
2018
RMB
(in millions)
2019
RMB
US$
5,174
-
7,467
22,533
30,000
3,527
325
3,852
26,141
17,356
-
20,778
23,827
44,605
6,238
595
6,833
37,721
15,426
7,000
26,914
25,764
52,678
8,490
510
9,000
43,590
2,216
1,005
3,866
3,701
7,567
1,220
73
1,293
6,261
3,071
-
4,997
18,538
23,535
2,523
378
2,901
20,625
2
The following table presents our selected consolidated cash flow data for the periods indicated.
Selected Consolidated Cash Flow Data:
Net cash generated from operating activities
Net cash generated from/(used in) investing activities
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Exchange differences on cash and cash equivalents
Cash and cash equivalents at end of the year
Non-IFRS Financial Measure
2016
RMB
873
496
1,712
3,081
-
(10)
3,071
2017
RMB
For the Year Ended December 31,
2018
RMB
(in millions)
RMB
2019
US$
2,500
(483)
99
2,116
3,071
(13)
5,174
5,632
(1,190)
7,741
12,183
5,174
(1)
17,356
6,200
(8,102)
(31)
(1,933)
17,356
3
15,426
891
(1,164)
(4)
(278)
2,493
-
2,216
We use adjusted profit for the year, which is a non-IFRS financial measure, in evaluating our operating results and for financial and operational
decision-making purposes. We believe that adjusted profit for the year helps identify underlying trends in our business that could otherwise be distorted by
the effect of certain expenses that we include in our profit for the year. We believe that adjusted profit for the year provides useful information about our
results of operations, enhances the overall understanding of our past performance and future prospects and allows for greater visibility with respect to key
metrics used by our management in its financial and operational decision-making.
Adjusted profit for the year should not be considered in isolation or construed as an alternative to operating profit, net profit/loss for the year or any
other measure of performance or as an indicator of our operating performance. Investors are encouraged to review adjusted profit for the year and the
reconciliation to its most directly comparable IFRS measure. Adjusted profit for the year presented here may not be comparable to similarly titled measures
presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to
our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
Adjusted profit for the year represents profit for the year excluding an amortization of intangible and other assets arising from business combinations,
share-based compensation expenses, share-based payments in respect of the issuance of ordinary shares to music label partners, gains/losses from
investments and fair value change on puttable shares and income tax effects.
3
The table below sets forth a reconciliation of our profit for the year to adjusted profit for the periods indicated.
Profit for the year
Adjustments:
Amortization of intangible and other assets arising from business combinations(1)
Share-based compensation expenses
Share-based payments in respect of issuance of ordinary shares to music label partners(2)
(Gains)/losses from equity investments
Fair value change on puttable shares(3)
Income tax effects (4)
Adjusted profit for the year
Attributable to
Non-IFRS equity holders of the Company
Non-controlling interests
Earnings per share for Class A and Class B ordinary shares
Basic
Diluted
Shares used in earnings per Class A and Class B ordinary share computation
Basic
Diluted
Earnings per ADS(5)
Basic
Diluted
ADS used in earnings per ADS computation
Basic
Diluted
Notes:
For the Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
US$
(in millions, except for share and per share data)
1,319
329
384
—
(70)
—
(58)
1,904
1,911
(7)
0.74
0.72
1,832
306
487
1,519
52
35
(57)
4,174
4,175
(1)
1.36
1.32
3,977
362
519
—
79
37
(71)
4,903
4,908
(5)
1.50
1.47
571
52
75
—
11
5
(10)
704
705
(1)
0.22
0.21
2,593,157,207
2,639,466,412
3,076,314,670
3,159,220,888
3,272,754,403
3,347,572,338
3,272,754,403
3,347,572,338
—
—
—
—
2.71
2.64
3.00
2.93
0.43
0.42
1,538,157,335
1,579,610,444
1,636,377,201
1,673,786,169
1,636,377,201
1,673,786,169
(1)
(2)
(3)
(4)
(5)
Represents the amortization of identifiable assets, including intangible assets and prepayments for music content, resulting from Tencent's acquisition of CMC in 2016 and
certain acquisition and combination transactions, net of related deferred taxes.
Represents the excess of the then fair value of the ordinary shares we issued to Warner Music Group and Sony Music Entertainment over the aggregate consideration we
received in October 2018.
Represents the fair value changes on the put liability of certain shares issued in 2018.
Represents the income tax effects of amortization of identifiable assets, including intangible assets and prepayments for music content, resulting from business combinations.
Each ADS represents two of our Class A ordinary shares.
Exchange Rate Information
Substantially all of our operations are conducted in China and all of our revenues is denominated in Renminbi. This annual report contains
translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from
Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.9618 to US$1.00, the exchange rate set
forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2019. In addition, unless otherwise noted, all translations from Hong
Kong dollars to U.S. dollars and from U.S. dollars to Hong Kong dollars in this annual report were made at a rate of HK$7.7894 to US$1.00, the exchange
rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2019. We make no representation that the Renminbi or U.S.
dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular
rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into
foreign exchange and through restrictions on foreign trade.
3.B.
Capitalization and Indebtedness
Not applicable.
3.C.
Reason for the Offer and Use of Proceeds
Not applicable.
4
3.D.
Risk Factors
Risks Related to Our Business and Industry
If we fail to anticipate user preferences to provide online music entertainment content catering to user demands, our ability to attract and retain users
may be materially and adversely affected.
Our ability to attract and retain our users, drive user engagement and deliver a superior online music entertainment experience depends largely on our
ability to continue to offer attractive content, including songs, playlists, video, lyrics, live streaming of music performances and karaoke-related content.
Music that was once popular with our users may become less attractive if user preferences evolve. The success of our business relies on our ability to
anticipate changes in user preferences and industry dynamics, and respond to such changes in a timely, appropriate and cost-effective manner. If we fail to
cater to the tastes and preferences of our users, or fail to deliver superior user experiences, we may suffer from reduced user traffic and engagement, and
our business, financial condition and results of operations may be materially and adversely affected.
We strive to generate creative ideas for content acquisition and to source high-quality content, including both popular, mainstream content and long-
tail content. Sourcing attractive content may be challenging, expensive and time-consuming. We have invested and intend to continue to invest substantial
resources in content acquisition and production. However, we may not be able to successfully source attractive content or to recover our content acquisition
and production investments. Any deterioration in our content quality, failure to anticipate user preferences, inability to acquire attractive content, or any
negative feedback of users to our existing content offerings may materially and adversely affect our business, financial condition and operating results.
We depend upon third-party licenses for the content of our music offerings, and any adverse changes to, or loss of, our relationships with these music
content providers may materially and adversely affect our business, operating results, and financial condition.
Significant portions of our music offerings are licensed from our music content partners, including leading music publishers and labels in China and
internationally with whom we have entered into master distribution and licensing agreements. There is no assurance that the licenses currently available to
us will continue to be available in the future at royalty rates and on terms that are favorable, commercially reasonable or at all.
The royalty rates and other terms of these licenses may change as a result of various reasons beyond our control, such as changes in our bargaining
power, changes in the industry, or changes in the law or regulatory environment. If our music content partners are no longer willing or able to license
content to us on terms acceptable to us, the breadth or quality of our content offerings may be adversely affected or our content acquisition costs may
increase. Likewise, increases in royalty rates or changes to other terms of our licenses may materially and adversely affect the breadth and quality of our
music content offerings and may, in turn, materially and adversely affect our business, financial condition and results of operations.
There also is no guarantee that we have all of the licenses for the music content available on our platform, as we need to obtain licenses from many
copyright owners, some of whom are unknown, and there are complex legal issues such as open questions of law as to when and whether particular licenses
are needed. Additionally, there is a risk that copyright owners (particularly aspiring artists), their agents, or legislative or regulatory bodies may require or
attempt to require us to enter into additional license agreements with, and pay royalties to, newly defined groups of copyright owners, some of which may
be difficult or impossible to identify.
Even when we are able to enter into license agreements with content partners, we cannot guarantee that such agreements will continue to be renewed
indefinitely. It is also possible that such agreements will never be renewed at all. The non-renewal or termination of one or more of our license agreements,
the renewal of license agreements on less favorable terms, any deterioration in our relationships with content providers or the entry of license agreements
between our content providers and any of our competitors could have a material adverse effect on our business, financial condition and results of
operations.
We may not have obtained complete licenses for certain copyrights with respect to a portion of the music content offered on our platform.
Under PRC law, to secure the rights to provide music content on the internet or for our users to download or stream music from our platform, or to
provide other related online music services, we must obtain licenses from the appropriate copyright owners for one or more of the economic rights,
including the music publishing and musical recording rights, among others. See “Item 4. Information on the Company—4.B. Business Overview—
Regulations—Regulations on Intellectual Property Rights—Copyright.”
5
We may not have complete licenses for the copyrights underlying a portion of the music content offered on our platform, and therefore we may be
subject to assertions by third parties of infringement or other violations by us of their copyright in connection with such content. As of December 31, 2019,
we offered over 40 million tracks on our platform, and we had licenses to both the music publishing and musical recording rights for approximately 85% of
those tracks. We have sought, and will continue to seek, licenses to the remaining tracks to the extent we identify the relevant copyright owners and enter
into agreements with them.
With respect to the musical compositions and lyrics we license from our content partners, including the MCSC, there is no guarantee that such content
partners have the rights to license the copyright underlying all music content covered by our agreements. With respect to any musical compositions and
lyrics that the MCSC is not authorized to sublicense to us, the MCSC undertakes to resolve such disputes and compensate the relevant copyright owners
from infringement claims made by third-party rights owners against us for using their content on our platform. Despite such undertakings by the MCSC,
there is no guarantee that we will not be subject to potential copyright infringement claims by third parties in relation to content licensed from the MCSC.
In addition, some of our license agreements with our content partners are silent on our rights to use the accompanying music for our online karaoke
services, partly due to the relatively novel nature of online karaoke services and lack of industry standard on the applicable royalty arrangements. There is
no guarantee that we will be able to reach agreements with content partners on license arrangements in relation to our provision of online karaoke services,
and that we will not be subject to potential copyright infringement claims by third parties in relation to such services.
We allow user-generated content to be uploaded on our platform; if users have not obtained all necessary copyright licenses in connection with such
uploaded content, we may be subject to potential disputes and liabilities.
We allow users to upload user-generated content on our platform, which exposes us to potential disputes and liabilities in connection with third-party
copyright. When users register on our platform, they agree to our standard agreement, under which they agree not to disseminate any content infringing on
third-party copyright.
However, we have historically allowed users to upload music content anonymously, and our platform has over the years accumulated user-generated
content for which users or performers may not have obtained proper and complete copyright licenses. Given the large volume of such user-generated
content available on our platform, it is challenging for us to accurately identify and verify the individual users or performers that uploaded such content, the
copyright status of such content, and the appropriate copyright owners from whom copyright licenses should be obtained.
Under PRC laws and regulations, online service providers, which provide storage space for users to upload works or links to other services or content,
may be held liable for copyright infringement under various circumstances, including situations where the online service provider knows or should
reasonably have known that the relevant content uploaded or linked to on its platform infringes upon the copyright of others and the online service provider
profits from such infringing activities. For example, online service providers are subject to liability if they fail to take necessary measures, such as deletion,
blocking or disconnection, after being duly notified by the legal right holders.
As an online service provider, we have adopted measures to reduce the likelihood of using, developing or making available any content without the
proper licenses or necessary consents. Such measures include (i) requiring users to acknowledge and agree that they will not upload or perform content
which may infringe upon others’ copyright; (ii) putting in place procedures to block users on our blacklists from uploading content; and (iii) implementing
“notice and take-down” policies to be eligible for the safe harbor exemption for user- generated content. However, these measures may not be effective in
preventing the unauthorized posting and use of third parties’ copyrighted content or the infringement of other third-party intellectual property rights.
Specifically, it is possible that such acknowledgments and agreements by users may not be enforceable against third parties who file claims against us.
Furthermore, a plaintiff may not be able to locate users who generate content that infringes on the plaintiff’s copyright and may choose to sue us instead. In
addition, individual users who upload infringing content on our platform may not have sufficient resources to fully indemnify us, if at all, for any such
claims. Also, such measures may fail or be considered insufficient by courts or other relevant governmental authorities. If we are not eligible for the safe
harbor exemption, we may be subject to joint infringement liability with the users, and we may have to change our policies or adopt new measures to
become eligible and retain eligibility for the safe harbor exemption, which could be expensive and reduce the attractiveness of our platform to users.
6
Assertions or allegations, even not true, that we have infringed or violated intellectual property rights could harm our business and reputation.
Third parties, including artists, copyright owners and other online music platforms, have asserted, and may in the future assert, that we have infringed,
misappropriated or otherwise violated their copyright or other intellectual property rights. As we face increasing competition in China and globally, the
possibility of intellectual property rights claims against us grows.
We have adopted robust screening processes to filter out or disable access to potentially infringing content. We have also adopted procedures to
enable copyright owners to provide us with notice and evidence of alleged infringement, and are generally willing to enter into license agreements to
compensate copyright owners for works distributed on our platform. However, given the volume of content available on our platform, it is not possible to
identify and promptly remove all alleged infringing content that may exist. Third parties may take action against us if they believe that certain content
available on our platform violates their copyright or other intellectual property rights. Moreover, while we use location-based controls and technology to
prevent all or a portion of our services and content from being accessed outside of the PRC as required by certain licensing agreements with our content
partners, these controls and technology may be breached and the content available on our platform may be accessed from geographic locations where such
access is restricted, in which case we may be subject to potential liabilities, regardless of whether there is any fault and/or negligence involved on our part.
We have been involved in litigation based on allegations of infringement of third-party copyright due to the music content available on our platform.
We may be involved in similar litigation and disputes or subject to allegations of infringement, misappropriation or other violations of intellectual property
rights in China, as well as globally as we seek to expand our international footprint. If we are forced to defend against any infringement or misappropriation
claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and
financial resources to defend such claims. Furthermore, an adverse outcome of a dispute may damage our reputation, force us to adjust our business
practices, or require us to pay significant damages, cease providing content that we were previously providing, enter into potentially unfavorable license
agreements in order to obtain the right to use necessary content or technologies, and/or take other actions that may have a material adverse effect on our
business, operating results and financial condition.
We also sublicense some of our licensed music content to other platforms. Our agreements with such third-party platforms typically require them to
comply with the terms of the license and applicable copyright laws and regulations. However, there is no guarantee that the third-party platforms that we
sublicense content to will comply with the terms of our license arrangements or all applicable copyright laws and regulations. In the event of any breach or
violation by such platforms, we may be held liable to the copyright owners for damages and be subject to legal proceedings as a result, in which case our
business, financial condition and results of operations may be materially and adversely affected.
In addition, music, internet, technology and media companies are frequently subject to litigation based on allegations of infringement,
misappropriation, or other violations of intellectual property rights. Other companies in these industries may have larger intellectual property portfolios
than we do, which could make us a target for litigation as we may not be able to assert counterclaims against parties that sue us for intellectual property
infringement. Furthermore, from time to time, we may introduce new products and services, which could increase our exposure to intellectual property
claims. It is difficult to predict whether assertions of third-party intellectual property rights or any infringement or misappropriation claims arising from
such assertions will substantially harm our business, financial condition and results of operations.
Our license agreements are complex, impose numerous obligations upon us and may make it difficult to operate our business; any breach of such
agreements could adversely affect our business, operating results and financial condition.
Many of our license agreements are complex and impose numerous obligations on us, including obligations to:
•
•
•
•
•
•
calculate and make payments based on complex royalty structures that involve a number of variables, including the revenue generated and size
of user base, which requires tracking usage of content on our platform that may have inaccurate or incomplete metadata necessary for such
calculation;
make minimum guaranteed payments;
use reasonable efforts to achieve certain paying user conversion targets;
adopt and implement effective anti-piracy and geo-blocking measures;
monitor performance by our sublicensees of their obligations with respect to content distribution and copyright protections; and
comply with certain security and technical specifications.
7
Many of our license agreements grant the licensor the right to audit our compliance with the terms and conditions of such agreements. Some of our
license agreements also include “most favored nations” provisions which require that certain material terms of such agreements are no less favorable than
those provided to any similarly situated licensor. If triggered, these most favored nations provisions could cause our payments or other obligations under
those agreements to escalate substantially. If we materially breach any of these obligations or any other obligations set forth in any of our license
agreements, we could be subject to monetary penalties and our rights under such license agreements could be terminated, either of which could have a
material adverse effect on our business, financial condition and results of operations.
Minimum guarantees required under certain of our license agreements for music content may limit our operating flexibility and may materially and
adversely affect our business, financial condition and results of operations.
Certain of our license agreements for music require that we make minimum guarantee payments to copyright owners. Such minimum guarantees are
not always tied to our number of users or the number of sound recordings used on our platform. Accordingly, our ability to achieve and sustain profitability
and operating leverage in part depends on our ability to increase our revenue through increased sales of our music services to our users in order to maintain
a healthy gross margin. The duration of our license agreements that contain minimum guarantees is typically between one to three years, but our paying
users may cancel their subscriptions at any time. If our paying user growth forecasts do not meet our expectations or our sales decline significantly during
the term of our license agreements, our margins may be materially and adversely affected. To the extent our revenues do not meet our expectations, our
business, financial condition and results of operations also could be adversely affected as a result of such minimum guarantees. In addition, the fixed cost
nature of these minimum guarantees may limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate.
We rely on estimates of the market share of licensable content controlled by each content partner, as well as our own user growth and forecasted
revenue, to forecast whether such minimum guarantees could be recouped against our actual content acquisition costs incurred over the duration of the
license agreement. To the extent that our actual revenue and/or market share underperform relative to our expectations, leading to content acquisition costs
that do not exceed such minimum guarantees, our margins may be materially and adversely affected.
If we are unable to obtain accurate and comprehensive information necessary to identify the copyright ownership of the music content offered on our
platform, our ability to obtain necessary or commercially viable licenses from the copyright owners may be adversely affected, which may result in us
having to remove music content from our platform, and may subject us to potential copyright infringement claims and difficulties in controlling
content-related costs.
Comprehensive and accurate copyright owner information for musical compositions and musical recordings underlying our music content is
sometimes unavailable to us or difficult or, in some cases, impossible for us to obtain. For example, such information may be withheld by the owners or
administrators of such rights, especially with regards to user-generated content or content provided by aspiring artists. If we are unable to identify
comprehensive and accurate copyright owner information for the music content offered on our platform, such as identifying which composers, publishers
or collective copyright organizations own, administer, license or sublicense music works, or if we are unable to determine which music works correspond
to specific musical recordings, it may be difficult for us (i) to identify the appropriate copyright owners to whom to pay royalties or from whom to obtain a
license, or (ii) ascertain whether the scope of a license we have obtained covers specific music works. This also may make it difficult to comply with the
obligations of any agreements with those rights holders.
If we do not obtain necessary and commercially viable licenses from copyright owners, whether due to the inability to identify or verify the
appropriate copyright owners or for any other reason, we may be found to have infringed on the copyright of others, potentially resulting in claims for
monetary damages, government fines and penalties, or a reduction of content available to users on our platform, which would adversely affect our ability to
retain and expand our user base, attract paying users for our paid music services and generate revenue from our content library. Any such inability may also
involve us in expensive and protracted copyright disputes.
If music copyright owners withdraw all or a portion of their music works from the MCSC, a collective copyright organization, we may have to enter
into direct licensing agreements with these copyright owners, which may be time-consuming and costly, and we may not be able to reach an agreement
with some copyright owners, or may have to pay higher rates than we currently pay.
We have obtained licenses from the MCSC with respect to musical composition and lyrics for a substantial portion of our music content library. We
cannot guarantee that composers and lyricists in China will not withdraw all or part of their music works from the MCSC. To the extent that the MCSC has
not obtained authorization to license from the relevant copyright owners, including circumstances where the copyright owners choose not to be represented
by the MCSC, our
8
ability to secure favorable licensing arrangements could be negatively affected, our content licensing cost may increase, and we may be subject to liabilities
for copyright infringement. If we are unable to reach an agreement with respect to the content of any music copyright owners who withdraw all or a portion
of their music works from the MCSC, or if we have to enter into direct licensing agreements with such music copyright owners at rates higher than those
currently set by the MCSC for the use of music works, our ability to offer music content may be limited or our service costs may significantly increase,
which could materially and adversely affect our business, financial condition and results of operations.
Uncertainties surrounding the monetization of music content may cause us to lose users and materially and adversely affect our business, financial
condition and results of operations.
We have devoted substantial efforts to monetize our user base by increasing our number of paying users and cultivating our users’ willingness to pay
for music. We currently generate our revenues from (i) online music services, and (ii) social entertainment services and others. At a strategic level, we plan
to continue to optimize our existing monetization strategies and explore new monetization opportunities. However, if these efforts fail to achieve our
anticipated results, we may not be able to increase or even maintain our revenue growth. For example, we generated most of the revenue for our live
streaming services from the sale of virtual gifts. Users of our live streaming services get free access to the live music performance or other types of music
content with the option to purchase virtual gifts to send to performers and other users. User demand for live streaming services may decrease substantially
or we may fail to anticipate and serve user demands effectively. In addition, we introduced the pay-for-streaming model for our online music services in the
first quarter of 2019 and expect to gradually transition into a pay-for-streaming model in the coming years. See “Item 4. Information on the Company—
4.B. Business Overview - How We Generate Revenue - Online Music Services – Paid Music” for more information of the pay-for-streaming model. While
we believe the adoption of pay-for-streaming has driven the number of paying users, paying ratio and paying user retention of our online music services,
we cannot guarantee that its early popularity will continue, or that our attempts to explore new monetization models or enhance our paying user conversion
will be successful.
In order to increase the number of our paying users and cultivate our users’ willingness to pay for music content, we will need to address a number of
challenges, including:
•
•
•
•
•
•
providing consistently high-quality and user-friendly experience, particularly as our online music services continue to shift to a pay-for-
streaming model;
continuing to curate a catalog of engaging content;
continuing to introduce new, appealing products, services and content that users are willing to pay for;
continuing to innovate and stay ahead of our competitors;
continuing to maintain and enhance the copyright protection environment; and
maintaining and building our relationships with our content providers and other industry partners.
If we fail to address any of these challenges, especially if we fail to offer high-quality music content and superior user experience to meet user
preferences and demands, we may not be successful in increasing the number of our paying users and cultivating our users’ willingness to pay for music
content, which could have a material adverse impact on our business, financial condition and results of operations.
Our business depends on our strong brands, and any failure to maintain, protect and enhance our brands could hurt our ability to retain or expand our
user base and advertising customers.
We rely on our strong brands, principally QQ Music, Kugou, Kuwo and WeSing, to maintain our market leadership. Maintaining and enhancing our
brands depends largely on our ability to continue to deliver comprehensive, high-quality content and service offerings to our users, which may not always
be successful. Maintaining and enhancing our brands also depends largely on our ability to remain a leader in China’s online music entertainment market,
which could be difficult and expensive. If we do not successfully maintain our strong brands, our reputation and business prospect could be harmed.
Our brands may be impaired by a number of factors, including any failure to keep pace with technological advances, slower load times for our
services, a decline in the quality or breadth of our content offerings, any failure to protect our intellectual property rights, or alleged violations of law and
regulations or public policy committed by us. Additionally, if our content partners fail to maintain high standards, our brands could be adversely affected.
9
If we fail to keep up with industry trends or technological developments, our business, results of operations and financial condition may be materially
and adversely affected.
The online music entertainment industry is rapidly evolving and subject to continuous technological changes. Our success will depend on our ability
to keep up with the changes in technology and user behavior resulting from new developments and innovations. For example, as we provide our product
and service offerings across a variety of mobile systems and devices, we are dependent on the interoperability of our services with popular mobile devices
and mobile operating systems that we do not control, such as Android and iOS. If any changes in such mobile operating systems or devices degrade the
functionality of our services or give preferential treatment to competitive services, the usage of our services could be adversely affected.
Technological innovations may also require substantial capital expenditures in product development as well as in modification of products, services or
infrastructure. We cannot assure you that we can obtain financing to cover such expenditure. See “—We require a significant amount of capital to fund our
music content acquisitions, user acquisitions and technology investments. If we cannot obtain sufficient capital, our business, financial condition and
prospects may be materially and adversely affected.” If we fail to adapt our products and services to such changes in an effective and timely manner, we
may suffer from decreased user traffic and user base, which, in turn, could materially and adversely affect our business, financial condition and results of
operations.
China’s internet and music entertainment industries are highly regulated. Our failure to obtain and maintain requisite licenses or permits or to respond
to any changes in government policies, laws or regulations may materially and adversely impact our business, financial condition and results of
operation.
The PRC government regulates the internet industry extensively, including foreign ownership of companies in the internet industry and the licensing
requirements pertaining to them. A number of regulatory authorities, such as the Ministry of Commerce, the Ministry of Culture and Tourism, the National
Copyright Administration, the Ministry of Industry and Information Technology, the National Radio and Television Administration and the Cyberspace
Administration of China, regulate different aspects of the internet industry. In addition to complying with the laws and regulations promulgated and
enforced by Chinese governmental authorities, operators in the internet industry may also need to rely heavily on Chinese governmental authorities’
policies and guidelines. Such laws, regulations, policies and guidelines cover many aspects of the telecommunications, internet information services,
copyright, internet culture, internet publishing industries and online audio-visual products services, including entry into such industries, scope of permitted
business activities, licenses and permits for various business activities and foreign investments into such industries. Operators are required to obtain various
government approvals, licenses and permits in connection with their provision of internet information services, internet culture services, internet
publication services, online audio-visual products and other related value-added telecommunications services. If we fail to obtain and maintain approvals,
licenses or permits required for our business, we could be subject to liabilities, penalties and operational disruption and our business could be materially
and adversely affected. In addition, if we fail to follow applicable laws, regulations, policies and guidelines, or applicable laws, regulations, policies and
guidelines are tightened by any regulatory authorities, or if there are new laws, regulations, policies or guidelines introduced to impose additional
government approvals, licenses, permits and requirements, our business may be disrupted and our results of operations may suffer.
Tencent Music Entertainment (Shenzhen) Co., Ltd., or Tencent Music Shenzhen, a wholly owned subsidiary of Guangzhou Kugou Computer
Technology Co., Ltd., or Guangzhou Kugou, operates our online music services, QQ Music, and online karaoke business, WeSing. As of the date of this
annual report, Tencent Music Shenzhen has submitted an application for a Value-added Telecommunications Business Operation License for providing
online music and other commercial content via the internet. Tencent Music Shenzhen also intends to apply for an Online Publishing Service Permit for
releasing music works for the first time via the internet. As of the date of this annual report, Tencent Music Shenzhen has not been subject to any legal or
regulatory penalties in the past for the lack of any of these licenses. However, we cannot assure you that it can successfully obtain these licenses in a timely
manner, or at all. As Tencent Music Shenzhen operates QQ Music and WeSing, an Audio and Video Service Permission, or AVSP, may be required. Tencent
Music Shenzhen currently operates these two platforms as sub-domains of www.qq.com of Tencent Computer, which holds a valid AVSP for the
www.qq.com domain and is controlled by our parent, Tencent. In the event Tencent Music Shenzhen is required to obtain an AVSP under its own name for
operating our QQ Music and WeSing platforms, Tencent Music Shenzhen may not be eligible for an AVSP, because the current PRC laws and regulations
require an applicant to be a wholly state-owned or state-controlled entity.
In addition, as of the date of this annual report, Guangzhou Kugou has submitted an application and Beijing Kuwo plans to apply, in each case, for an
expansion of the permitted scope of business under their respective AVSP to cover their provision of audio and video programs through mobile network to
users’ mobile device. In addition, Guangzhou Kugou and Beijing Kuwo plan to respectively apply for an Online Publishing Service Permit for their release
of original music works via the internet. As of the date of this annual report, neither of Guangzhou Kugou or Beijing Kuwo has been subject to any legal or
regulatory penalties for failure to include the above-mentioned business in the permitted scope of business under their respective AVSPs or for the lack of
the Online Publishing Service Permit. There is, however, no assurance that such applications will eventually be approved in a timely manner, or at all. If
any of Tencent Music Shenzhen, Guangzhou Kugou,
10
Beijing Kuwo, our other subsidiaries, our VIEs or our VIE’s subsidiaries is found to be in violation of PRC laws and regulations regarding licenses and
permits, we could be subject to legal and regulatory penalties and our business operations may not be able to continue operating in the same manner or at
all, and our business, financial condition and results of operations could be materially and adversely affected.
Mr. Guomin Xie, our former co-president and director, and previously a PRC citizen, has obtained a foreign citizenship. Mr. Xie is the registered
holder of 9.99% equity interests in Guangzhou Kugou. Pursuant to relevant PRC laws and regulations, shareholders of entities holding an AVSP or an
Online Culture Operating Permit must be PRC citizens or entities. Mr. Guomin Xie entered into a share transfer agreement to transfer all of his equity
interests in Guangzhou Kugou to his spouse, Ms. Meiqi Wang, a PRC citizen. Pursuant to the terms of such agreement, such transfer has become effective
since Guangzhou Kugou obtained pre-clearance by the competent PRC governmental authorities for the renewal of their respective AVSP to reflect the
applicable proposed transfer in August 2019. Furthermore, we plan to submit the application for registration with competent local branch of State
Administration for Market Regulation with respect to such transfer and amend the existing contractual arrangements concerning Guangzhou Kugou
concurrently with or immediately after completion of such registration, and will thereafter complete other governmental procedures to reflect the change in
the shareholders of Guangzhou Kugou including but not limited to renewal of our Value-added Telecommunications Business Operation License and
Online Culture Operating Permit. The existing contractual arrangements concerning Guangzhou Kugou to which Mr. Guomin Xie is a party will remain
effective and binding until such amendment is made. In addition, in connection with the change in his citizenship, Mr. Guomin Xie also transferred 23.02%
equity interests in Beijing Kuwo held by him to Ms. Meiqi Wang. The required pre-clearance and governmental procedures for the foregoing transfer have
been completed, except the renewal of the Online Culture Operating Permit held by Beijing Kuwo, for which an application has been submitted. There is
no assurance that the pre-clearance or governmental procedures required for the share transfer can be obtained or completed in a timely manner, or at all.
During the pendency of the pre-clearance and other requisite governmental procedures to effect the proposed transfers, there is no assurance that the
validity of our Value-added Telecommunications Business Operation License and Online Culture Operating Permit will not be adversely affected by the
change of nationality of Mr. Guomin Xie, which could include non-renewal or revocation of such licenses and permits.
PRC laws and regulations are evolving, and there are uncertainties relating to the regulation of different aspects of the online music entertainment
industry, including but not limited to exclusive licensing and sublicensing arrangements. Pursuant to an article posted on National Copyright
Administration’s official website, in September 2017, the National Copyright Administration held meetings with a number of music industry players,
including us, where it encouraged the relevant industry players to “avoid acquiring exclusive music copyright” and indicated that they should also not
engage in activities involving “collective management of music copyright.” There is substantial uncertainty as to whether some of our current licensing
arrangements may be found objectionable by the regulatory authorities in the future. In such event, we may have to revisit and modify such arrangements in
a way that may cause substantial costs, and our ability to offer music content and our competitive advantages may be harmed, which may have a material
and adverse impact on our business, financial condition and results of operations.
We operate in a relatively new and evolving market.
Many elements of our business are unique, evolving and relatively unproven. Our business and prospects primarily depend on the continuing
development and growth of the online music entertainment industry as well as the live streaming industry in China, which are affected by numerous
factors. For example, content quality, user experience, technological innovations, development of internet and internet-based services, regulatory
environment and macroeconomic environment are important factors that affect our business and prospects. The markets for our products and services are
relatively new and rapidly developing and are subject to significant challenges. In addition, our continued growth depends, in part, on our ability to respond
to constant changes in the internet industry, including rapid technological evolution, continued shifts in customer demands, frequent introductions of new
products and services and constant emergence of new industry standards and practices. Developing and integrating new content, products, services or
infrastructure could be expensive and time- consuming, and these efforts may not yield the benefits we expect to achieve. We cannot assure you that we
will succeed in any of these aspects or that these industries in China will continue to grow as rapidly as in the past. If online music or live streaming as
forms of entertainment lose their popularity due to changing social trends and user preferences, or if such industries in China fail to grow as quickly as
expected, our business, financial condition and results of operation may be materially and adversely affected.
We operate in a competitive industry. If we are unable to compete successfully, we may lose market share to our competitors.
We operate in a competitive industry. We face competition for users and their time and spending primarily from the online music services provided by
other online music services providers in China. We also face competition from online offerings of other forms of content, including karaoke services, live
streaming, radio services, literature, games and video provided by other social entertainment services providers. In particular, we are increasingly facing
noticeable competition
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from offerings of other emerging forms of content which have been growing in popularity rapidly in recent years, such as live streaming and user-generated
short videos.
We compete with our competitors based on a number of factors, such as the diversity and quality of content, product features, social interaction
features, quality of user experience, brand awareness and reputation, and our ability to continuously attract, incentivize and retain live streaming performers
and their agencies. Some of our competitors may be able to respond more quickly to technological innovations or changes in user demands and preferences,
acquire more attractive and diverse content, and act more effectively in the development, promotion and sale of products than we can. Also, they may enter
into more favorable relationships with content providers and provide their users with content that competes with our offerings. If any of our competitors
achieves greater market acceptance or is able to provide more attractive content offerings than we do, our user traffic and market share may decrease,
which may result in a loss of users and a material and adverse effect on our business, financial condition and results of operations.
We may fail to attract and retain talented and popular live streaming performers, karaoke singers and other key opinion leaders to maintain the
attractiveness and level of engagement of our social entertainment services.
The engagement level of our user base as well as the quality of our social entertainment content offered on our platform are closely linked to the
popularity and performance of our live streaming performers, karaoke singers and other key opinion leaders.
With respect to our live streaming services, we rely on live streaming performers to attract user traffic and drive user engagement. Although we have
entered into cooperation agreements that contain exclusivity clauses with certain live streaming performers and/or their talent agencies, those live streaming
performers may breach the agreement or decide not to renew their agreements upon expiration.
In addition to our most popular live streaming performers, we must continue to attract and retain talented and popular karaoke singers and other key
opinion leaders in order to maintain and increase our social entertainment content offerings and ensure the sustainable growth of our online music user
community. We must identify and acquire potential popular karaoke singers and other key opinion leaders and provide them with sufficient resources.
However, we cannot assure you that we can continue to maintain the same level of attractiveness to such popular karaoke singers and other key opinion
leaders.
If we can no longer maintain our relationships with our live streaming performers, karaoke singers and other key opinion leaders or their appeal
decreases, the popularity of our platform may decline and the number of our users may decrease, which could materially and adversely affect our business,
financial condition and results of operations.
We cooperate with various talent agencies to manage and recruit our live streaming performers and any adverse change in our relationships could
materially and adversely impact our business.
We cooperate with talent agencies to manage, organize and recruit live streaming performers on our platform. As we are an open platform that
welcomes all live streaming performers to register on our websites, cooperation with talent agencies substantially increases our operation efficiency in
terms of discovering, supporting and managing live streaming performers in a more organized and structured manner, and turning amateur live streaming
performers to full-time ones.
We share a portion of the revenues generated from the sales of virtual gifts attributed to the performers’ live streams with live streaming performers
and the talent agencies who manage these performers. If we cannot balance the interests between us, live streaming performers and the talent agencies and
offer a revenue-sharing mechanism that is attractive to live streaming performers and talent agencies, we may not be able to retain their services. If other
platforms offer better revenue sharing incentives to talent agencies, such talent agencies may choose to devote more of their resources to live streaming
performers who stream on such other platforms, or encourage their live streaming performers to use or even enter into exclusive agreements with such
other platforms, all of which could materially and adversely affect our business, financial condition and results of operations.
Our brand image and business may be adversely impacted by misconduct by our live streaming performers and users and their misuse of our platform.
We do not have full control over how users use our platform, whether through live streaming, commenting or other forms of sharing or
communication. We face the risk that our platform may be misused or abused by live streaming performers or users. We have a robust internal control
system in place to review and monitor live streams and other forms of social interactions among our users and will shut down streams that are illegal or
inappropriate. However, we may not be able to identify all such streams and content, or prevent all such content from being posted.
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Moreover, we have limited control over the real-time behavior of our live streaming performers and users. To the extent such behavior is associated
with our platform, our ability to protect our brand image and reputation may be limited. Our business and public perception of our brand may be materially
and adversely affected by the misuse of our platform. In addition, in response to allegations of illegal or inappropriate activities conducted through our
platform or any negative media coverage about us, PRC government authorities may intervene and hold us liable for non-compliance with PRC laws and
regulations concerning the dissemination of information on the internet and subject us to administrative penalties, including confiscation of income and
fines or other sanctions, such as requiring us to restrict or discontinue certain features and services. As a result, our business, financial condition and results
of operation may be materially and adversely affected.
We face the risk that live streaming performers that perform on our platform may infringe upon third parties’ intellectual property rights.
Our agreements with live streaming performers and their agencies provide that content generated through our platform by live streaming performers
is owned by us. Live streaming performers are prohibited from disseminating content infringing on others’ intellectual property rights. We delete content
we deem unauthorized and block the account of the performers. However, we cannot guarantee that all content generated by our live streaming performers
or users is legal and non-infringing, and we cannot guarantee that the online performance and/or other use of music works by the live streaming performers
are authorized by the corresponding intellectual property rights owners.
As the application of existing laws and regulations to specific aspects of online music business remains relatively unclear and is still evolving, it is
difficult to predict whether we will be subject to joint infringement liability if our live streaming performers or users infringe on third parties’ intellectual
property rights. We rely on our ownership over the content generated by the performers and our exclusive contractual relationship with certain live
streaming performers to maintain our competitiveness, but these measures may increase our risk of being liable for infringement committed by the live
streaming performers or users. Furthermore, if we are determined to be jointly liable either by new regulations or court judgments, we may have to change
our policies and it may materially and adversely impact on our business, financial condition and results of operation.
Failure to protect our intellectual property could substantially harm our business, operating results and financial condition.
We rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and patent, copyright,
software copyright, trademark, and other intellectual property laws to protect our intellectual property rights. Despite our efforts to protect our intellectual
property rights, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property
by competitors, former employees or other third-parties.
We have filed, and may in the future file, patent applications on certain of our innovations. It is possible, however, that these innovations may not be
patentable. In addition, given the cost, effort and risks associated with patent application, we may choose not to seek patent protection for some
innovations. Furthermore, our patent applications may not lead to granted patents, the scope of the protection gained may be insufficient or an issued patent
may be deemed invalid or unenforceable. We also cannot guarantee that any of our present or future patents or other intellectual property rights will not
lapse or be invalidated, circumvented, challenged, or abandoned.
Litigation or proceedings before governmental authorities, administrative and judicial bodies may be necessary in the future to enforce our intellectual
property rights and to determine the validity and scope of our rights. Our efforts to protect our intellectual property in such litigation and proceedings may
be ineffective and could result in substantial costs and diversion of resources and management time, each of which could substantially harm our operating
results.
While we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to execute
agreements assigning such intellectual property to us, we may be unsuccessful in executing or enforcing such agreements with each party that develops
intellectual property that we regard as our own. In addition, such agreements may be breached. We may be forced to bring claims against the breaching
third parties, or defend claims that they may bring against us related to the ownership of such intellectual property.
The content available on our platform may be found objectionable by the PRC government, which may subject us to penalties and other regulatory or
administrative actions.
As an internet content provider, we are subject to PRC regulations governing internet access and the distribution of music, music videos and other
forms of content over the internet. See “—Regulations.” These regulations prohibit internet content providers and internet publishers from posting on the
internet any content that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene,
superstitious, frightening, gruesome, offensive, fraudulent or defamatory. In particular, since the outset of 2018, the Chinese government has tightened its
crackdown on content that it deemed to be “vulgar” offered by online and mobile live streaming and video services. Failure to comply with these
requirements may result in monetary penalties, revocation of licenses to provide internet content or other licenses, suspension of the concerned platforms
and reputational harm. In addition, these laws and regulations are
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subject to interpretation by the PRC government, and it may not be possible to determine in all cases the types of content that could cause us to be held
liable for offering content that is found objectionable by the PRC government.
Internet content providers may be held liable for content displayed on or linked to their online platforms that is subject to certain restrictions. We
allow our users to upload user-generated content, such as music, videos, comments, reviews and other forms of content. We also make it possible for
selected professional producers to make their content available to users through our official music accounts and allow them a high level of control of the
content offered through our music accounts. While we have in place internal rules and procedures to monitor user-generated content on our platform, due to
the massive amount of such content, we may not be able to identify, in a timely manner or at all, the content that is illegal or inappropriate or that may
otherwise be found objectionable by the PRC government. Additionally, we may not be able to keep our rules and procedures abreast of changes in the
PRC government’s requirements for content display. Failure to identify and prevent illegal or inappropriate content from being displayed on our platform
may result in legal and administrative liability, government sanctions, fines, loss of licenses and/or permits, or reputational harm. If the PRC regulatory
authorities find any content displayed on our platform objectionable, they may require us to limit or eliminate the dissemination of such content on our
platform. In the past, we have from time to time received phone calls and written notices from the relevant PRC regulatory authorities requesting us to
delete or restrict certain content that the government deemed inappropriate or sensitive. Although we have not been materially penalized for our content so
far, in the event that the PRC regulatory authorities find any content on our platform objectionable and impose penalties on us or take other actions against
us in the future, our business, financial condition and results of operations may be materially and adversely affected.
Pending or future litigation or governmental proceedings could have a material and adverse impact on our reputation, business, financial condition
and results of operations.
From time to time, we have been, and may in the future be, subject to lawsuits brought by our competitors, individuals, or other entities against us, as
well as governmental investigations or proceedings, in matters primarily relating to intellectual property rights, antitrust, and competition claims
concerning our content acquisition and distribution. We cannot predict the outcomes of such lawsuits or governmental actions, which may not be successful
or favorable to us. Lawsuits or governmental investigations against us may also generate negative publicity that significantly harms our reputation, which
may adversely affect our user base and relationships with our content partners. In addition to the related cost, managing and defending litigation and
governmental proceedings can significantly divert our management’s attention from operating our business. We may also need to pay damages or settle
lawsuits or governmental proceedings with a substantial amount of cash, or be required by the relevant governmental authorities to make substantive
changes to our existing business model. As of December 31, 2019, there were 132 lawsuits pending in connection with alleged copyright infringement on
our platform against us or our affiliates with an aggregate amount of damages sought of approximately RMB20.5 million (US$2.9 million). While we do
not believe that any such proceedings are likely to have a material adverse effect on us, if there were adverse determinations in legal proceedings against
us, we could be required to pay substantial monetary damages or adjust our business practices, which could have an adverse effect on our reputation,
business, financial condition and results of operations.
We and certain of our directors and officers have been named as defendants in several shareholder class action lawsuits, which could have a material
adverse impact on our business, financial condition, results of operation, cash flows and reputation.
We will have to defend against the putative class actions described in “Item 8. Financial Information—A. Consolidated Statements and Other
Financial Information—Legal Proceedings,” including any appeals of such lawsuits should our initial defense be unsuccessful. We are currently unable to
estimate the potential loss, if any, associated with the resolution of such lawsuits, if they proceed. We anticipate that we will continue to be a target for
lawsuits in the future, including putative class action lawsuits brought by shareholders. There can be no assurance that we will be able to prevail in our
defense or reverse any unfavorable judgment on appeal, and we may decide to settle lawsuits on unfavorable terms. Any adverse outcome of these cases,
including any plaintiffs’ appeal of the judgment in these cases, could result in payments of substantial monetary damages or fines, or changes to our
business practices, and thus have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition,
there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. The
litigation process may utilize a significant portion of our cash resources and divert management’s attention from the day-to-day operations of our company,
all of which could harm our business. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that
indemnification claims may have on our business or financial results.
We, certain of our consolidated entities in the PRC and Mr. Guomin Xie, our former co-president and director, have been named as respondents in an
arbitration proceeding in the PRC.
On December 6, 2018, we became aware of an arbitration (the “Arbitration”) filed by an individual named Mr. Hanwei Guo (the “Claimant”) before
the China International Economic and Trade Arbitration Commission, or CIETAC. The
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Arbitration named Mr. Guomin Xie, who previously served as our Co-President and a director, CMC, and certain affiliates of CMC as respondents
(collectively, the “Respondents”). In 2012, Mr. Xie co-founded CMC and the Claimant became an investor in CMC’s business by acquiring substantial
stakes in entities including CMC, Ocean Interactive (Beijing) Technology Co., Ltd. (“Ocean Technology”) and Ocean Interactive (Beijing) Culture Co.,
Ltd. (“Ocean Culture”). CMC was acquired by Tencent in 2016 and subsequently was renamed Tencent Music Entertainment Group. As a result of the
merger of CMC’s operations and Tencent’s former music businesses in 2016, Ocean Culture and Ocean Technology also became our PRC consolidated
entities.
The Claimant alleged that Mr. Xie defrauded and threatened him into signing a series of agreements in late 2013 to relinquish his substantial
investment interests in multiple entities, including CMC, Ocean Culture and Ocean Technology (together, the “Ocean Music Entities”), and transferring his
equity interests in the Ocean Music Entities to Mr. Xie, CMC and certain other Respondents at below-market value. The Claimant seeks an award from
CIETAC ruling, among other things, that (i) such agreements, pursuant to which the Claimant allegedly transferred his interests in the Ocean Music Entities
to Mr. Xie, CMC and other Respondents, be declared invalid; (ii) Mr. Xie, CMC and other applicable Respondents return to the Claimant all of his initial
equity interests in the Ocean Music Entities; and (iii) the Respondents pay damages in the amount of RMB100 million (US$14.6 million). The Arbitration
is currently pending for hearing.
In addition, on December 5, 2018, the Claimant filed an Application and Petition for an Order to Take Discovery for Use in a Foreign Proceeding
Pursuant to 28 U.S.C. § 1782 (the “Discovery Petition”) in the U.S. District Court of the Southern District of New York (the “District Court”), whereby he
seeks permission to serve subpoenas for production of documents on Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, and Morgan Stanley & Co. LLC, each of which is an underwriter in our initial public offering, for use in the Arbitration. We
and the underwriters opposed the Claimant’s Discovery Petition by filing Oppositions in the District Court on December 21, 2018. On February 25, 2019,
the Discovery Petition was denied by the District Court. On March 27, 2019, the Claimant filed a notice of appeal with the United States Court of Appeals
for the Second Circuit regarding the denial of the Discovery Petition. On February 28, 2020, oral argument on the Claimant’s appeal was held in the U.S.
Court of Appeals for the Second Circuit.
Both we and Mr. Xie intend to contest the Claimant’s claims vigorously. However, there can be no assurance that we will be able to prevail in the
Arbitration or that we will be able to settle the dispute on terms favorable to us. Moreover, if the claims alleged by the Claimant are successful, we are
currently unable to estimate the possible loss or range of loss, if any, associated with the resolution of the Arbitration. Any adverse outcome of the
Arbitration could have a material adverse effect on our reputation, capital structure (including potential dilution to our shareholders), business and financial
condition. The Arbitration may require us to incur significant resources and divert management’s attention, which could in turn harm our business.
Moreover, we cannot guarantee that additional legal actions relating to the subject matters in the Arbitration would not be threatened or brought against us
or our directors and officers in the future, and we cannot assure you that no such legal actions have been threatened or initiated as of the date of this annual
report, nor can we predict the potential impact of any such actions on our reputation, business, financial condition and results of operations.
Our strategic focus on rapid innovation and long-term user engagement over short-term financial results may generate results of operation that do not
align with investors’ expectations. If that happens, our stock price may be negatively affected.
Our business is growing and becoming more complex, and our success depends on our ability to quickly develop and launch new and innovative
products and services. This business strategy could result in unintended outcomes or decisions that are poorly received by our users or partners. Our culture
also prioritizes our long-term user engagement over short-term financial condition or results of operations. We frequently make decisions that may reduce
our short-term revenue or profitability if we believe that the decisions will improve user experience and long-term financial performance, as well as our
continuous investment in music-related content production and innovation. For example, we are seeking to build long-term partnerships with our content
partners, including partnerships in the pan-entertainment sector with other companies within the Tencent ecosystem, and will continue to invest
substantially in producing in-house or in collaboration with content partners popular, trend-setting content catering to evolving user demands. Furthermore,
as our brand awareness increases, we may continue to expand into new markets and geographic locations. These decisions may not produce the long-term
benefits that we expect, in which case our user growth and engagement, our relationships with our partners, and our business, financial condition and
results of operation could be materially and adversely affected.
Privacy concerns or security breaches relating to our platform could result in economic loss, damage our reputation, deter users from using our
products, and expose us to legal penalties and liability.
We collect, process, and store significant amounts of data concerning our users, business partners and employees, including personal and transaction
data involving our users. While we have taken reasonable steps to protect such data, there is no guarantee that such steps will be successful. Techniques
used to gain unauthorized access to data and systems, disable
15
or degrade service, or sabotage systems, are constantly evolving, and we may be unable to anticipate, deter, or prevent such techniques or otherwise
implement adequate preventative measures to avoid unauthorized access to such data or our systems.
Like all internet services, our service is vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks, attempts to
overload servers with denial-of-service, and similar attacks and disruptions from the unauthorized use of our and third-party computer systems, any of
which could lead to system interruptions, delays, or shutdowns and cause the loss of critical data or the unauthorized access to our data or our users’ data.
Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry, have occurred on our systems in the
past, and we experience cyber-attacks of varying degrees on a regular basis, including hacking or attempted hacking into our user accounts and redirecting
our user traffic to other internet platforms. Any functions that we use to facilitate interactivity with other internet platforms have the potential to increase
the scope of access that hackers may have to our user accounts. Though it is difficult to determine what, if any, harm may directly result from any specific
interruption or attack, our failure to maintain performance, reliability, security and availability of our products and technical infrastructure to the
satisfaction of our users may harm our reputation and ability to retain existing users and attract new users. Although we have in place systems and
processes that are designed to protect our data and our users’ data, prevent data loss, disable undesirable accounts and activities on our platform, and
prevent or detect security breaches, we cannot assure you that such measures will provide absolute security. We may incur significant costs in protecting
against cyber-attacks, and if an actual or perceived breach of security occurs to our systems or a third party’s systems, we could be required to expend
significant resources to mitigate the breach of security and to address matters related to any such breach, including notifying users or regulators.
In addition, we are subject to a variety of laws and other obligations relating to the security and privacy of data, including restrictions on the
collection, use and storage of personal information and requirements to take steps to prevent personal data from being divulged, stolen, or tampered with.
The PRC Constitution, the PRC Criminal Law, the General Principles of the PRC Civil Law protect individual privacy in general. The Cybersecurity Law
of the PRC, which came into effect in June 2017, requires certain authorization or consent from Internet users prior to collection, use or disclosure of their
personal data and also protection of the security of the personal data of such users, but there are still great uncertainties as to the interpretation and
application of the Cybersecurity Law. The Office of the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the
Ministry of Public Security, and the State Administration for Market Regulation jointly promulgated an announcement on January 23, 2019 to carry out
special campaigns against illegal collection and usage of personal information by mobile internet application programs operators, including collecting
personal information irrelevant to their services, or forcing users to give authorization in disguised manner. Further, the Office of the Central Cyberspace
Affairs Commission issued the Provisions on the Cyber Protection of Children’s Personal Information, effective on October 1, 2019, which requires, among
others, that internet operators who collect, store, use, transfer and disclose personal information of children under the age of 14 shall establish special rules
and user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and clear manner, and shall obtain
the consent of the children’s guardians. We may be subject to laws and regulations relating to the security and privacy of data, including the collection, use
and storage of personal information, of jurisdictions other than the PRC. Any failure, or perceived failure to maintain the security of our user data or to
comply with applicable PRC or foreign privacy, data security and personal information protection laws and obligations may result in civil or regulatory
liability, including governmental or data protection authority enforcement actions and investigations, fines, penalties, enforcement orders requiring us to
cease operating in a certain way, litigation, or adverse publicity, and may require us to expend significant resources in responding to and defending
allegations and claims.
In addition, although we currently do not operate in Europe, if and to the extent our operations are extended into Europe, we may be required to notify
European Data Protection Authorities within strict time periods about any personal data breaches, unless the personal data breach is unlikely to result in a
risk to the rights and freedoms of affected individuals. We may also be required to notify affected individuals of the personal data breach where there is a
high risk to their rights and freedoms. If we suffer a personal data breach, or otherwise violate the General Data Protection Regulation, we could be fined
up to EUR 20 million or 4% of worldwide annual turnover of the preceding financial year, whichever is greater. Furthermore, any data breach by service
providers that are acting as data processors (i.e., processing personal data on our behalf) could also mean that we are subject to these fines and are required
to comply with the notification obligations described above. Complying with the General Data Protection Regulation and other applicable regulatory
requirements may cause us to incur substantial expenses or require us to alter or change our practices in a manner that could harm our business.
Regulatory requirements regarding the protection of data are constantly evolving and can be subject to differing interpretations or significant changes,
making the extent of our responsibilities in that regard uncertain. While in the U.S., the state of California recently enacted the California Consumer
Privacy Act, which become effect on January 1, 2020 and imposes heightened obligations with respect to data privacy, including the ability for individuals
in California to object to the sale of their personal data in certain instances. If other states in the United States adopt similar laws, or if a comprehensive
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federal data privacy law is enacted, we may be required to expend considerable resources to meet the applicable requirements to the extent our operations
are expanded into the United States.
Any failure, or perceived failure, by us, or by our third-party partners, to maintain the security of our user data or to comply with applicable privacy
or data security laws, regulations, policies, contractual provisions, industry standards, and other requirements, may result in civil or regulatory liability,
including governmental or data protection authority enforcement actions and investigations, fines, penalties, enforcement orders requiring us to cease
operating in a certain way, litigation, or adverse publicity, and may require us to expend significant resources in responding to and defending allegations
and claims. Moreover, claims or allegations that we have failed to adequately protect our users’ data, or otherwise violated applicable privacy and data
security laws, regulations, policies, contractual provisions, industry standards, or other requirements, may result in damage to our reputation and a loss of
confidence in us by our users or our partners, potentially causing us to lose users, advertisers, content providers, other business partners and revenues,
which could have a material adverse effect on our business, financial condition and results of operations and could cause our stock price to drop
significantly.
We depend on our senior management and highly skilled personnel. If we are unable to attract, retain and motivate a sufficient number of them, our
ability to grow our business could be harmed.
We believe that our future success depends significantly on our continuing ability to attract, develop, motivate and retain our senior management and
a sufficient number of experienced and skilled employees. Qualified individuals are in high demand, particularly in the online music industry, and we may
have to incur significant costs to attract and retain them. Additionally, we use share-based awards to attract talented employees, and if the ADSs decline in
value, we may have difficulties recruiting and retaining qualified employees.
In particular, we cannot ensure that we will be able to retain the services of our senior management and key executive officers. The loss of any key
management or executive could be highly disruptive and adversely affect our business operations and future growth. Moreover, if any of these individuals
joins a competitor or forms a competing business, we may lose crucial business secrets, technological know-how and other valuable resources. Although
our senior management and executive officers have non-compete agreements with us, we cannot assure you that they will comply with such agreements or
that we will be able to effectively enforce such agreements.
Compliance with the laws or regulations governing virtual currency may result in us having to obtain additional approvals or licenses or change our
current business model.
The Circular on Strengthening the Administration of Online Game Virtual Currency, or the Virtual Currency Circular, jointly issued by the Ministry
of Culture and the Ministry of Commerce in 2009, broadly defined virtual currency as a type of virtual exchange instrument issued by internet game
operation enterprises, purchased directly or indirectly by the game users by exchanging legal currency at a certain exchange rate, saved outside the game
programs, stored in servers provided by the internet game operation enterprises in electronic record format and represented by specific numeric units.
Virtual currency is used to exchange internet game services provided by the issuing enterprise for a designated extent and time, and is represented by
several forms, such as online prepaid game cards, prepaid amounts or internet game points, and does not include game props obtained from playing online
games. In addition, the Virtual Currency Circular defines “issuing enterprise” and “transaction enterprise” and stipulates that a single enterprise may not
operate both types of business. Online game operators are further prohibited from distributing virtual gifts or virtual currencies to users paying cash or
virtual currency through random selection methods such as lottery, gambling or prize draw. See “—Regulations—Regulations on Virtual Currency.”
Although we issue virtual currencies to users for cash or, in a few past cases, as a reward for users’ participation in our guessing games on our
platform for them to purchase various items to be used on our live streaming and online karaoke platforms, as advised by our PRC legal advisor, our
service does not constitute virtual currency transaction services because users cannot transfer or trade these currency among themselves. However, given
the uncertainties of the interpretation and enforcement of the virtual currency related laws, regulations and policies, we cannot assure you that internet
platforms, including us, will not be subject to liabilities due to the activities of third parties, including our users. On May 14, 2019, the Ministry of Culture
and Tourism issued the Notice on Adjustment of Approval Scope of the Internet Culture Operation License and Further Regulation on Approval, pursuant
to which Ministry of Culture and Tourism no longer assumes the responsibility for the administration of online games industry. As of the date of this annual
report, no PRC laws and regulations have been officially promulgated regarding whether the responsibility of Ministry of Culture and Tourism for
supervising the online games and virtual currency will be undertaken by another government agency, so it is still unclear as to whether such supervision
responsibility will be re-designated to another government agency or whether such government agency taking on the responsibility will require similar or
new supervision requirements for the issuance of virtual currencies. If there is similar or new supervision requirements for the issuance of virtual currencies
or the sale, exchange or circulation of
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virtual gifts in the future, there is no assurance that we can meet all such supervision requirements in a timely or cost-effective manner. We cannot assure
you that the PRC regulatory authorities will not take stricter actions against all internet platforms conducting business operations involving virtual
currencies, including us, or will not take a view contrary to ours or consider any other aspects of our business operations involving virtual currencies as
virtual currency transactions or otherwise subject such transactions to the PRC regulatory regime on online games. If the PRC regulatory authorities deem
any transfer or exchange on our platform to be a virtual currency transaction, or if our platform is deemed to be engaged in illegal or inappropriate activities
relating to third parties’ misuse, we may be deemed to be engaging in the issuance of virtual currency and providing transaction platform services that
enable the trading of such virtual currency. Simultaneously engaging in both of these activities is prohibited under PRC law. We may be required to cease
either our virtual currency issuance activities or such deemed “transaction service” activities and may be subject to certain penalties, including mandatory
corrective measures and fines. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results
of operations.
We require a significant amount of capital to fund our music content acquisitions, user acquisitions and technology investments. If we cannot obtain
sufficient capital, our business, financial condition and prospects may be materially and adversely affected.
Operating our online music platforms requires significant, continuous investment in acquiring content, users and technology. Acquiring licenses to
music content can be costly. Historically, we have financed our operations primarily with operating cash flows and shareholder contributions. As part of our
growth strategies, we expect to continue to require substantial capital in the future to cover, among other things, the costs to license music content and
innovate our technologies, which requires us to obtain additional equity or debt financing. Our ability to obtain additional financing in the future is subject
to uncertainties, including those relating to:
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our future business development, financial condition and results of operations;
general market conditions for financing activities;
macro-economic and other conditions in China and elsewhere; and
our relationship with Tencent, our controlling shareholder.
Although we expect to rely less on financing support from Tencent and rely increasingly on net cash provided by operating activities and financing
through capital markets and commercial banks for our liquidity needs as our business continues to grow and we are now a public company, we cannot
assure you that we will be successful in our efforts to diversify our sources of capital. If we cannot obtain sufficient capital, we may not be able to
implement our growth strategies, and our business, financial condition and prospects may be materially and adversely affected.
If we fail to attract more advertisers to our platform or if advertisers are less willing to advertise with us, our business, financial condition and results
of operation may be adversely affected.
Our advertising revenues depend on the overall growth of the online advertising industry in China and advertisers’ continued willingness to deploy
online advertising as part of the advertised spend. In addition, advertisers may choose more established Chinese internet portals or search engines over our
platform. If the online advertising market does not continue to grow, or if we are unable to capture and retain a sufficient share of that market, our ability to
grow our advertising revenues may be materially and adversely affected.
Furthermore, our key and long-term priority of optimizing user experience and satisfaction may limit our ability to significantly grow our advertising
revenues. For example, in order to provide our users with an uninterrupted online music entertainment experience, we limit the amount of advertising on
our streaming interface or pop-up advertisements during streaming. While this may adversely affect our operating results in the short-term, we believe it
enables us to provide a superior user experience which will enable us to expand current user base and strengthen our monetization potential in the long-
term. However, this philosophy of prioritizing user experience may also negatively impact our relationships with advertisers, and may not result in the
long-term benefits that we expect, in which case the success of our business, financial condition and results of operations could be materially and adversely
affected.
We cannot assure you that we will be able to attract or retain direct advertisers or advertising agencies. If we fail to retain and enhance our business
relationships with these advertisers or third-party advertising agencies, we may suffer from a loss of advertisers and our business and results of operations
may be materially and adversely affected. If we fail to retain existing advertisers and advertising agencies or attract new direct advertisers and advertising
agencies or any of our current
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advertising methods or promotion activities becomes less effective, our business, financial condition and results of operations may be materially and
adversely affected.
Our historical financial information for the years ended December 31, 2016, 2017, 2018 and 2019 may not be directly comparable due to our
consolidation of CMC’s financial results since July 2016, which may make it difficult for you to evaluate our business and prospects.
On July 12, 2016, Tencent acquired CMC, a major online music entertainment platform in China. See “Item 4. Information on the Company—4.A.
History and Development of the Company” for more information about the acquisition. As a result of the acquisition, CMC’s operations were merged with
Tencent’s QQ Music and WeSing business, and we have consolidated the financial results of CMC into ours since July 12, 2016. Therefore, our
consolidated financial information for the year ended December 31, 2016 may not be directly comparable with the years ended December 31, 2017, 2018
and 2019, which may make it difficult for you to evaluate our business and prospects.
Our operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may harm our reputation
and our business.
We regularly review MAUs, number of paying users and other key metrics to evaluate growth trends, measure our performance and make strategic
decisions. These metrics are calculated using our internal data and have not been validated by an independent third party. While these numbers are based on
what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our
services are used across large populations in China. For example, individuals who have multiple accounts and devices registered with our platform could
result in an overstatement of the number of our users. We are also subject to the risk associated with artificial manipulation of data, such as stream counts
on our platform. Any errors or inaccuracies in these metrics could result in less informed business decisions and operational inefficiencies. For example, if
our user base is overstated by MAU and other user engagement metrics we track, we may fail to make the right strategic choices needed to expand our user
base and achieve our growth strategies.
We are subject to payment processing risk.
Our users pay for our membership services and the music content offered on our platforms through a variety of online payment solutions. We rely on
third parties to process such payments. Acceptance and processing of these payment methods are subject to certain rules and regulations and require
payment of interchange and other fees. To the extent there are increases in payment processing fees, material changes in the payment network, such as
delays in receiving payments from processors and/or changes in the rules or regulations concerning payment processing, our ability to provide superior use
experience, including convenient payment options, may be undermined, and our revenue, operating expenses and results of operation could be adversely
impacted.
Our ability to expand our user base depends in part on users being able to access our services, which may be affected by third-party interference beyond
our control.
Access to our services may be affected by restrictions on the ability of our users to access websites, mobile apps and client-based desktop applications
via the internet. Corporations, professional organizations and governmental agencies could block access to the internet or our online platforms as a
competitive strategy or for other reasons, such as security or confidentiality concerns, or political, regulatory or compliance reasons. In any of these
occurrences, users may not be able to access our services, and user engagement and monetization of our services may be adversely affected.
Additionally, we offer our mobile apps via smartphone and tablet apps stores operated by third parties. Some of these third parties are now, and others
may in the future become, competitors of ours, and could stop allowing or supporting access to our mobile apps through app stores, increase access costs or
change the terms of access in a way that makes our apps less desirable or harder to access. Furthermore, since the mobile devices that provide users with
access to our services are not manufactured and sold by us, we cannot guarantee that such devices will perform reliably, and any faulty connection between
these devices and our services may result in user dissatisfaction toward us. As a result, our brand and reputation, business, financial condition and results of
operations may be materially and adversely affected.
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Negative media coverage could adversely affect our business.
Negative publicity about us or our business, shareholders, affiliates, directors, officers or other employees, as well as the industry in which we
operate, can harm our operations. Such negative publicity could be related to a variety of matters, including:
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alleged misconduct or other improper activities committed by our shareholders, affiliates, directors, officers and other employees;
false or malicious allegations or rumors about us or our shareholders, affiliates, directors, officers and other employees;
user complaints about the quality of our products and services;
copyright infringements involving us and content offered on our platform;
security breaches of confidential user information; and
governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.
In addition to traditional media, there has been an increasing use of social media platforms and similar devices in China, including instant messaging
applications, such as Weixin/WeChat, social media websites and other forms of internet-based communications that provide individuals with access to a
broad audience of users and other interested persons. The availability of information on instant messaging applications and social media platforms is
virtually immediate as is without affording us an opportunity for redress or correction. The opportunity for dissemination of information, including
inaccurate information, is seemingly limitless and readily available. Information concerning our company, shareholders, directors, officers and employees
may be posted on such platforms at any time. The risks associated with any such negative publicity or incorrect information cannot be completely
eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.
Future strategic alliances or acquisitions may have a material and adverse effect on our business, financial condition and results of operations.
We may enter into strategic alliances, including joint ventures or equity investments, with various third parties to further our business purpose from
time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the
third parties and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have
limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffer negative publicity or harm
to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with
any such third parties.
In addition, when appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to
our existing business. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government
authorities for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased delay and costs, and may
derail our business strategy if we fail to do so. Furthermore, past and future acquisitions and the subsequent integration of new assets and businesses
require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an
adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the
use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges,
amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying
and consummating acquisitions may be significant. Furthermore, our equity investees may generate significant losses, a portion of which will be shared by
us in accordance with IFRS. Any such negative developments could have a material adverse effect on our business, financial condition and results of
operations.
Advertisements shown on our platform may subject us to penalties and other administrative actions.
Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our platform to ensure that such content is
true, accurate and in full compliance with applicable laws and regulations. See “—Regulation—Regulations on Online Advertising Services.” Violation of
these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the
advertisements and orders to publish an announcement correcting the misleading information. A majority of the advertisements shown on our platform are
provided to us by third parties. While we have implemented a combination of automated monitoring and manual review to ensure that
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the advertisements shown on our platform are in compliance with applicable laws and regulations, we cannot assure you that all the content contained in
such advertisements is true and accurate as required by the advertising laws and regulations, especially given the uncertainty in the application of such laws
and regulations. In addition, advertisers may, through illegal technology, evade our content monitoring procedures to show advertisements on our platform
that do not comply with applicable laws and regulations. The inability of our systems and procedures to adequately and timely discover such evasions may
subject us to regulatory penalties or administrative sanctions.
Programming errors could adversely affect our user experience and market acceptance of our content, which may materially and adversely affect our
business and results of operations.
Our platform or content on our platform may contain programming errors that adversely affect our user experience and market acceptance of our
content. We have from time to time received user feedback pertaining to programming errors. While we generally have been able to resolve such errors in a
timely manner, we cannot assure you that we will be able to detect and resolve all these programming errors effectively. Programming errors or defects may
adversely affect user experience, cause users to refrain from subscribing for our services, or cause our advertising customers to reduce their use of our
services, any of which could materially and adversely affect our business and results of operations.
We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses.
We have adopted various equity incentive plans, including a share incentive plan adopted in 2014 and a share option plan and a restricted share award
plan adopted in 2017. We account for compensation costs for all share-based awards using a fair-value based method and recognize expenses in our
consolidated statements of comprehensive loss in accordance with IFRS. Under such plans, we are authorized to grant options, stock appreciation rights,
restricted shares, restricted stock units and other types of awards as the administrator of such plans may decide. The maximum aggregate number of shares
that we are authorized to issue pursuant to the equity awards granted under such plans is 311,438,316 shares. As of the date of this annual report,
34,583,840 restricted shares and the options to purchase a total of 37,213,144 Class A ordinary shares have been granted and are outstanding, under such
plans. Our share-based compensation expenses also include the share-based compensation expenses arising from awards granted under certain share
incentive plans of Tencent that was allocated to us in connection with Tencent’s acquisition of CMC in July 2016. In 2016, 2017, 2018 and 2019, we
recorded RMB170 million, RMB384 million, RMB487 million and RMB519 million (US$75 million), respectively, in share-based compensation expenses.
We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will
continue to grant share-based awards in the future. As a result, our expenses associated with share-based compensation may increase, which may have an
adverse effect on our results of operations.
If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or
prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring most public companies
to include a management report on such company’s internal control over financial reporting in its annual report, which contains the management’s
assessment of the effectiveness of the company’s internal control over financial reporting. In addition, when a company meets the SEC’s criteria, an
independent registered public accounting firm must report on the effectiveness of the company's internal control over financial reporting.
Our management and independent registered public accounting firm have concluded that our internal control over financial reporting as of December
31, 2019 was effective. However, we cannot assure you that in the future our management or our independent registered public accounting firm will not
identify material weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process. In addition, because of the inherent limitations of internal
control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or
fraud may not be prevented or detected on a timely basis. If we fail to achieve and maintain an effective internal control environment, we could suffer
material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our
reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading
price of the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets
and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. Furthermore, we
have incurred and expect to continue to incur considerable costs and to use significant management time and the other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act which can significantly divert our management’s attention from operating our business.
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Risks Related to Our Relationship with Tencent
If we are no longer able to benefit from our business cooperation with Tencent, our business may be adversely affected.
Our ultimate controlling shareholder and a strategic partner, Tencent, is one of the largest internet companies in the world. Our business has benefited
significantly from Tencent’s brand name and strong market position in China. In addition, we have benefited from distributing our content through
Tencent’s extensive social network, which provides Tencent’s large number of users with access to our music content. We also cooperate with Tencent in a
number of other areas, such as user traffic acquisition, advertising, technology, social graphs and IT infrastructure. We cannot assure you that we will
continue to benefit from our cooperation with Tencent and its subsidiaries in the future. To the extent we cannot maintain our cooperative relationships with
Tencent on terms favorable to us or at all, we will need to source other business partners to provide services such as distribution channels, promotion
services, as well as IT and payment services, and we may lose access to key strategic assets, which could result in material and adverse effects on our
business and results of operations.
Any negative development in Tencent’s market position, brand recognition or financial condition may materially and adversely affect our user base,
marketing efforts and the strength of our brand.
We have benefited significantly and expect to continue to benefit significantly from Tencent’s strong brand recognition, broad user base, social graphs
and extensive user data, as well as Tencent’s content ecosystem, which enhances our reputation and credibility. If Tencent loses its market position, the
effectiveness of our marketing efforts through our association with Tencent may be materially and adversely affected. In addition, any negative publicity
associated with Tencent or any negative development with respect to Tencent’s market position, financial condition, or compliance with legal or regulatory
requirements in China, will likely have an adverse impact on our user traffic and engagement as well as our reputation and brand.
Tencent, our controlling shareholder, has had and will continue to have effective control over the outcome of shareholder actions in our company. The
interests of Tencent may not be aligned with the interests of our other shareholders and holders of the ADSs.
As of the date of this annual report, Tencent beneficially owns 16.7% of our outstanding Class A ordinary shares and 81.5% of our outstanding Class
B ordinary shares, representing in the aggregate 78.7% of our total voting power. Tencent’s voting power gives it the power to control certain actions that
require shareholder approval under Cayman Islands law, our memorandum and articles of association and New York Stock Exchange requirements,
including approval of mergers and other business combinations, changes to our memorandum and articles of association, the number of shares available for
issuance under any share incentive plans, and the issuance of significant amounts of our ordinary shares in private placements.
Tencent’s voting control may cause transactions to occur that might not be beneficial to you as a holder of the ADSs and may prevent transactions that
would be beneficial to you. For example, Tencent’s voting control may prevent a transaction involving a change of control in us, including transactions in
which you as a holder of the ADSs might otherwise receive a premium for the ADSs over the then-current market price. In addition, Tencent is not
prohibited from selling the controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your
ADSs. If Tencent is acquired, otherwise undergoes a change of control or is subject to a corporate restructuring, an acquirer, successor or other third party
may be entitled to exercise the voting control and contractual rights of Tencent, and may do so in a manner that could vary significantly from that of
Tencent.
We may have conflicts of interest with Tencent and, because of Tencent’s controlling ownership interest in our company, we may not be able to resolve
such conflicts on terms favorable to us.
Conflict of interest may arise between Tencent and us in a number of areas relating to our ongoing relationships. Potential conflicts of interest that we
have identified mainly include the following:
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Agreements with Tencent. We entered into a master business cooperation agreement in July 2018. Tencent may use its control over us to prevent
us from bringing a legal claim against it in the event of a contractual breach by Tencent, notwithstanding our contractual rights under the master
business cooperation agreement and any other agreement we may enter into with Tencent from time to time.
Allocation of business opportunities. There may arise business opportunities in the future that both we and Tencent are interested in and which
may complement each of our respective businesses. Tencent holds a large number of business interests, some of which may directly or indirectly
compete with us. For example, Tencent currently owns equity stakes in certain music streaming businesses operating outside of the PRC.
Tencent may decide to take up such opportunities itself, which would prevent us from taking advantage of those opportunities.
Employee recruiting and retention. We may compete with Tencent in the hiring of employees, especially computer programmers, engineers,
sales and other employees with experience or an interest in the internet industry.
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Sale of shares in our company. Subject to lock-up arrangements it entered into with the underwriters in connection with our initial public
offering and applicable securities laws, Tencent may decide to sell all or a portion of the shares that it holds in our company to a third party,
including to one of our competitors, thereby giving that third party substantial influence over our business and our affairs. Such a sale could be
contrary to the interests of our employees or our other shareholders or holders of the ADSs.
Developing business relationships with Tencent’s competitors. We may be limited in our ability to do business with Tencent’s competitors, which
may limit our ability to serve the best interests of our company and our other shareholders or holders of the ADSs.
Our directors may have conflicts of interest. Certain of our directors are also employees of Tencent. These relationships could create, or appear
to create, conflicts of interest when these persons are faced with decisions with potentially different implications for Tencent and us.
Our financial contribution to Tencent was not material during the periods presented in this annual report, and Tencent may from time to time make
strategic decisions that it believes are in the best interests of its business as a whole, which may be different from the decisions that we would have made on
our own. Tencent’s decisions with respect to us or our business may favor Tencent and therefore the Tencent shareholders, which may not necessarily be
aligned with our interests and the interests of our other shareholders. Moreover, Tencent may make decisions, or suffer adverse trends, that may disrupt or
discontinue our collaborations with Tencent or our access to Tencent’s user base. Although we are now a stand-alone public company and we have an audit
committee, consisting of independent non-executive directors, to review and approve all proposed related party transactions, we may not be able to resolve
all potential conflicts of interest, and even if we do so, the resolution may be less favorable to us than if we were dealing with a non-controlling
shareholder.
Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC
regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be
subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign investment in the value-added telecommunication services industry in China is extensively regulated and subject to numerous restrictions.
The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version) provides that foreign investors are generally not
allowed to own more than 50% of the equity interests in a value-added telecommunication service provider other than providers of e-commerce, domestic
multiparty-communication, store-and-forward or call center service, and the Provisions on the Administration of Foreign-Invested Telecommunications
Enterprises (2016 Revision) requires that the major foreign investor in a value-added telecommunication service provider in China must have experience in
providing value-added telecommunications services overseas and maintain a good track record. In addition, foreign investors are prohibited from investing
in companies engaged in online publishing businesses, internet audio-visual programs businesses, internet culture businesses (except for music), and radio
and television program production businesses. See “—Regulation-Regulations on Foreign Investment—Special Administrative Measures for Entrance of
Foreign Investment (Negative List) (2019 Version).”
We are a Cayman Islands company and our PRC subsidiaries are currently considered foreign-invested enterprises. Accordingly, none of our PRC
subsidiaries is eligible to provide value-added telecommunication services or conduct other businesses which foreign-owned companies are prohibited or
restricted from conducting in China. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through our
consolidated variable interest entities, or VIEs, and their respective subsidiaries in the PRC. Through a series of contractual arrangements entered into by
our wholly owned subsidiaries in China, our VIEs and their respective shareholders, we exercise effective control over the VIEs, receive substantially all of
the economic benefits of our VIEs, and have an exclusive option to purchase all or part of the equity interests and assets in our VIEs when and to the extent
permitted by PRC laws and regulations. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs
and hence consolidate their operating results in our consolidated financial statements under IFRS. See “Item 4. Information on the Company—4.C.
Organizational Structure” for details.
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If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the value-added
telecommunication services, or if the PRC government otherwise finds that we, our VIEs, or any of their respective subsidiaries are in violation of PRC
laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities, including the Ministry of
Industry and Information Technology, the National Radio and Television Administration and the Ministry of Commerce, would have broad discretion in
dealing with such violations or failures, including:
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revoking the business licenses and/or operating licenses of such entities;
discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiaries and our
VIEs;
imposing fines, confiscating the income from our PRC subsidiaries or our VIEs, or imposing other requirements with which we or our VIEs may
not be able to comply;
requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and
deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert
effective control over our VIEs; or
restricting or prohibiting our use of the proceeds of our initial public offering to finance our business and operations in China.
Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially
and adversely affect our business, financial condition and results of operations. If occurrences of any of these events result in our inability to direct the
activities of our VIEs that most significantly impact their economic performance and/or our failure to receive the economic benefits of our VIEs, we may
not be able to consolidate their operating results in our consolidated financial statements in accordance with IFRS.
Substantial uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Investment Law of the PRC and how
it may impact the viability of our current corporate structure, corporate governance and business operations.
On March 15, 2019, the National People’s Congress adopted the Foreign Investment Law of the PRC, which became effective on January 1, 2020 and
replace three existing laws regulating foreign investment in China, namely, the Wholly Foreign-Invested Enterprise Law of the PRC, the Sino-Foreign
Cooperative Joint Venture Enterprise Law of the PRC and the Sino-Foreign Equity Joint Venture Enterprise Law of the PRC, together with their
implementation rules and ancillary regulations. The Foreign Investment Law of the PRC embodies an expected PRC regulatory trend to rationalize its
foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for
both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For
example, the Foreign Investment Law of the PRC adds a catch-all clause to the definition of “foreign investment” so that foreign investment, by its
definition, includes “investments made by foreign investors in China through other means defined by other laws or administrative regulations or provisions
promulgated by the State Council” without further elaboration on the meaning of “other means”. The Implementing Regulation of the Foreign Investment
Law Regulations adopted by the State Council on December 12, 2019 also did not provide further clarification for such “other means”. It leaves leeway for
the future legislations to be promulgated by competent PRC legislative institutions to provide for contractual arrangements as a form of foreign investment.
It is therefore uncertain whether our corporate structure will be seen as violating the foreign investment rules as we currently leverage the contractual
arrangements to operate certain businesses in which foreign investors are prohibited from or restricted to investing. Furthermore, if future legislations
prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face
substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. If we fail to take appropriate and timely measures to
comply with any of these or similar regulatory compliance requirements, our current corporate structure, corporate governance and business operations
could be materially and adversely affected.
We rely on contractual arrangements with our VIEs and their respective shareholders for a large portion of our business operations, which may not be
as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with our VIEs and their respective shareholders, as well as certain of our
VIEs’ subsidiaries to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with
control over our VIEs. For example, our VIEs and their respective shareholders could breach their contractual arrangements with us by, among other things,
failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. The revenues contributed by our
VIEs and their subsidiaries constituted substantially all of our revenues in 2016, 2017, 2018 and 2019.
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If we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our
VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the
current contractual arrangements, we rely on the performance by our VIEs and their respective shareholders of their respective obligations under the
contracts to exercise control over our VIEs. The shareholders of our VIEs may not act in the best interests of our company or may not perform their
obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the
contractual arrangements with our VIEs and their respective shareholders. If any dispute relating to these contracts remains unresolved, we will have to
enforce our rights under these contracts through the operations of PRC law and arbitration, litigation or other legal proceedings and therefore will be
subject to uncertainties in the PRC legal system. See “—Any failure by our VIEs or their respective shareholders to perform their obligations under our
contractual arrangements with them would have a material and adverse effect on our business.” Therefore, our contractual arrangements with our VIEs and
their respective shareholders may not be as effective in controlling our business operations as direct ownership.
Any failure by our VIEs or their respective shareholders to perform their obligations under our contractual arrangements with them would have a
material and adverse effect on our business.
If our VIEs or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our
ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial
costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific
performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of our
VIEs refuse to transfer their equity interest in our VIEs to our PRC subsidiaries or their designee after we exercise the purchase option pursuant to these
contractual arrangements, or if they otherwise act in bad faith or otherwise fail to fulfill their contractual obligations, we may have to take legal actions to
compel them to perform their contractual obligations. In addition, if there are any disputes or governmental proceedings involving any interest in such
shareholders’ equity interests in our VIEs, our ability to exercise shareholders’ rights or foreclose the share pledges according to the contractual
arrangements may be impaired. If these disputes or proceedings were to impair our control over our VIEs, we may not be able to maintain effective control
over our business operations in the PRC and thus would not be able to continue to consolidate our VIEs’ financial results, which would in turn result in a
material adverse effect on our business, operations and financial condition.
All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in
China. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes would be resolved in accordance with PRC
legal procedures.
All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in
China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC
legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to
how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding
the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot
appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties
may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and
delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing
these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively
affected. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could materially and adversely affect us.”
Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIEs
owe additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax
authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax
authorities determine that the contractual arrangements between us and our VIEs were not entered into on an arm’s-length basis in such a way as to result in
an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIEs in the form of a transfer pricing
adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for PRC tax
purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary’s tax expenses. In addition, the PRC tax authorities may
impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position
could be materially and adversely affected if our VIEs’ tax liabilities increase or if it is required to pay late payment fees and other penalties.
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The shareholders of our VIEs may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and
financial condition.
The shareholders of our VIEs may have actual or potential conflicts of interest with us. These shareholders may breach, or cause our VIEs to breach,
or refuse to renew, the existing contractual arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to
effectively control our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs
to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis.
We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will
be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company.
If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result
in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
We may lose the ability to use, or otherwise benefit from, the licenses, permits and assets held by our VIEs.
As part of our contractual arrangements with our VIEs, our VIEs hold certain assets, licenses and permits that are material to our business operations,
including the Value-added Telecommunications Business Operation License, the Audio and Video Service Permission and the Online Culture Operating
Permit. The contractual arrangements contain terms that specifically obligate our VIEs’ shareholders to ensure the valid existence of the VIEs and restrict
the disposal of material assets of the VIEs. However, in the event the VIEs’ shareholders breach the terms of these contractual arrangements and voluntarily
liquidate any of our VIEs, or any of our VIEs declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or
are otherwise disposed of or encumbered without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit
from the assets held by the VIEs, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore,
under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of their material assets or legal or beneficial
interests in the business without our prior consent. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or
unrelated third-party creditors may claim rights to some or all of the assets of the VIEs, thereby hindering our ability to operate our business as well as
constrain our growth.
Risks Related to Doing Business in China
A severe or prolonged downturn in the PRC or global economy could materially and adversely affect our business and our financial condition.
The global macroeconomic environment is facing challenges. There is considerable uncertainty over the long-term effects of the expansionary
monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States
and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa and over the conflicts involving Ukraine, Syria
and North Korea. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential
conflicts in relation to territorial disputes, and the trade disputes between the United States and China. Additionally, our business, financial condition and
results of operations may be negatively influenced to the extent that COVID-19 continues to affect the Chinese economy or evolves into a worldwide
health crisis that results in a global economic downturn. See “ - We face risks related to accidents, disasters and public health challenges in China and
globally.” It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and
economic conditions in the long term.
Economic conditions in China are sensitive to global economic conditions, changes in domestic economic and political policies and the expected or
perceived overall economic growth rate in China. While the economy in China has grown significantly over the past decades, growth has been uneven, both
geographically and among various sectors of the economy, and the rate of growth has been slowing in recent years. Although the growth of China’s
economy remained relatively stable, there is a possibility that China’s economic growth may materially decline in the near future. Any severe or prolonged
slowdown in the global or PRC economy may materially and adversely affect our business, results of operations and financial condition.
Uncertainties with respect to the PRC legal system could materially and adversely affect us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system
may be cited for reference but have limited precedential value.
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In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The
overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China.
However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. In particular, the PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Our
PRC subsidiaries, our VIEs and its subsidiaries are subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese
laws and regulations generally applicable to companies incorporated in China. Since these laws and regulations are relatively new and the PRC legal
system continues to rapidly evolve, the interpretations of many laws, regulations and rules may not be uniform and enforcement of these laws, regulations
and rules involves uncertainties. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our
contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in
attempts to extract payments or benefits from us. Furthermore, the PRC legal system is based in part on government policies and internal rules, some of
which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these
policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in
substantial costs and diversion of resources and management attention.
In particular, PRC laws and regulations concerning the online music entertainment industry are developing and evolving. Although we have taken
measures to comply with the laws and regulations that are applicable to our business operations and avoid conducting any non-compliant activities under
the applicable laws and regulations, the PRC governmental authorities may promulgate new laws and regulations regulating the online music industry in
the future. We cannot assure you that our practice would not be deemed to violate any new PRC laws or regulations relating to online music streaming.
Moreover, developments in the online music entertainment industry may lead to changes in PRC laws, regulations and policies or in the interpretation and
application of existing laws, regulations and policies that may limit or restrict online music marketplaces like us, which could materially and adversely
affect our business and operations.
The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or
misappropriate or misuse these assets.
Under the PRC law, legal documents for corporate transactions, including agreements and contracts are executed using the chop or seal of the signing
entity or with the signature of a legal representative whose designation is registered and filed with relevant PRC market regulation administrative
authorities.
In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any
event that the chops and seals are intended to be used, the responsible personnel will submit the application through our office automation system and the
application will be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to
maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we
monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees
could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or consolidated
VIEs. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could
experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources
to resolve and divert management from our operations.
Our operations depend on the performance of the internet infrastructure and telecommunications networks in China, which are in large part operated
and maintained by state-owned operators.
The successful operation of our business depends on the performance of the internet infrastructure and telecommunications networks in China.
Almost all access to the internet is maintained through state-owned telecommunications operators under the administrative control and regulatory
supervision of the Ministry of Industry and Information Technology. We have limited access to alternative networks or services in the event of disruptions,
failures or other problems with China’s internet infrastructure or the telecommunications networks provided by telecommunications service providers.
Internet traffic in China has experienced significant growth during the past few years. Effective bandwidth and server storage at internet data centers in
large cities such as Beijing are scarce. Our platform regularly serves a large number of users. With the expansion of our business, we may be required to
upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and
telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage. If we were unable to
increase our online content and service delivering capacity accordingly, we may not be able to continuously grow our internet traffic and the adoption of
our products and services may be hindered, which could adversely impact our business and our share price.
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In addition, we generally have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for
telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. If internet access fees or
other charges to internet users increase, our user traffic may decline and our business may be harmed.
Changes in China’s economic, political and social conditions as well as government policies could have a material adverse effect on our business and
prospect.
Substantially all of our operations are located in China. Accordingly, our business, prospect, financial condition and results of operations may be
influenced to a significant degree by political, economic and social conditions in China generally, and by continued economic growth in China as a whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved
corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese
government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises
significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among
various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and
regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business
and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government has
implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall
Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain
measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China.
Any prolonged slowdown in the Chinese economy may reduce the demand for our services and materially and adversely affect our business and operating
results.
We face risks related to accidents, disasters and public health challenges in China and globally.
Accidents, disasters and public health challenges in China and globally could impact our business and results of operations. These types of events
could negatively impact user activity and our local operations, if any, in the affected regions, or, depending upon the severity, across China or globally,
which could adversely impact our business and results of operations. For example, the recent outbreak of coronavirus, or COVID-19, has caused decrease
in levels of activities of our users and performers and negatively affected certain aspects of our business operations in the recent months. We have taken
specific precautionary measures intended to minimize the risks of COVID-19 to our employees, users, artists and business partners, including temporarily
requiring our employees to work remotely or canceling or postponing sponsored offline events and activities, which could compromise our efficiency and
productivity during such periods, require us to incur additional costs, slow down our branding and marketing efforts, and result in short-term fluctuations in
our results of operations. While the foregoing restrictions and measures designed to contain the spread of COVID-19 are expected to be temporary, the
duration of the disruption and the related economic impact cannot be reasonably estimated at this time. Our results of operations may be adversely affected
to the extent that COVID-19 continues to affect the Chinese economy in general. Additionally, as COVID-19 continues to evolve into a worldwide health
crisis that could adversely affect the economies and financial markets of countries other than China, it may potentially result in an economic downturn that
could affect demand for our users, business partners and services and therefore materially adversely affect our business, financial condition and results of
operations.
Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to
liability for information displayed on our website.
The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under
these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other
things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure
to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned
websites. The website operator may also be held liable for such censored information displayed on or linked to the
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websites. If our website is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation
could be adversely affected.
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have,
and any limitation on the ability of our PRC subsidiaries to make payments to us and any tax we are required to pay could have a material and adverse
effect on our ability to conduct our business.
We are a Cayman Islands holding company and, other than external financing, we rely principally on dividends and other distributions on equity from
our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and for
services of any debt we may incur. Our PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations
permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, our VIEs and its subsidiaries is required to set aside at least 10% of
its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable
as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay
dividends or make other payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective
shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay
dividends or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to
dividends payable by Chinese companies to non-PRC resident enterprises unless otherwise exempted or reduced according to treaties or arrangements
between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are incorporated.
In response to the persistent capital outflow and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of
China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures in the subsequent months,
including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder
loan repayments. For instance, the People’s Bank of China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB
Loans Provided by Domestic Enterprises, or PBOC Circular 306, on November 26, 2016, which provides that offshore RMB loans provided by a domestic
enterprise to offshore enterprises with which it has an equity relationship shall not exceed 30% of the domestic enterprise’s most recent audited owner’s
equity. PBOC Circular 306 may constrain our PRC subsidiaries’ ability to provide offshore loans to us. The PRC government may continue to strengthen
its capital controls and our PRC subsidiaries’ dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the
ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
Under the Enterprise Income Tax Law of the PRC and related regulations, dividends, interests, rent or royalties payable by a foreign-invested
enterprise, such as our PRC subsidiaries, to any of its foreign non-resident enterprise investors, and proceeds from any such foreign enterprise investor’s
disposition of assets (after deducting the net value of such assets) are subject to a 10% withholding tax, unless the foreign enterprise investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may
delay or prevent us from using the proceeds of our initial public offering to make loans to or make additional capital contributions to our PRC
subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any transfer of funds by us to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to PRC regulations.
Capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce in its local branches and registration
with a local bank authorized by SAFE. Any foreign loan procured by our PRC subsidiaries is required to be registered or filed with SAFE or its local
branches or satisfy relevant requirements as provided in SAFE Circular 28. Any medium or long-term loan to be provided by us to our VIEs must be
registered with the National Development and Reform Commission and SAFE or its local branches. We may not be able to obtain these government
approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC
subsidiaries. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of our initial public offering and to
capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. There
is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, provided that the
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PRC subsidiaries complete the relevant filing and registration procedures. With respect to loans to the PRC subsidiaries by us, (i) if the relevant PRC
subsidiaries adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt Mechanism, the outstanding amount of the loans
shall not exceed the difference between the total investment and the registered capital of the PRC subsidiaries; and (ii) if the relevant PRC subsidiaries
adopt the Notice No. 9 Foreign Debt Mechanism, the outstanding amount of the loans shall not exceed 250% of the net asset of the relevant PRC
subsidiary.
In addition, on October 23, 2019, SAFE promulgated the Circular on Further Promoting the Facilitation of Cross-Border Trade and Investment, or
SAFE Circular 28, pursuant to which, our PRC subsidiaries established in the pilot regions, which refers to Guangdong-Hong Kong-Macao Greater Bay
Area and Hainan province, are not required to register each of their foreign debts with SAFE or its local branches but to complete foreign debts registration
with SAFE or its local branches in the amount of 250% of the net asset of the relevant PRC subsidiary. Upon such registrations, our relevant PRC
subsidiaries will be allowed to procure foreign loan within the registered amount and complete the formalities for inward and outward remittance of funds,
purchase and settlement of foreign currency directly with a bank, and are required to make declaration of international balance of payments pursuant to
applicable regulations. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation.
According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of PBOC Notice No. 9, the People’s Bank of China
and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall
implementation of PBOC Notice No. 9. As of the date of this annual report, neither the People’s Bank of China nor SAFE has promulgated and made
public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by the People’s Bank of China and
SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. Currently, our PRC subsidiaries have the
flexibility to choose between the Current Foreign Debt Mechanism and the Notice No. 9 Foreign Debt Mechanism. However, if a more stringent foreign
debt mechanism becomes mandatory, our ability to provide loans to our PRC subsidiaries or our consolidated affiliated entities may be significantly
limited, which may adversely affect our business, financial condition and results of operations. Despite neither the Foreign Investment Law nor its
Implementing Regulation prescribes whether the certain concept “total investment amount” with respect to foreign-invested enterprises will still be
applicable, no PRC laws and regulations have been officially promulgated to abolish the Current Foreign Debt Mechanism.
The Circular on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign- Invested Enterprises, or SAFE Circular 19,
effective as of June 1, 2015, as amended by Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control
over Foreign Exchange Settlement under the Capital Account, or SAFE Circular 16, effective on June 9, 2016, allows FIEs to settle their foreign exchange
capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure
beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise
permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from our initial
public offering within the business scopes of our PRC subsidiaries. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use
Renminbi converted from the net proceeds of our initial public offering to fund the establishment of new entities in China by our VIEs or their respective
subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new consolidated VIEs in China, which may
adversely affect our business, financial condition and results of operations. Even though SAFE Circular 28 allows all FIEs (including those without an
investment business scope) to utilize and convert their foreign exchange capital for making equity investment in China if certain requirements prescribed
therein are satisfied, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and
economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging
the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between
July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since
June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the
International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR,
and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth
currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated
significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and
progress towards interest rate liberalization and Renminbi
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internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the
Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to
convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar
against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any
hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Foreign exchange controls may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes foreign exchange controls on the convertibility of the Renminbi, in certain cases, the remittance of currency out of
China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily
relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the
existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay
dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted
into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we
need to obtain SAFE approval or registration to use cash generated from the operations of our PRC subsidiaries and VIE to pay off their respective debt in
a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than
Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign
exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay
dividends in foreign currencies to our shareholders and holders of the ADSs.
The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
The Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in
2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that
the anti-monopoly law enforcement agency be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC
domestic enterprise. Moreover, the Anti-Monopoly Law of the PRC requires that the anti-monopoly law enforcement agency be notified in advance of any
transaction where the parties’ turnover in the China market and/or global market exceed certain thresholds and the buyer would obtain control of, or
decisive influence over, the target as a result of the business combination. As further clarified by the Provisions of the State Council on the Threshold of
Filings for Undertaking Concentrations issued by the State Council in 2008 and amended in September 2018, such thresholds include: (i) the total global
turnover of all operators participating in the transaction exceeds RMB10 billion in the preceding fiscal year and at least two of these operators each had a
turnover of more than RMB400 million within China in the preceding fiscal year, or (ii) the total turnover within China of all the operators participating in
the transaction exceeded RMB2 billion in the preceding fiscal year, and at least two of these operators each had a turnover of more than RMB400 million
within China in the preceding fiscal year. There are numerous factors the anti-monopoly law enforcement agency considers in determining “control” or
“decisive influence,” and, depending on certain criteria, the anti-monopoly law enforcement agency may conduct anti-monopoly review of transactions in
respect of which it was notified. In light of the uncertainties relating to the interpretation, implementation and enforcement of the Anti-Monopoly Law of
the PRC, we cannot assure you that the anti-monopoly law enforcement agency will not deem our past and future acquisitions or investments, including
Tencent’s acquisition of CMC, to have triggered filing requirement for anti-trust review. If we are found to have violated the Anti-Monopoly Law of the
PRC for failing to file the notification of concentration and request for review, we could be subject to a fine of up to RMB500,000, and the parts of the
transaction causing the prohibited concentration could be ordered to be unwound, which may materially and adversely affect our business, financial
condition and results of operations.
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In addition, the Circular of the General Office of the State Council on the Establishment of Security Review System for the Merger and Acquisition of
Domestic Enterprises by Foreign Investors that became effective in March 2011, and the Rules on Implementation of Security Review System for the
Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by the Ministry of Commerce that became effective in September 2011
specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which
foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry
of Commerce, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or
contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the
above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes,
including obtaining approval from the State Administration for Market Regulation, the Ministry of Commerce or its local counterparts may delay or inhibit
our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners
or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE promulgated the Circular on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-
trip Investment by Domestic Residents via Special Purpose Vehicles, or SAFE Circular 37, in July 2014. SAFE Circular 37 requires PRC residents or
entities to register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for the purpose of
overseas investment or financing with such PRC residents or entities’ legally owned assets or equity interests in domestic enterprises or offshore assets or
interests. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material
events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in
investment amount, transfers or exchanges of shares, or mergers or divisions. According to the Circular of Further Simplifying and Improving the Policies
of Foreign Exchange Administration Applicable to Direct Investment released in February 2015 by SAFE, local banks will examine and handle foreign
exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular
37 from June 2015. See “—Regulation—Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents.”
If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiaries may be
prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our
ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with SAFE registration requirements described above could
result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
We have notified all PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to
us as being PRC residents to complete the foreign exchange registrations. However, we may not be informed of the identities of all the PRC residents or
entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a
result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future
make, obtain or update any applicable registrations or approvals required by SAFE regulations. Failure by such shareholders or beneficial owners to
comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or
affect our ownership structure, which could adversely affect our business and prospects.
Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving,
it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and
implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our
foreign exchange activities, such as remittance of dividends and foreign currency denominated borrowings, which may adversely affect our financial
condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such
company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign
exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
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Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan
participants or us to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit
applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our
directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not
less than one year, subject to limited exceptions, and who have been granted share-based awards by us, may follow the Circular of SAFE on Issues
Concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plan of Overseas Listed Companies,
promulgated by SAFE in 2012. Pursuant to the circular, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than
one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE
through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In
addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or
sale of shares and interests. We, our directors, our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous
period of not less than one year and who have been granted share-based awards are subject to these regulations. Failure to complete SAFE registration
requirements may subject them to fines, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and
limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional
incentive plans for our directors, executive officers and employees under PRC law. See “—Regulations on Foreign Exchange Registration of Offshore
Investment by PRC Residents—Employee Stock Incentive Plan.”
The State Administration of Taxation has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our
employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC
subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold
individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes
according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “—
Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents—Employee Stock Incentive Plan.”
Our business may be negatively affected by the potential obligations to make additional social insurance and housing fund contributions.
We are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-
related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The
relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and employers
who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. Certain of our PRC subsidiaries have historically
failed to promptly make social insurance and housing fund contributions in full for their employees. In addition, certain of our PRC subsidiaries engage
third-party human resources agencies to make social insurance and housing fund contributions for some of their employees, and there is no assurance that
such third-party agencies will make such contributions in full in a timely manner, or at all. If the relevant PRC authorities determine that we shall make
supplemental social insurance and housing fund contributions or that we are subject to fines and legal sanctions in relation to our failure to make social
insurance and housing fund contributions in full for our employees, our business, financial condition and results of operations may be adversely affected.
We may be classified as a “PRC resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us
and our non-PRC shareholders and ADS holders and have a material adverse effect on our results of operations and the value of your investment.
Under the Enterprise Income Tax Law of the PRC and its implementation rules, an enterprise established outside of the PRC with a “de facto
management body” within the PRC is considered a “resident enterprise” and will be subject to PRC enterprise income tax on its global income at the rate of
25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall
management of the business, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular,
known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled
enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC
enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax
resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of
the following conditions are met: (i) the primary location of the
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day-to-day operational management is in the PRC; decisions relating to the enterprise’s financial and human resource matters are made or are subject to
approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and
shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the
PRC.
We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is
subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As
a majority of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities
determine that our company or any of our subsidiaries outside of China is a PRC resident enterprise for enterprise income tax purposes, we may be subject
to PRC enterprise income on our worldwide income at the rate of 25%, which could materially reduce our net income. In addition, we will also be subject
to PRC enterprise income tax reporting obligations. Furthermore, we may be required to withhold a 10% withholding tax from dividends we pay to our
shareholders that are non-resident enterprises, including the holders of the ADSs. In addition, non-resident enterprise shareholders (including the ADS
holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated
as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders
(including the ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of
20% (which, in the case of dividends, may be withheld at source by us), if such gains are deemed to be from PRC sources. These rates may be reduced by
an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your
investment in the ADSs or ordinary shares.
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015, the State Administration of Taxation issued the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by
Non-PRC Resident Enterprises, or SAT Circular 7. SAT Circular 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets
through offshore transfer of a foreign intermediate holding company. In addition, SAT Circular 7 has introduced safe harbors for internal group
restructurings and the purchase and sale of equity through a public securities market. SAT Circular 7 also brings challenges to both foreign transferor and
transferee (or other person who is obligated to pay for the transfer) of taxable assets.
On October 17, 2017, the State Administration of Taxation issued the Circular on Issues of Tax Withholding regarding Non-PRC Resident Enterprise
Income Tax at Source, or SAT Circular 37, which came into effect on December 1, 2017. SAT Circular 37 further clarifies the practice and procedure of the
withholding of non-resident enterprise income tax.
Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is
known as an indirect transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may
report such indirect transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the
overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As
a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay
for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both
the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay
the taxes.
We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as
offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our
company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT
Circular 7 or SAT Circular 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be
requested to assist in the filing under SAT Circular 7 or SAT Circular 37. As a result, we may be required to expend valuable resources to comply with SAT
Circular 7 or SAT Circular 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish
that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and,
as such, you are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in this annual report filed with the SEC, as an auditor of
companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is
subject to the laws in the United States pursuant to which the
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PCAOB conducts regular inspections by the PCAOB to assess its compliance with applicable professional standards. Since our auditors are located in
China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not
currently inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality
control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China
prevents the PCAOB from regularly evaluating our auditors’ audits and its quality control procedures. As a result, investors may be deprived of the benefits
of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit
procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in
our reported financial information and procedures and the quality of our financial statements.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular
China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to
maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed
Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure
requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the NYSE of issuers included on the
SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause the
market price of the ADSs to be adversely affected. It is unclear if this proposed legislation would be enacted. Furthermore, there have been recent media
reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital
markets. If any such deliberations were to materialize, the resulting legislation may have a material and adverse impact on the stock performance of China-
based issuers listed in the United States.
Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public
accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected
by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the
PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed
that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such
papers in China had to be channeled through the CSRC.
In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002
against five Chinese-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S.
securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of certain
China-based companies that are publicly traded in the U.S. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or
permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such
laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four
of the five firms from practicing before the SEC for a period of six months. Four of these China-based accounting firms appealed to the SEC against this
decision and, on February 6, 2015, each of the four China-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and
avoid suspension of their ability to practice before the SEC. The firms’ ability to continue to serve all their respective customers was not affected by the
settlement. The settlement required the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via
the China Securities Regulatory Commission. If the firms did not follow these procedures, the SEC could impose penalties such as suspensions.
Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice
four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict whether the SEC will further challenge
the four China-based accounting firms’ compliance with U.S. laws in connection with U.S. regulatory requests for audit work papers or whether the results
of such a challenge would result in the SEC imposing penalties such as suspensions. In the event that the four China-based accounting firms become
subject to additional legal challenges by the SEC or PCAOB, depending upon the final outcome, listed companies in the United States with major PRC
operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being
determined to not be in compliance with the requirements of the Exchange
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Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty
regarding China-based, U.S.-listed companies, and the market price of our ordinary shares may be adversely affected.
If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to
timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be
determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs
from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the
ADSs in the United States.
Risks Related to the ADSs
The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.
The trading price of the ADSs is likely to be volatile and could fluctuate widely due to multiple factors, some of which are beyond our control. This
may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business
operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading
volume for the ADSs may be highly volatile for factors, including the following:
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variations in our revenues, operating costs and expenses, earnings and cash flow;
our controlling shareholder’s business performance and the trading price of its stock;
announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
announcements of new products and services by us or our competitors;
changes in financial estimates by securities analysts;
detrimental adverse publicity about us, our shareholders, affiliates, directors, officers or employees, our content offerings, our business model,
our services or our industry;
announcements of new regulations, rules or policies relevant for our business;
additions or departures of key personnel;
release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
potential litigation or regulatory investigations.
Any of these factors may result in large and sudden changes in the volume and price at which the ADSs will trade.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability
in the market price of their securities. Any class action suit involving us could divert a significant amount of our management’s attention and other
resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any
such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is
successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and
results of operations.
If securities or industry analysts do not publish favorable research, or if they adversely change their recommendations regarding the ADSs, the market
price for the ADSs and trading volume could decline.
The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or
more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or
fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the
ADSs to decline.
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The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.
Sales of substantial amounts of the ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price
of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. As of March 25, 2020, we had 1,341,335,323
Class A ordinary shares and 2,013,730,615 Class B ordinary shares outstanding. The ADSs representing our Class A ordinary shares sold in our initial
public offering are freely transferable by persons other than our “affiliates” without restriction or further registration under the Securities Act. The
remaining ordinary shares outstanding will be available for sale, upon the expiration of the 180-day lock-up period described elsewhere in this annual
report beginning from June 9, 2019 (if applicable to such holder), subject to volume and other restrictions as applicable under Rules 144 and 701 under the
Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the lock-up period at the discretion of the designated
representatives. To the extent ordinary shares are released before the expiration of the lock-up period and sold into the market, the market price of the
ADSs could decline.
Certain holders of our ordinary shares have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable
180-day lock-up period in connection with our initial public offering. Registration of these shares under the Securities Act would result in ADSs
representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales
of these registered shares in the form of ADSs in the public market could cause the price of the ADSs to decline.
Techniques employed by short sellers may drive down the market price of the ADSs.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying
identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of
the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it
is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and
allegations regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after
selling a security short. These short attacks have, in the past, led to selling of shares in the market. If we were to become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such
allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which
we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.
Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of the ADSs for a return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a
result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for
any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In
addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under
Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may
a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of
directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and
cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition,
contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely
depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at
which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our
ordinary shares and the ADSs.
Our memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage
in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board
of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their
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designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions,
including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the
rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or
prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the
price of the ADSs representing our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares and the ADSs may be
materially and adversely affected.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are
incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and
articles of association, the Companies Law (2020 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders
to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a
large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not
binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as
clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a
less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted
bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action
in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other
than the memorandum and articles of association and any special resolutions passed by such companies, and the registers of mortgages and charges of such
companies) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine
whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our
shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit
proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our
management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the
United States.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and substantially all of our current operations are conducted in China. In addition, most of our current directors
and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to bring an action
against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal
securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you
unable to enforce a judgment against our assets or the assets of our directors and officers. Moreover, our PRC counsel has advised us that the PRC does not
have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgement of courts.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable
outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS
holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the
deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based
on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-
dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme
Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New
York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising
under the deposit agreement. In determining whether to enforce a contractual pre-dispute
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jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this
would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision
before investing in the ADSs.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the
deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury
trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against
us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted
according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable
to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury
trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or
the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the
voting of the Class A ordinary shares underlying the ADSs.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend
general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the Class A
ordinary shares underlying the ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement.
Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder of the Class A ordinary shares underlying the
ADSs. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares
in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with
instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class A
ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. When a
general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the Class A ordinary shares
underlying the ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general
meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our
articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may
close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a
record date may prevent you from withdrawing the Class A ordinary shares underlying the ADSs and becoming the registered holder of such shares prior to
the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting,
upon our instruction, the depositary will notify you of the upcoming vote and to deliver our voting materials to you. We cannot assure you that you will
receive the voting material in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible
for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your
right to direct how the shares underlying the ADSs are voted and you may have no legal remedy if the shares underlying the ADSs are not voted as you
requested.
Under our dual-class share structure with different voting rights, holders of Class B ordinary shares have complete control of the outcome of matters
put to a vote of shareholders, which will limit your ability to influence corporate matters and could discourage others from pursuing any change of
control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial.
We have adopted a dual-class share structure. Our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. In respect of
matters requiring the votes of shareholders, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 15 votes. Each
Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible
into Class B ordinary shares under any circumstances. Upon (i) any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder
thereof to any person or entity which is not an affiliate of such holder, or (ii) a change of beneficial ownership of any Class B ordinary shares as a result of
which any person who is not an affiliate of registered holders of such Class B ordinary shares becomes a beneficial owner of such Class B ordinary
shares, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. There is no limit on the
circumstances where holders of Class B ordinary shares may transfer or otherwise dispose of their Class B ordinary shares. As of March 25, 2020, the
holders of our Class B ordinary shares beneficially own 95.7% of the aggregate voting power of our ordinary shares. As a result of this
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dual-class share structure, the holders of our Class B ordinary shares will have complete control over the outcome of matters put to a vote of shareholders
and have significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all
of our assets, election of directors and other significant corporate actions. The holders of Class B ordinary shares may take actions that are not in the best
interest of us or our other shareholders or holders of the ADSs. It may discourage, delay or prevent a change in control of our company, which could have
the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the
price of the ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential
merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
You may experience dilution of your holdings due to the inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary
will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from
registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may,
but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an
exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or
underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our
rights offerings and may experience dilution of their holdings as a result.
As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance
matters that differ significantly from the New York Stock Exchange corporate governance listing standards. These practices may afford less protection
to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards.
As a company listed on the New York Stock Exchange, we are subject to New York Stock Exchange corporate governance listing standards.
However, New York Stock Exchange rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain
corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate
governance listing standards. We have followed and intend to follow Cayman Islands corporate governance practices in lieu of the corporate governance
requirements of the New York Stock Exchange that listed companies must have: (i) a majority of independent directors; (ii) the establishment of a
nominating/corporate governance committee composed entirely of independent directors; (iii) a compensation committee composed entirely of independent
directors, and (iv) an audit committee composed of at least three members. As a result of our reliance on the “foreign private issuer” exemptions, our
shareholders may be afforded less protection than they otherwise would enjoy under New York Stock Exchange corporate governance listing standards
applicable to U.S. domestic issuers.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain reporting
requirements applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations
in the United States that are applicable to U.S. domestic issuers, including:
•
•
•
•
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the
Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders
who profit from trades made in a short period of time; and
the rules under Regulation FD governing selective disclosure rules of material nonpublic information.
We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our
results on a quarterly basis as press releases, distributed pursuant to the rules of the New York Stock Exchange. Press releases relating to financial results
and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less
extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same
protections or information that would be made available to you were you investing in a U.S. domestic issuer.
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We are a “controlled company” within the meaning of the rules of the New York Stock Exchange and, as a result, can rely on exemptions from certain
corporate governance requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the rules of the New York Stock Exchange since Tencent beneficially owns more than 50% of our
total voting power. For so long as we remain a controlled company under this definition, we are permitted to elect to rely on certain exemptions from
corporate governance rules, including:
•
•
•
an exemption from the rule that a majority of our board of directors must be independent directors;
an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent
directors; and
an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could result in adverse U.S.
federal income tax consequences to U.S. investors in the ADSs or Class A ordinary shares.
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50%
or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the
above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held
its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Cash is a
passive asset for these purposes. Based on the composition of our income and assets and the value of our assets, including goodwill, which is based on the
price of the ADSs, we believe that we were not a PFIC for our 2019 taxable year. However, it is not entirely clear how the contractual arrangements
between our wholly-owned subsidiaries, our VIEs and the shareholders of our VIEs will be treated for purposes of the PFIC rules. Because the treatment of
the contractual arrangements is not entirely clear, because we hold a substantial amount of cash, and because our PFIC status for any taxable year will
depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the
market price of the ADSs, which could be volatile), there can be no assurance that we will not be a PFIC for any taxable year. If we were a PFIC for any
taxable year during which a U.S. taxpayer holds ADSs or Class A ordinary shares, certain adverse U.S. federal income tax consequences could apply to
such U.S. taxpayer. See “Item 10. Additional Information—10.E. Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company Rules.”
ITEM 4.INFORMATION ON THE COMPANY
4.A. History and Development of the Company
Launch of QQ Music, Kugou, Kuwo and WeSing
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QQ Music: In 2003, QQ, the social network operated by Tencent, launched its online music services. In 2005, QQ Music commenced
operations.
Kugou: In 2004, Kugou Music was launched. In February 2006, Guangzhou Kugou Computer Technology Co., Ltd., or Guangzhou Kugou,
was incorporated in China and commenced the operations of Kugou Music. In September 2012, Guangzhou Kugou commenced offering its
live streaming services through Fanxing Live, which was rebranded to Kugou Live in December 2016.
Kuwo: In December 2005, Beijing Kuwo Technology Co., Ltd., or Beijing Kuwo, was incorporated in China and commenced its
operations of Kuwo Music. Beijing Kuwo and its then shareholders subsequently entered into a series of contractual arrangements with
Yeelion Online Network Technology (Beijing) Co., Ltd., or Yeelion Online, through which Yeelion Online acquired effective control over
Beijing Kuwo. In March 2013, Beijing Kuwo launched Kuwo Live to offer live streaming services.
WeSing: In September 2014, WeSing commenced offering its online karaoke services.
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CMC’s Acquisition of Guangzhou Kugou and Beijing Kuwo
In June 2012, China Music Corporation, or CMC, was incorporated in the Cayman Islands. Between December 2013 and April 2014, through a series
of transactions, CMC obtained effective control over, and became the primary beneficiary of, each of Guangzhou Kugou and Beijing Kuwo through which
it operated substantially all of its online music entertainment services in the PRC.
Combination of Tencent’s Online Music Business with CMC
Prior to July 2016, Tencent held an approximately 15.8% equity interests in CMC. In July 2016, Tencent acquired control of CMC through a series of
transactions, pursuant to which Tencent injected substantially all of its online music business in the PRC (which primarily included QQ Music and WeSing)
into CMC in consideration of certain number of shares issued by CMC. Upon the completion of such transactions, Tencent owned an approximately 61.6%
equity interests in CMC, and CMC became a consolidated subsidiary of Tencent. In December 2016, CMC was renamed “Tencent Music Entertainment
Group,” or TME. Ocean Music Hong Kong was renamed “Tencent Music Entertainment Hong Kong Limited,” or TME Hong Kong; and Ocean
Information was renamed “Tencent Music (Beijing) Co., Ltd.,” or Beijing Tencent Music.
Spotify Transactions
In December 2017, (i) we issued 282,830,698 ordinary shares to Spotify AB, a wholly-owned subsidiary of Spotify Technology S.A. (NYSE: SPOT),
or Spotify, and (ii) Spotify, in exchange, issued 8,552,440 ordinary shares (after giving effect to a 40-to-one share split of Spotify’s ordinary shares) to TME
Hong Kong. TME Hong Kong subsequently transferred 50% of Spotify’s ordinary shares that it acquired in the foregoing transactions to a wholly owned
subsidiary of Tencent.
Initial Public Offering
In December 2018, we completed an initial public offering in which we and certain selling shareholders offered and sold an aggregate of 164,000,000
Class A ordinary shares in the form of ADSs. On December 12, 2018, the ADSs began trading on the New York Stock Exchange under the symbol “TME.”
Recent Transactions
In December 2019, through one of our wholly-owned subsidiaries, we proposed to join a consortium led by Tencent to acquire a 10% equity stake in
Universal Music Group, or UMG, from its parent company, Vivendi S.A., at an enterprise value of EUR30 billion. The foregoing transaction is referred to
in this annual report as the UMG Transaction. We proposed to invest up to a 10% equity interest in the consortium. The consortium also has the option to
purchase an additional 10% equity stake in UMG at the same enterprise value as in the UMG Transaction pursuant to the terms of the transaction
documents. The UMG Transaction is subject to regulatory approvals and other customary closing conditions, and is expected to close by the first half of
2020. Prior to the closing of the UMG Transaction, we and UMG also intend to enter into a second agreement that will grant us an option to acquire a
minority equity stake in UMG's Greater China business.
Our corporate headquarters is located at 17/F, Matsunichi Building, Kejizhongyi Road, Midwest District of Hi-tech Park, Nanshan District, Shenzhen,
518057, the People’s Republic of China. Our telephone number at this address is +86-755-8601-3388. Our registered office in the Cayman Islands is
located at the office of Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman KY1-9008, Cayman
Islands.
We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the
Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four
months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the SEC. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling
the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the SEC using its EDGAR system. Such information can also be found on the
Company’s investor relations website at https://ir.tencentmusic.com.
4.B. Business Overview
Our Mission
Our mission is to use technology to elevate the role of music in people’s lives, by enabling them to create, enjoy, share and interact with music.
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Overview
Music is a universal passion. No matter who we are, or where we come from, we all have our favorite songs, albums or artists. We love music because
it can inspire, uplift, motivate and enrich our lives. Music reaches us in deeply personal ways and connects us with each other through engaging, social and
fun experiences.
With over 1.4 billion people, China has a massive audience with a growing demand for music entertainment. Until recently, the music industry in
China was relatively underdeveloped and highly fragmented largely due to deficiencies in copyright protection. Piracy was rampant. People didn’t see the
value of paying for music. Spending on music entertainment in China has been relatively low.
We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for
personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion
copyright protection—because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the
long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.
Our Platform
We are the largest online music entertainment platform in China, operating the top four music mobile apps in terms of mobile MAUs in 2019. Our
platform comprises online music, online karaoke and music-centric live streaming products, supported by our content offerings, technology and data.
Our platform is an all-in-one music entertainment destination that allows users to seamlessly engage with music in many ways, including discovering,
listening, singing, watching, performing and socializing, as illustrated in the diagram below. On our platform, social interactions such as sharing, liking,
commenting, following and virtual gifting, are deeply integrated in our products and highly complementary to the core music experience, thereby
enhancing our user experience, engagement and retention. As a result, we have built our platform into not just a music streaming platform, but a broad
community for music fans to discover, listen, sing, watch, perform and socialize.
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We offer a comprehensive suite of music entertainment products to let users engage interactively with music by discovering, listening, singing,
watching, performing and socializing.
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Our online music services, QQ Music, Kugou Music and Kuwo Music, enable users to discover and listen to music in personalized ways.
We provide a broad range of features for music discovery, including music search and recommendations, music ranking charts, playlists,
official music accounts and digital releases. We also offer comprehensive music-related video content including music videos, live
performances and short videos.
Our online karaoke social community, primarily WeSing, enables users to have fun by singing and interacting with friends, with most
activities taking place between users already connected on Weixin/ WeChat or QQ. Each day, millions of users come to our platform to
share what they have sung and to discover their friends’ performances. They can also sing duets with celebrities or other users, have a
karaoke party in our virtual singing rooms, challenge each other in online sing-offs and request songs for artists or other users to sing live.
WeSing continued to be the largest social networks in China where it allows users to share their singing performances with friends and
discover songs that others have sung through a timeline feature similar to Weixin/WeChat Moments.
Our music-centric live streaming services, primarily Kugou Live and Kuwo Live, provide an interactive online stage for performers and
users to showcase their talent and engage with those who are interested in their performance.
We have worked tirelessly to build a vibrant and fast-growing music platform with the following elements:
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Users. We have a massive user base covering the largest music fan base in China with a full spectrum of user demographics, with 653
million online music mobile MAUs and 232 million social entertainment mobile MAUs in 2019.
Products. We develop and operate a portfolio of products that are engaging, social and fun. Our products allow users to discover and listen
to music, sing and perform, as well as watch music videos and live music performances in a seamless and immersive way. With different
music entertainment services fully integrated into one platform, users don’t just listen to music on our platform—after listening to a song,
they may be inspired to sing that song and share the performance with friends or want to watch a live performance of the same song by a
popular live streaming performer.
Content. We have China’s largest music content library with over 40 million tracks from domestic and international music labels as of
December 31, 2019. We offer music content in recorded and live, audio and video formats of music videos, concerts and music shows, as
well as an increasing range of other formats including short videos, variety shows, original soundtracks for games, films and TV shows,
podcasts and audiobooks. In addition, hundreds of millions of users have shared their singing, short videos, live streaming of music
performances, comments and music-related articles on our platform.
Data and technology. The scale and engagement of our user base generate extensive data which enables us to develop innovative products
that best cater to user preferences by utilizing deep learning and datamining and enhance user experience. We have also developed
technology that can monitor and protect copyrighted music, which empowers our artists and content partners to promote their music and
protect their creative work.
Monetization. We have innovative and multi-faceted monetization models that mainly include subscriptions, sales of digital music, virtual
gifts and premium memberships. They are seamlessly integrated with our products and services in a way that enhances user experience.
Our strong monetization capability supports our long-term investments in content, technology and products. It also allows us to attract
more content creators and transform China’s music entertainment industry. The number of our online music paying users grew from 24.4
million in 2018 to 33.7 million in 2019, with a paying ratio of 5.2% in 2019. The number of our social entertainment paying users grew
from 9.8 million in 2018 to 11.6 million in 2019, with a paying ratio of 5.0% in 2019.
Significant synergies with Tencent. We benefit from unique access to Tencent’s massive user base, representing China’s largest online
social community, with over 1.1 billion MAUs of Weixin and WeChat combined and over 600 million smart device MAUs of QQ in the
fourth quarter of 2019, which facilitates the organic growth of our user base. The integration between Tencent’s social graph and our
platform enables us to deliver a superior user experience and increase user engagement. For example, the music module embedded in the
QQ mobile app allows QQ users to seamlessly access QQ Music. WeSing users can enjoy the recorded performances of their
Weixin/WeChat and QQ friends and interact with them on our platform. We also benefit
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from the opportunities to collaborate with other platforms in Tencent’s content ecosystem. For example, in 2019 we collaborated with
Tencent Games in the production of the original soundtrack for Honor of Kings, one of the most popular online games in China.
We have achieved growth and profitability at scale. From 2017 to 2019, our revenue increased from RMB10,981 million to RMB18,985 million, and
further to RMB25,434 million (US$3,653 million). In 2017, 2018 and 2019, we reported profit for the year of RMB1,319 million, RMB1,832 million and
RMB3,977 million (US$571 million), respectively, and recorded adjusted profit for the year of RMB1,904 million, RMB4,174 million and RMB4,903
million (US$704 million), respectively. See “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results—Non-IFRS Financial
Measure.”
Our Brands and Products
We have four major product brands—QQ Music, Kugou, Kuwo and WeSing—through which we provide online music and music-centric social
entertainment services to address the diverse music entertainment needs of music audiences in China.
Our products provide users with access to a comprehensive suite of service offerings, allowing them to listen, sing, watch and share music in a
number of different ways and in a variety of settings. These services are fully integrated into our platform to give users a comprehensive music
entertainment experience. Users can access these products through both mobile and PC as well as through in-car and smart, in-home entertainment systems.
Social interactions are deeply integrated in our products and highly complementary to the core music experience. Moreover, they help generate a
strong network effect across our platform that enhances our user experience, engagement and retention. As a result, we are able to encourage music
listeners to become singers and performers, and vice versa. As an illustration, a user who listens to a song on QQ Music frequently sings the same song on
WeSing and shares the performance with friends on Weixin/WeChat or QQ, which in turn attracts their friends to download the WeSing app.
The following table summarizes the key attributes of our major product brands.
Brands
QQ Music
Key Attributes
Leading online music services with nationwide popularity that offer a comprehensive music library and a broad range of music-
related video content, with a focus on popular artists and leading mainstream hits for younger music fans in top-tier cities in China,
providing a platform for initial and exclusive releases of digital music to promote interactions between fans and artists and develop a
music fan economy centered around popular artists
Kugou
Pioneer and leader in online music entertainment industry with nationwide popularity and the broadest user base in China,
recognized as a preferred destination for users to discover music content trending on the internet via:
•Kugou Music, leading online music services offering a comprehensive set of entertainment features, with a mass market focus and
strong user penetration in lower-tier cities in addition to top-tier cities
•Kugou Live, a music-centric live streaming platform where users can watch live streaming of music performances, concerts, music
variety shows in an interactive and engaging setting
Kuwo
Comprehensive online music entertainment services with a large user base in Northern China:
•Kuwo Music, online music services with a focus on selected genres and segments, such as DJ mixes and children’s songs, to cater to
users’ diverse tastes
•Kuwo Live, a music-centric live streaming platform where users can watch live streaming of music performances, concerts, music
variety shows in an interactive and engaging setting
WeSing
Largest online karaoke social community by mobile MAUs with nationwide popularity, offering unique social networking features
that enable users to express themselves by sharing their singing performances and interacting with friends, singers and other users
with similar interests in various online social settings
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From a content library perspective, QQ Music, Kugou Music and Kuwo Music are substantially integrated as they share access to all the tracks that we
license from music labels. While QQ Music, Kugou Music and Kuwo Music are focused on different user segments with a low user overlap among
themselves, we have a higher degree of user overlap between our online music services and social entertainment services as a result of the complementary
nature of our products that attracts users from our online music services to our social entertainment services. We also adopt a holistic approach to operating
our online music services and social entertainment services.
Unique Online Music Entertainment Experience
Our music entertainment services span a number of use cases, such as listening at home or in a vehicle, that are complementary to one another in
terms of user experience and engagement. We cater to the varying needs of users through our flagship products. The following are screenshots of each of
our mobile apps.
Online Music Services
We deliver our online music services primarily through QQ Music, Kugou Music and Kuwo Music, each of which has attracted a large and avid user
base.
Users may use basic features on QQ Music, including streaming, without logging in. To purchase subscription plans and enjoy additional features,
such as creating personal playlists, users need to log into QQ Music, which requires a Weixin/Wechat or QQ account. Users may register with and access
our online music services on Kugou Music and Kuwo Music using their mobile phone numbers, or through their Weixin/WeChat or QQ accounts.
We make listening to music simple and fun through discovery and personalization:
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Listening experience.
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Personal homepage. Users have their own personal homepages where they can manage their playlists and access recently
downloaded and/or streamed music content. It also provides various functions, such as following artists, purchasing subscription
packages, tracking activity data and changing app themes.
Experience-enhancing music player. We offer various functions to enhance user experience, such as sound quality optimization,
shuffle play, day/night modes and music caching. We have also developed hundreds of audio settings that fit different songs,
environments, moods and output devices. Our cloud-based services enable users to synchronize their playlists on different devices.
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•
Music discovery. Users can discover music through a comprehensive range of features and services we offer:
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Search. Users can discover content through our powerful search engine. They can search music content across playlists, music charts,
artists and genres. We also offer a song recognition tool which enables users to recognize the songs embedded in short videos within
seconds.
Personalized recommendations. Using our algorithm and multi-dimensional data insights and metadata on our users’ music tastes, we
recommend music to users as part of their search as well as through daily songs, new songs, music radios and users’ favorite songs
based on what they listen to. We have been improving the efficiency in content curation and accuracy of personalized
recommendation by utilizing deep learning and data mining, which has resulted in a substantial increase in average daily streams and
user engagements for both its online music and social entertainment services. Users can also customize their recommendation
sources. As we expand our content library, we continue to improve our knowledge about music and our users’ preferences by refining
our music metadata tagging. This allows us to further enhance our music discovery and recommendation capabilities.
o Music charts. Leveraging our leading position in the industry, we have compiled a variety of music charts across different genres and
languages that are widely recognized by fans, artists and labels.
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Playlists. We offer playlists covering a wide variety of genres, themes, languages and moods. We are also adapting to the preferences
of younger music users by adding genres such as urban, EDM, animation, comic and gaming, as well as Chinese ancient style. Our
playlist offerings include curated playlists created by our music editorial team, machine-generated playlists supported by our AI
capabilities, and user-generated playlists. We also encourage users to create their own playlists to share, thereby further amplifying
their exposure within our online music community.
Official music accounts. Users can subscribe to their favorite official music accounts operated by both established and aspiring
artists, columnists and other music industry key opinion leaders. Through their official music accounts, owners can upload and share
songs, videos, literature, photos and other music-related content.
Original music. We offer a full suite of services to nurture and promote up-and-coming, aspiring artists. We offer “Tencent Musician
Program,” an open platform for artists to upload and manage their soundtracks, with user data analysis and actionable intelligence on
music trends. See “ - Our Content - Our Content Strategies - Cultivating Aspiring Artists” for more information.
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Social experience. Our platform delivers a superior and uniquely social music experience. Users can share their songs or playlists via
Weixin/WeChat or QQ and other major social platforms. While listening to a song, users can interact with others listening to the same song
by posting and exchanging comments. They can also create their own lyrics posters and share them with friends. Additionally, we provide
users with various exciting ways to interact with their favorite artists, particularly in connection with releases of their digital singles and
album. These all enable users to stay connected with their friends through music, to discover music that is trending around them and to
share music with those they care about. This in turn allows us to gain more data insight to improve music discovery and recommendations
on our platform.
Music-centric Social Entertainment Services
We offer users simple and entertaining ways to sing, watch and socialize on our platform, whether it is with a friend, a group of friends, or other users
on our platform. Our music-centric social entertainment services include online karaoke social community and live streaming of music performances.
Online Karaoke Social Community
Karaoke singing is a popular way of enjoying music in China, whether at a weekend party, a family event or a simple social gathering.
This is why we introduced our online karaoke social community in 2014—to make it easier for users to sing and have fun with friends. Our online
karaoke social community is a platform for users who want a simple stage to share their love of music and singing, or a springboard to launch their careers
as the stars of tomorrow.
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We deliver online karaoke services primarily through WeSing, China’s largest online karaoke social community in terms of mobile MAUs in 2019, as
well as the “Sing” functions on Kugou Music and Kuwo Music. We currently offer millions of karaoke songs covering a broad range of genres, and we
continue to review and update our karaoke song library to keep it fresh, current and popular.
We currently require users to register with and access services and functions on WeSing using their Weixin/ WeChat or QQ accounts, as WeSing is
primarily used by users to socialize with their friends on Weixin/WeChat or QQ through music. Such linkage between WeSing and Weixin/WeChat or QQ
has in turn also enriched Tencent’s content ecosystem by providing Weixin/WeChat or QQ users with convenient access to our content. In 2019, we
introduced a WeSing lite app with streamlines functionality designed to attract users in China’s lower tier cities who have phones with lower storage
capacity or slower internet connections, as well as first-time users who may appreciate a simpler interface.
Users can sing along from our vast library of karaoke songs and share their performances, either in audio or video formats, with friends, mostly with
users already connected on Weixin/WeChat or QQ. Karaoke songs recorded by users significantly augment our user-generated music content library.
WeSing has functions and features designed to drive user engagement, social interaction and entertainment, including:
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Singing features. Users can record their karaoke songs in audio and video formats. They can not only sing along, but also sing duets with
celebrities or other users and then make a complete song to share with their friends. Users also receive a system-generated assessment of
their performance which helps them continue improving their singing. In addition, users may edit recordings of karaoke songs with a large
selection of special audio and visual effects, or record songs at offline mini-KTV booths and share their performances online. In January
2019, we launched “Grab the Mic” on WeSing, a new feature that offers a new way of socializing by allowing users to join a singing
competition with friends. In the second half of 2019, we introduced WeSing Live House, a new function based on proprietary technology
that allows users to integrate their offline stage singing experience with online social interactions.
Recitation features. Users can choose different text, such as ancient poetry and famous novels provided by us or text of their choice, and
plentiful supply of background music to complete their recitation work.
Singing timeline. Users can organize and display their singing performances into a timeline, which enables them to shape their music
performance in a personal narrative that is organized chronologically. Users can also choose to add comments and photos to their singing
timelines, and control with whom each piece of content is shared. Once a song is shared on one’s timeline, other users can give comments
and likes, share the song and send virtual gifts to the singer to encourage social interactions.
Virtual karaoke rooms. Users can create virtual karaoke rooms and invite their friends or others to join an online karaoke party anytime
and anywhere. In a singing room, users can sing and interact with each other by voice and text chatting, sending virtual gifts, rating each
other’s performance and holding sing-offs for most likes and gifts.
Online singing groups. Users can discover and join a larger online singing group of people sharing common music interests. Online
singing groups provide users with a great way to create online music communities, meet new like-minded friends, improve their singing
performances and have fun socializing online.
Live performance. Users can stream their singing performance through interactive live streaming sessions where users can interact with
others by chatting, rating each other’s performance and giving virtual gifts.
Value-added services. While users may access our basic karaoke functions free of charge, they can also purchase virtual gifts to send to
their favorite singers and subscribe for premium memberships that come with value-added functions, such as higher soundtrack resolution,
additional app themes and access to vocal singing tutorial programs.
Live Streaming of Music Performances
Live music performances provide a different fan experience than recorded content. They can be extremely exciting, exhilarating and engaging.
Through technology, online live streaming has become a preferred entertainment alternative with huge and rapidly growing market potential to cater to
millions of China’s music fans. This motivated us to provide a forum for performers to express themselves, share their creative work and for fans to enjoy a
completely different, interactive, music entertainment experience.
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We offer live streaming of music performances primarily through the “Live Streaming” tab on Kugou Music, Kuwo Music and WeSing, as well as
through Kugou Live and Kuwo Live. Professional artists and other performers alike can stream their singing and other performance to a vast online
audience, fostering a vibrant online social music entertainment community.
We offer users the option to register with and access our live streaming services using their Weixin/WeChat or QQ accounts. Alternatively, users may
also register with and access our live streaming services using their mobile phone numbers, without Weixin/WeChat or QQ accounts.
Our live streaming content features a broad range of performance categories such as singing, instrument playing and DJ performances by both
professional artists and other performers.
Our live streaming platforms cultivate an engaging and interactive environment for both the live streaming performers and the audience to create,
discover, socialize and have fun together, mainly featuring the following:
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Music-centric content. Most of our live streaming users also use our online music or online karaoke services. Our data analytics and AI
technology enable us to provide recommendations of relevant live streaming content based on what our users are listening to or singing on
our platform. For example, when a live streaming performer on Kugou Live performs a song, a message bubble pops up instantaneously on
Kugou Music notifying users listing to the same song. This allows users to seamlessly access this performer’s live streaming sessions on
Kugou Live.
Social functions. Our social functions make everyone a part of the show. Performers and users interact in various formats, such as voice &
text chatting, video chatting, rating the performer’s performance and sending virtual gifts. We also rank popularity of performers by value
of virtual gifts. This validates and rewards good performances and lets the user base know what others enjoy, driving user engagement and
stickiness. At any time during a live streaming session, users may choose to follow the performer to receive notifications of future
performances.
Sing-offs. Live streaming performers can engage in a variety of real time singing and performance contests against each other to boost
their popularity and rankings. Users can vote for and send virtual gifts to their favorite performers.
Song requests. Users can request to have a favorite song performed in exchange for a virtual gift.
Music events and talent shows. To further diversify our live streaming content offerings, we live stream concerts performed by
professional artists as well as music events, music variety shows and fan meetings on our live streaming platforms to allow our users to
support and interact with their favorite artists through various ways including online audience voting.
New forms of interaction. We bolster social and young attributes on the WeSing by adding new forms of content such as mini live-
streaming reality shows and new features such as universal duet that encourage users to interact.
We encourage our live streaming performers to sing and engage in other music performance on our platform. Our live streaming platform becomes a
large stage for performers to cultivate their fan base and easily access attractive revenue opportunities, enabling them to develop their artist image and
pursue their goals of becoming popular artists.
Live streaming performers include aspiring performers and ordinary people who want to share their music. We also have professional artists perform
on our platform to further diversify our content offering and drive user retention.
We seek to establish and maintain stable, mutually beneficial relationships with live streaming performers. In particular, as part of our content
strategies, we nurture promising live streaming performers and help them grow their fan base and make a living from their performances. We provide them
with performance training and promotion support to increase their exposure. Our platform further provides a unique way for live streaming performers to
interactively engage with their fans and reach a larger potential fan base and to raise their profile in the industry.
For those live streaming performers who become popular, we can assist them to release new singles and albums, enriching our comprehensive music
content offerings and attracting more traffic to both of our music and live streaming services, thus creating a strong network effect that drives user
engagement and stickiness on our platform.
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Live streaming performers are required to enter into a cooperation agreement with us. Some agreements contain provisions that require the performer
to live stream exclusively on our platform, typically with a one-to-three-year term. We have a revenue sharing model in which the performers (and their
talent agency, if applicable) share with us a percentage of the virtual gift sales generated from their live streams. We also own the relevant intellectual
property rights of the live streaming content they create.
In 2019, we effectively broadened our user base through mini-program and a lite version app, and also improved user engagement by adding new
product features, especially social features with high user participation.
Other Music Services
We offer other services to drive user traffic, deepen user engagement and increase monetization. Such services primarily include (i) sales of music-
related merchandise, including Kugou headset, smart speakers, WeSing karaoke microphones and Hi-Fi systems, (ii) services that help smart device and
automobile makers build and operate their branded music services on their devices and vehicles, and (iii) online music event ticketing services.
In order to provide users a consistent and cohesive listening experience, we started to forge Internet of Things (IoT) partnerships with leading
manufacturers of cars, smart speakers and smart watches in 2019, which will provide further channels for user acquisition. In the second quarter of 2019,
we pioneered a product innovation by adding personalized recommendations of short videos to the Kugou Music streaming page, catering to users’ fast-
growing needs to consume music-centric short videos.
Our Content
We are dedicated to building the most comprehensive and up-to-date library covering our users’ favorite music content across both genre and format.
Our Diverse Music Content Library
We offer a diverse range of professional as well as user-generated recorded and live music content across various formats. This content generally
spans five different types:
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Songs. Largest music library in China, with over 40 million tracks as of December 31, 2019:
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Features songs performed by both established and aspiring artists in China and around the world.
Represents a variety of themes such as latest top hits, all internet hits, time favorites and movie soundtracks.
Covers a broad range of music genres, including pop, rock, indie, hip hop, R&B, classical, jazz and electronic music in various
languages including Mandarin, Cantonese, English, Korean and Japanese.
Categorized by listening habits, settings and moods, such as workout, travel, study and work, relaxation and many more.
Adapts to the preferences of younger music users by covering a wide range of genres such as urban, EDM, animation, comic and
gaming, as well as Chinese ancient style.
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Live streaming of music performances. Professional artists along with aspiring and other performers stream music and other performances
in real-time to our online audiences. These live streams allow users to experience and enjoy live music performances and interact with the
performers in a variety of ways. Additionally, we offer live streaming of more professionally organized online concerts and music events
for more established artists.
Recorded video and audio. Various recorded music-oriented video content, such as full-length music videos, short videos, both
professionally generated and user generated, behind-the-scenes footage, artist interviews, music-focused variety shows and music awards
shows, as well as audio books and podcasts covering a diverse set of topics on children, education, history, and humanity, among other
things.
Karaoke songs. Millions of online karaoke songs and the related user comments, which further expand the breadth of our music content
offering, enhancing our user experience and engagement.
Reviews and articles. We supplement our music content offerings through an enormous library of reviews and articles about music, artists
and fans, written or curated by our in-house editorial team. We place links in the articles to the featured music to provide users with even
more choices of content.
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Our Content Strategies
Partnering with Music Labels and Leading Industry Players
Currently, we focus on licensing top hits and premium content from major domestic and international music labels for a broad audience base. All the
tracks that we license from music labels are generally available to users across our online music apps and, to the extent permitted by the terms of our
licensing agreements with the licensors, our social entertainment products, except under certain circumstances where the artists or rights owners require us
to publish their content under specific subscription plans or in a specific format. See “—Content Sourcing Arrangements.”
Given the reach of our platform and our ability to help users discover music, we have become one of the most preferred and effective ways for music
labels and artists to gain exposure to and gauge the popularity of their music with their audience base. Over the years, we have developed long-term
relationships with a broad range of music labels including major domestic and international labels that provide us unique opportunities to collaborate on
new album releases, music events and other initiatives. We also collaborate with established artists and major music labels to promote and release digital
albums for distribution to our massive user base. In September 2019, Jay Chou, one of the most famous singers in Asia, released his new single “Won’t
Cry” exclusively on our platform which broke his personal sales record with more than 12 million karaoke recordings of the song on WeSing within 10 days
after its release. International artists also enjoy and benefit from our promotional capabilities, which allows them to connect with music lovers in China.
For example, the title song of Taylor Swift’s new digital album Lover sold nearly 6 million copies within 24 hours after its release on our platform.
Additionally, we are continually diversifying across content type, genres and format on our platform. We are also seeking to strengthen our alliances
to produce and distribute more high-quality original content, including our partnerships within the Tencent ecosystem to develop original music content for
games, films and TV shows. For example, in 2019 we collaborated with Tencent Games in the production and distribution of the original soundtrack for
Honor of Kings, one of the most popular online games in China. As another example, the digital album of the original soundtracks of The Tamed, an
internet drama series produced by Tencent Video with national popularity, was released on our platform in 2019. Its release broke the sales record of
original soundtracks for domestic films and videos. In March 2020, we signed a five-year strategic partnership with China Literature, the leading copyright
owner of online literature in China, which gives us a global license to produce derivative content in the form of audiobooks of online literary works for
which China Literature has the rights to or the license to adapt, and the rights to sublicense, as well as the ability to distribute existing audiobooks already
in China Literature’s portfolio.
Cultivating Aspiring Artists
We are not just a platform for established artists but also one for discovering and cultivating rising music talent. We provide opportunities for newer
generations of aspiring artists to fulfill their singing ambitions by supporting them in areas such as marketing, promotion, monetization and career training.
We are proud to have helped promote the singing careers of many new music stars who got their start on our platform. We also work closely together with
music labels to identify and cultivate aspiring artists from the large base of content creators on our platform.
We identify aspiring artists through a number of different ways on our platform. On our online karaoke and live streaming platforms, we allow
aspiring artists to create a personalized artist profile, reach the broadest audience in China, access attractive monetization opportunities and produce and
promote their digital albums.
Additionally, we launched the “Tencent Musician Program” in 2017, an online service for selected aspiring artists to upload original music content to
our platform that can be streamed and downloaded. Today, Tencent Musician Program has become a major online music platform for original music in
China. In 2019, users listened to original songs on Tencent Musician Program for nearly one billion times. By January 2020, both the numbers of
musicians participating in and original song produced through Tencent Musician Program more than doubled year-over-year, and the number of streams of
original songs on Tencent Musician Program as a proportion of all streams on our platform also nearly doubled from a year ago. Tencent Musician
Program demonstrates our superior capability in incubating talented musicians and bringing their original works to hundreds of millions of music lovers in
China. For example, we have successfully helped Hai Lun, a grassroot singer, gain nationwide popularity. His original song "Girl by the Bridge" quickly
became viral after release on Tencent Musician Program, achieving over 1.1 billion streams on our platform as of February 2020.
Fostering User Content Creation
To further extend the breadth of our content offerings, we allow users to upload content in the forms of karaoke songs, live streaming performance,
short-and long-form videos and other formats of music-related content. This user-generated music content engages users further and enhances their
experience, both as content creators and as the audience.
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We promote user-generated content in similar manners as with our licensed content. We leverage our data analytics and AI technologies to
recommend content generated by karaoke singers and live streaming performers to our users to help increase their exposure. We further use our proprietary
music audio recognition system to identify qualified user-generated original soundtracks and make them easily accessible on our platform.
In 2019, we added additional video and long-form audio formats to our content offering and continued to launch social media initiatives and
additional lite versions of our apps to attract a broader group of users. We also developed innovative ways for users to enjoy personalization by consistently
improving our music content tagging process and analyzing our platform's data repository to better fulfill users' music tastes and preferences. We believe
that all of these initiatives are strategic, long-term investments that will improve our user experience, attract more customers, and increase monetization
capabilities going forward.
Enhancing our in-house content development capability
We continue to invest substantially in content production to meet user demands for diverse forms of music entertainment ranging from songs and
variety shows to music-centric short videos. We have produced highly popular, trend-setting original music-centric content, which serves as a great
compliment to our licensed content and attracts more users to our platform. For example, we have continued to make progress in expanding our video
content by launching new episodes of Kugou Music Show, our self-produced music-centric variety show which has become a key leverage for us to
cultivate and promote aspiring artists. During the show, well-known celebrities shared their music creations and life inspirations with fans, creating a strong
connection between artists and fans.
We rely on our in-house team to generate creative ideas for original content and collaborate closely with artists, right owners, authors, screenplay
writers, performers, and other partners in the content creation process.
How We Generate Revenue
We generate revenue primarily from online music services and social entertainment services and others.
Online Music Services
Our revenues generated from online music services were RMB3,149 million, RMB5,536 million and RMB7,152 million (US$1,027 million),
accounting for 28.7%, 29.2% and 28.1% of our revenues in 2017, 2018 and 2019, respectively.
Paid Music
Currently, we offer users subscription packages across our QQ Music, Kugou Music and Kuwo Music products to access our licensed music content.
Our basic subscription packages are priced at RMB8 per month for a fixed amount of downloads per month of our music content offerings and access to
certain paid-for-streaming content. Users may also subscribe for our premium memberships at RMB15 or RMB18 per month to access a range of additional
features and privileges including additional personalized app themes, more audio settings that enhance listening experiences, video downloading, unlimited
playlist storage and faster streaming and download speed. We also offer discounts on the subscription packages, as well as certain privileges and benefits
that are only available to paying users, to encourage user spending and paying user conversion and retention on our platform.
In the first quarter of 2019, we launched the pay-for-streaming model where selected songs are made available only for streaming (as opposed to
streaming and downloading) by paying users during the term of the subscription. We believe the adoption of the pay-for-streaming model has since driven
the number of paying users, paying ratio and paying user retention of our online music services. We will continue to gradually increase the percentage of
music content behind the paywall as we nurture users’ willingness to pay for premium music content.
In addition to monthly subscription, we also allow users to stream and/or download singles and albums on a paid on-demand basis. Songs were first
released on our platforms (typically on an exclusive basis) are available for streaming and/or downloading within a given “promotion” period after the
release only by the users who have purchased those songs, and the songs will be made available under the pay-for-streaming model when the promotion
period expires under this model. For example, in September 2019, Jay Chou, one of the most famous singers in Asia, released his new single “Won’t Cry”
exclusively on our platform, breaking his personal sales record.
Content Sublicensing
We sublicense certain of our licensed music content to other online music platforms in accordance with the terms of the relevant master license and
distribution agreements. To preserve more flexibility to respond to market changes, we
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sublicense such music content to other online music platforms at a fixed rate typically for a term of one year, renewable by mutual agreement of both
parties.
Advertising
We offer various advertising services across our platform, which accounted for a small portion of our revenues for the periods presented in this annual
report. Our advertising offerings mainly include full-screen display ads that automatically appear when a user opens our mobile apps and industry standard
banner ads of various sizes and placements on the interfaces of our platform.
Social Entertainment Services and Others
Our revenues generated from social entertainment services and others were RMB7,832 million, RMB13,449 million and RMB18,282 million
(US$2,626 million), accounting for 71.3%, 70.8% and 71.9% of our revenues in 2017, 2018 and 2019, respectively.
Users are attracted to our online karaoke and live streaming platforms primarily by engaging music performances from our online karaoke singers and
live streaming performers. We generate revenues from online karaoke and live streaming services primarily from sales of virtual gifts, including
consumable, time-based and durable virtual items. Consumable virtual items are mainly used as gifts sent to online karaoke singers and live streaming
performers as they perform by the audiences as a way for them to show support and appreciation for the performance. During the live streams, special
visual items, such as diamond rings or cars, will be displayed on the screen when these gifts are sent to the singers or performers. Users may also send
virtual gifts to online karaoke performers if he or she likes the recordings uploaded by the performers. We also offer users the option to purchase virtual
items which provide them with certain privileges or recognized status over a period of time, such as badges displayed for a certain period of time on the
users’ profile pages. While purchasing and using these virtual gifts is not a prerequisite for using the features in our products, it provides a way for users to
participate in online karaoke and live streaming, which drives user engagement and stickiness. We believe we are still at an early stage of monetization with
significant potential for future growth.
In addition to virtual gift sales, we also generate revenue from online karaoke and live streaming services by selling premium memberships. For
online karaoke, they include higher soundtrack resolution and access to video clips of vocal tutorials. For live streaming, these privileges include enhanced
status and visibility when users interact with live streaming performers and other users. In addition, selected live streaming performers can produce and sell
their own digital albums through our platform if they share a portion of their revenues with us. Revenues generated on our platform are shared with our
karaoke singers and live streaming performers or their agents, typically based on a percentage of the revenue generated from the sales of virtual gifts
attributable to their performance.
Moreover, we generate revenues from sales of music-related merchandise, including Kugou headsets, smart speakers, WeSing karaoke microphones
and Hi-Fi systems.
Branding, Marketing and Sales
The focus of our marketing efforts is to further strengthen our brands, including QQ Music, Kugou, Kuwo and WeSing, and to expand our
entertainment ecosystem to connect more users, artists and content providers. We aim to deliver best-in-class entertainment content and services in order to
garner strong word-of-mouth referrals and enhance our brand recognition.
We primarily rely on word-of-mouth referrals and benefit from our strong brands to attract users to our platform. We also engage in diverse marketing
activities both online and offline to enhance brand awareness. Specifically, our marketing campaigns increase platform traffic through search engine
marketing and social media. Moreover, we host or participate in various forms of music-related events and activities to further boost our brand recognition,
such as cooperation with established artists, singing competitions, TV and internet music talent shows, music festivals, campus campaigns, artist tours and
fan events, to enhance our brand recognition.
We continue to implement new technologies, introduce new features and tools, as well as improve user experience in order to encourage users to
access our platform more frequently and for longer periods of time, and ultimately to increase their spending on our platform. We also use direct marketing
tools deployed through our platform interfaces to convert our users into paying users.
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Content Sourcing Arrangements
Content is the foundation of our platform. We license from, and pay royalties to, the following major rights holders to obtain the vast majority of the
music content offered on our platform.
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Music labels and music copyright owners
o We have strong partnerships with a wide range of music labels and other copyright owners. As of December 31, 2019, we licensed
musical recording rights and/or music publishing rights underlying music content on terms ranging from one to three years from
domestic and international music labels, including through master distribution and licensing agreements with leading international
and Chinese music labels.
o We pay for music labels for licensed music content based on a minimum guaranteed licensing fee and revenue-sharing incentive
royalties. Under such fee arrangements, the amounts of minimum guaranteed licensing fees and incentive royalties depend on factors
including the type of content, the popularity of the performers, as well as our relationships with the licensors. Payments under the
licenses are generally made in installments throughout the duration of the licenses.
o We have arrangements with other online music platforms in China to cross-license our respective licensable or sub-licensable rights
in musical works. We believe these arrangements benefit not only particular market players like us, but also the industry at large by
increasing cooperation in copyright protection and allowing users to access more songs across different platforms.
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Individual artists. We also enter into licenses with individual artists or their agencies to bring a broader and more diverse content offering
on our platform. See “ - Our Content - Our Content Strategies - Cultivating Aspiring Artists” for more information about Tencent Musician
Program, an online service designed to nurture aspiring individual artists.
User-generated content. User-generated content from live streaming performers (and their agencies, if applicable) is covered by revenue-
sharing arrangements. We are entitled to the intellectual property rights of the live streaming content they create. In addition, users
uploading user-generated content on our platform typically agree to grant us the associated copyright of such content. For additional details
concerning our copyright protection with respect to user-generated content, see “—Copyright Protection” and “Item 3. Key Information—
3.D. Risk Factors—Risks Related to Our Business and Industry—We allow user-generated content to be uploaded on our platform; if users
have not obtained all necessary copyright licenses in connection with such uploaded content, we may be subject to potential disputes and
liabilities.”
MCSC. We have a framework agreement with the MCSC, a music collective copyright organization in China, for an initial term of two
years which automatically renews for one year upon the expiration of the initial term. The primary purpose of our agreement with the
MCSC is to secure the copyright with respect to musical compositions and lyrics underlying our music content that is not covered by our
licensing agreements with music labels and music copyright owners. Under such agreement, we are granted the right to distribute through
the internet the musical compositions and lyrics managed by the MCSC. The current license fee we pay to the MCSC equals to a specified
minimum guaranteed amount plus a percentage of revenues generated from the licensed music content (net of certain costs). In the event of
any copyright dispute or claims regarding music content covered by our agreement with the MCSC, the MCSC undertakes to negotiate
with, or pay compensation to, such third-party right owners.
Copyright Protection
We are committed to copyright protection and we strive to continue playing a leadership role in improving China’s music copyright environment.
We take various measures to ensure content offered on our platform does not infringe upon copyright of third parties. Once it is licensed, we closely
monitor copyrighted content on our platform for compliance with the scope of the licenses and therefore to attempt to detect and remediate infringement of
third-party copyrights on our platform in a timely manner. We also seek additional contractual protection from the agreements between us and the content
creators or licensors, including the MCSC. For example, we typically require the licensors to represent in the licensing agreement that they have the
legitimate right to license the content and require them to indemnify us for losses arising from any claims of infringement or violation of laws and
regulations. With respect to user-generated content, we also rely on the safe harbor provision for online storage service providers under PRC copyright laws
and regulations, and have adopted measures intended to minimize the likelihood that we may be held liable for copyright infringement as a result of
distributing user-generated content on our platform. Such measures include (i) requiring users to acknowledge and agree that they will not upload or
perform content which may infringe intellectual property rights, (ii) restricting users on our blacklists from uploading content, and (iii) implementing
“notice and take-down” policies to be eligible for the safe harbor exemption for user-generated content.
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We also actively enforce our rights against third-party platforms that infringe upon our content rights, using a combination of human and machine
monitoring to detect unauthorized use of copyrighted content on other online music platforms. More specifically:
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Monitoring. Leveraging our advanced audio fingerprinting technology and massive data base, we are able to continually screen and
identify infringing content displayed on third-party online music entertainment platforms in China.
Enforcement of our rights. When our system identifies an infringing use of our content on a third-party platform, our system
automatically generates an alert email to our legal and copyright protection department, which promptly serves a takedown notice to the
infringing platforms requesting that the infringing content be removed. Following the takedown notice, our legal and copyright protection
department will review the relevant evidence and initiate the removal procedures to ensure timely removal of infringing content, and they
may also file complaints with the National Copyright Administration and content providers or initiate legal proceedings.
Follow-up. Once a takedown notice is served or a legal proceeding initiated, our copyright system starts to track the relevant platforms to
check if the infringing content has been timely removed.
Content Monitoring
We are committed to complying with the applicable laws and regulations regarding the provision of content through the internet. We leverage our
technology to implement procedures to monitor and remove inappropriate or illegal content from our platform. Text, images and videos are screened by our
content monitoring team, aided by systems that periodically filter our platform. For example, our video recognition technology enables us to effectively
monitor live streaming for content violations and copyright protection purposes. We have also developed an effective copyright infringement monitoring
system that is able to detect potential copyright infringement by other music platforms or our users. We have also adopted various public reporting channels
to identify and remove illegal or improper content. Our legal team may also take further actions to hold the content creators accountable for any illegal or
inappropriate content.
We are focused on the monitoring and screening of user-generated content. We require live streaming performers and users to register on a real-name
basis to upload content to our platform and require them to agree not to distribute content in violation of any third-party rights or any applicable laws or
regulations. In particular, we monitor the live streaming sessions and online karaoke performances delivered on our platform using a combination of human
and machine screening.
Due to the massive amount of content displayed on our platform, we may not always be able to promptly identify the content that is illegal, improper
or may otherwise be found objectionable by the PRC government. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and
Industry—The content available on our platform may be found objectionable by the PRC government, which may subject us to penalties and other
regulatory or administrative actions.”
Other Intellectual Property
In addition to copyright in our music content, other intellectual property is also critical to our business. We rely on a combination of patent, copyright,
trademark and trade secret laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our intellectual
property rights. As of December 31, 2019, we have applied for the registration of 2,534 patents, among which 1,120 patents have been registered with the
National Intellectual Property Administration. One of our patents has been recognized with the Nineteenth China Patent Award by the National Intellectual
Property Administration. As of the same date, we have applied for 2,980 trademarks, among which 1,808 had been registered with the Trademark Office of
the National Intellectual Property Administration. We had also registered 351 software copyright with the Copyright Protection Center of the PRC. Our “(cid:0)
(cid:0)” (Kugou) trademark has been recognized as a well-known trademark by the Beijing Higher People’s Court.
Despite our efforts to protect ourselves from infringement or misappropriation of our intellectual property rights, unauthorized parties may attempt to
copy or otherwise obtain and use our intellectual property in violation of our rights. In the event of a successful claim of infringement against us, or our
failure or inability to develop non-infringing intellectual property or license the infringed or similar intellectual property on a timely basis, our business
could be harmed. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry—Assertions by third parties of
infringement or other violation by us of their intellectual property rights could harm our business, operating results and financial condition” and “—Failure
to protect our intellectual property could substantially harm our business, operating results and financial condition.”
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Technology and Data Capabilities
Technology
We focus on continually improving our technology to deliver superior user experience and enhance our operating efficiency. Over the years, we have
been innovating and improving our technologies to help users discover and enjoy content and help artists find their target audience and realize greater
value.
We have a large dataset and we devote substantial resources to analyzing data in order to obtain useful insights into our users’ music entertainment
and social behaviors. We believe our technology will allow us to better understand and respond to user preferences, deliver a superior user experience, and
further differentiate our services from our competitors.
•
•
Search and discovery engines. We provide users with a personalized music entertainment experience by leveraging our powerful music
search and discovery engines. Our advanced algorithms improve the accuracy and relevance of our search results. In addition, we have
developed various user functions including machine-generated playlists and intelligent recommendations of related music content to
deliver a highly personalized music discovery experience. For example, in 2019 we launched Floating Radar, a proprietary technology that
allows users to recognize in seconds the songs playing on their devices. We have been continually improving our efficiency in content
curation and accuracy of personalized recommendation by utilizing deep learning and data mining, which has resulted in a substantial
increase in average daily streams and user engagements for both its online music and social entertainment services.
User-experience enhancements. We offer a variety of sounds effects to enhance our users’ listening experience. Our award-winning
proprietary audio settings, such as QQ Music Super Sound, Kugou Viper Sound and WeSing Super Voice audio settings, not only bring
superior sound quality and best-in-class listening experience to users, but also foster a large, growing online community for them to share
user feedback about our sounds effects. In addition, we provide various special visual effects and camera filters for users recording videos
on our platform. Our proprietary “pairing” algorithm identifies live streaming performers of similar genres or styles inviting them to form a
duet or join a sing-off, which increases user engagement on our platform. Our technology makes our products a part of everyday life, such
as our QQ Music Running Station that recommends music to match a jogger’s running tempo.
User Data Security and Privacy
We believe data security is critical to our business operation because data is the foundation of our competitive advantages. We have internal rules and
policy to govern how we may use and share personal information, as well as protocols, technologies and systems in place to ensure that such information
will not be accessed or disclosed improperly. Users must acknowledge the terms and conditions of the user agreement before using our products, under
which they consent to our collection, use and disclosure of their data in compliance with applicable laws and regulations.
From an internal policy perspective, we limit access to our servers that store our user and internal data on a “need-to-know” basis. We also adopt a
data encryption system intended to ensure the secured storage and transmission of data, and prevent any unauthorized member of the public or third parties
from accessing or using our data in any unauthorized manner. Furthermore, we implement comprehensive data masking of user data for the purpose of
fending off potential hacking or security attacks.
Competition
We face competition for users and their time and attention from other online music providers in China. We also face competition from online offerings
of other forms of content, including long-and short-form videos, karaoke services, live streaming, radio services, literature, and games provided by other
online service providers. We compete to attract, engage and retain users based on a number of factors, such as the diversity of content, product features,
social interaction features, quality of user experience, brand awareness and reputation. Some of our competitors may have greater financial, marketing or
technology resources than we do, which could enable them to respond more quickly to technological innovations or changes in user demands and
preferences, license more attractive content, and devote greater resources towards the development, promotion and sale of products than we can. For a
discussion of risks relating to competition, see “Item 3. Key Information—3.D. Risk Factors—Risk Related to Our Business—We operate in a competitive
industry. If we are unable to compete successfully, we may lose market share to our competitors.”
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Insurance
We do not maintain any liability insurance or property insurance policies covering our equipment and facilities for injuries, death or losses due to fire,
earthquake, flood or any other disaster. Consistent with customary industry practice in China, we do not maintain business interruption insurance, nor do
we maintain key-man life insurance.
Regulation
We are subject to a variety of PRC laws, rules and regulations across a number of aspects of our business. The following is a summary of the principal
PRC laws and regulations relating to our business and operations within the territory of the PRC.
Regulations on Foreign Investment
Foreign Investment Law of the PRC
The Foreign Investment Law of the PRC adopted by the National People’s Congress on March 15, 2019 and its Implementing Regulation adopted by
the State Council on December 12, 2019 became effective on January 1, 2020. Pursuant to the Foreign Investment Law of the PRC, China will grant
national treatment to foreign invested entities, except for those foreign invested entities that operate in industries that fall within “restricted” or “prohibited”
categories as prescribed in the “negative list” to be released or approved by the State Council.
Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version)
The Ministry of Commerce and the National Development and Reform Commission jointly promulgated the Special Administrative Measures for
Entrance of Foreign Investment (Negative List) (2019 Version), or the Negative List requires that foreign investors should refrain from making investment
in any of prohibited sectors specified in the Negative List, and foreign investors are required to obtain the permit for access to other sectors that are listed in
the Negative List but not classified as “prohibited”.
We are a Cayman Islands company and our businesses by nature in China are mainly value-added telecommunication services and online culture
services, which are restricted or prohibited for foreign investors by the Negative List. We conduct business operations that are restricted or prohibited for
foreign investment through our variable interest entities, or VIEs.
Regulations on Value-Added Telecommunication Services and Internet Content Services
Licenses for Value-Added Telecommunications Services
The Telecommunications Regulations of the PRC (2016 Revision), or the Telecom Regulations, promulgated on September 25, 2000 by the State
Council and most recently amended on February 6, 2016, provide a regulatory framework for telecommunications services providers in the PRC. As
required by the Telecom Regulations, a commercial telecommunications service provider in the PRC shall obtain an operating license from the Ministry of
Industry and Information Technology, or the MIIT, or its counterparts at provincial level prior to its commencement of operations.
The Telecom Regulations categorize all telecommunication businesses in the PRC as either basic or value-added. The Catalog of Telecommunications
Business, or the Telecom Catalog, which was issued as an attachment to the Telecom Regulations and most recently updated on June 6, 2019, further
categorizes value-added telecommunication services into two classes: class I value-added telecommunication services and class II value-added
telecommunication services. Information services provided via cable networks, mobile networks, or internet fall within class II value-added
telecommunications services.
Pursuant to the Measures on Telecommunications Business Operating Licenses (2017 Revision), or the Telecom License Measures, promulgated by
the MIIT on March 1, 2009 and last amended on July 3, 2017, any approved telecommunications services provider shall conduct its business in accordance
with the specifications in its license for value-added telecommunications services, or VATS License. The Telecom License Measures further prescribes
types of requisite licenses for VATS Licenses together with qualifications and procedures for obtaining such VATS Licenses.
Pursuant to the Administrative Measures on Internet Information Services (2011 Revision), promulgated on September 25, 2000 and amended on
January 8, 2011 by the State Council, commercial internet information services providers, which means providers of information or services to internet
users with charge, shall obtain a VATS License with the business scope of internet information services, namely the Internet Content Provider License or
the ICP License, from competent government authorities before providing any commercial internet content services within the PRC.
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We engage in business activities that are value-added telecommunications services as defined in the Telecom Regulations and the Telecom Catalog.
To comply with the relevant laws and regulations, each of Guangzhou Kugou and Beijing Kuwo holds a valid ICP License, while Tencent Music Shenzhen
has submitted an application for the ICP License. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry—China’s
internet and music entertainment industries are highly regulated. Our failure to obtain and maintain requisite licenses or permits or to respond to any
changes in government policies, laws or regulations may materially and adversely impact our business, financial condition and results of operation.”
Restrictions on Foreign Direct Investment in Value-Added Telecommunications Services
Foreign direct investment in telecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested
Telecommunications Enterprises (2016 Revision), which was promulgated on December 11, 2001 and amended on September 10, 2008 and February 6,
2016 by the State Council. The regulations require that foreign-invested value-added telecommunications enterprises in China to be established as Sino-
foreign equity joint ventures and, with a few exceptions, the foreign investors may acquire up to 50% of the equity interests in such joint ventures. In
addition, the major foreign investor, as defined therein, is required to demonstrate a good track record and experience in operating value-added
telecommunications businesses. Moreover, foreign investors that meet these requirements must obtain approvals from the MIIT and the Ministry of
Commerce, or their authorized local counterparts, which retain considerable discretion in granting approvals.
On July 13, 2006, the Ministry of Information Industry (currently known as the MIIT), or the MII, released the Circular on Strengthening the
Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, or the MII Circular. The MII Circular prohibits
domestic telecommunications enterprises from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any
form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of telecommunication business in China. Furthermore,
under the MII Circular, the internet domain names and registered trademarks used by a foreign-invested value-added telecommunications services operator
shall be legally owned by that operator (or its shareholders). If a license holder fails to comply with the requirements in the MII Circular and cure such non-
compliance, the MII or its local counterparts have the discretion to take measures against such license holders, including revoking their VATS Licenses.
Regulations on Transmitting Audio-Visual Programs through the Internet
On December 20, 2007, the MII and the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT, jointly issued the
Administrative Provisions on the Internet Audio-Video Program Service, or the Audio-Video Program Provisions, which came into effect on January 31,
2008 and was amended on August 28, 2015. The Audio-Video Program Provisions defines “internet audio-video program services” as producing, editing
and integrating audio-video programs, supplying audio-video programs to the public via the internet, and providing audio-video programs uploading and
transmission services to a third party. Entities providing internet audio-video programs services must obtain an Audio and Video Service Permission, or
AVSP. Applicants for the AVSP shall be state-owned or state-controlled entities unless an AVSP has been obtained prior to the effectiveness of the Audio-
Video Program Provisions in accordance with the then-in-effect laws and regulations. In addition, foreign-invested enterprises are not allowed to engage in
the above-mentioned services. According to the Audio-Video Program Provisions and other relevant laws and regulations, audio-video programs provided
by the entities supplying internet audio-video program services shall not contain any illegal content or other content prohibited by the laws and regulations,
such as any content against the basic principles in the PRC Constitution, any content that jeopardizes the sovereignty of the country or national security,
and any content that disturbs social order or undermine social stability. A full copy of any audio-video program that has already been broadcasted shall be
retained for at least 60 days. Movies, television programs and other media contents used as internet audio-video programs shall comply with applicable
administrative regulations on programs transmitting through radio, movie and television channels. Entities providing services related to internet audio-
video programs shall immediately remove the audio-video programs violating laws and regulations, keep relevant records, report to relevant authorities,
and implement other regulatory requirements.
The Categories of the Internet Audio-Video Program Services, or the Audio-Video Program Categories, promulgated by SAPPRFT on March 10,
2017, classifies internet audio-video programs into four categories:(I) Category I internet audio-video program service, which is carried out with a form of
radio station or television station; (II) Category II internet audio-video program service, including (a) re-broadcasting service of current political news
audio-video programs; (b) hosting, interviewing, reporting, and commenting service of arts, entertainment, technology, finance and economics, sports,
education, and other specialized audio-video programs; (c) producing (interviewing not included) and broadcasting service of arts, entertainment,
technology, finance and economics, sports, education, and other specialized audio-video programs; (d) producing and broadcasting service of internet
films/dramas; (e) aggregating and broadcasting service of films, television dramas and cartoons; (f) aggregating and broadcasting service of arts,
entertainment, technology, finance and economics, sports, education and other specialized audio-video programs; and (g) live audio-video broadcasting
service of cultural
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activities of common social organizations, sport events or other organization activities; and (III) Category III internet audio-video program service,
including (a) aggregating service of online audio-video content, and (b) re-broadcasting service of the audio-video programs uploaded by internet users;
and (IV) Category IV internet audio-video program service, including (a) re-broadcasting of the radio or television program channels; and (b) re-
broadcasting of internet audio-video program channels.
On May 27, 2016, the SAPPRFT issued the Circular on Relevant Issues Concerning Implementing the Approval Granting for Mobile Internet Audio-
Video Program Services, or the Mobile Audio-Video Program Circular. The Mobile Audio-Video Program Circular provides that the mobile internet audio-
video program services shall be deemed a type of internet audio-video program services. Entities approved to provide mobile internet audio-video program
services may use mobile WAP websites or mobile applications to provide audio-video program services, but the types of the programs operated by such
entities shall be within the permitted scope as provided in their AVSPs and the said mobile applications shall be filed with the SAPPRFT.
On November 4, 2016, the Cyberspace Administration of China issued the Administrative Regulations on Online Live Streaming Services, or the
Online Live Streaming Regulations, which came into effect on December 1, 2016. According to the Online Live Streaming Regulations, when providing
internet news information services, both online live streaming service providers and online live streaming publishers must obtain the relevant licenses for
providing internet news information service and may only carry out internet news information services within the scope of their AVSPs. All online live
streaming service providers (whether or not providing internet news information) must take certain actions to operate their services, including establishing
platforms for monitoring live streaming content.
On November 18, 2019, the Cyberspace Administration of China, the Ministry of Culture and Tourism and the National Radio and Television
Administration jointly issued the Administrative Provisions on Internet Audio-Video Information Services, or the Internet Audio-Video Information
Services Provisions, which became effective on January 1, 2020. The Internet Audio-Video Information Services Provisions defines the “Internet audio-
video information services” as providing audio and video information production, uploading and transmission to the public via Internet platforms such as
websites and applications. Entities providing Internet audio-video information services must obtain relevant licenses subject to applicable PRC laws and
regulations and are required to authenticate users’ identities based on their organizational codes, PRC ID numbers, or mobile phone numbers etc.
Each of Guangzhou Kugou and Beijing Kuwo holds a valid AVSP. As their AVSPs do not include the scope of providing mobile internet audio-video
program services, Guangzhou Kugou has submitted an application and Beijing Kuwo plans to update their respective AVSPs to address this issue. Tencent
Music Shenzhen may be required to obtain an AVSP. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry—
China’s internet and music entertainment industries are highly regulated. Our failure to obtain and maintain requisite licenses or permits or to respond to
any changes in government policies, laws, or regulations may materially and adversely impact our business, financial condition, and results of operation.”
Regulations on Production and Operation of Radio and Television Programs
On July 19, 2004, the SAPPRFT promulgated the Regulations on the Administration of Production and Operation of Radio and Television Programs,
or the Radio and TV Programs Regulations, which came into effect on August 20, 2004 and was amended on August 28, 2015. Pursuant to the Radio and
TV Programs Regulations, entities engaging in the production of radio and television programs must obtain a License for Production and Operation of
Radio and TV Programs from the SAPPRFT or its counterparts at the provincial level. Holders of such licenses must conduct their business operations
strictly in compliance within the approved scope as provided in the licenses.
Each of Guangzhou Kugou and Beijing Kuwo holds a valid License for Production and Operation of Radio and TV Programs as required by the
Radio and TV Programs Regulations.
Regulations on Online Publication
Publishing activities in China are mainly supervised and regulated by the SAPPRFT. On February 4, 2016, the SAPPRFT and the MIIT jointly
promulgated the Regulations on the Administration of Online Publishing Services, or the Online Publishing Regulations, which came into effect on March
10, 2016. The Online Publishing Regulations define “online publications” as digital works that are edited, produced, or processed to be published and
provided to the public through the internet, including (a) original digital works, such as pictures, maps, games and comics; (b) digital works with content
that is consistent with the type of content that, prior to being released online, typically was published in offline media such as books, newspapers,
periodicals, audiovisual products and electronic publications; (c) digital works in the form of online databases compiled by selecting, arranging and
compiling other types of digital works; and (d) other types of digital works identified by the SAPPRFT. In addition, foreign-invested enterprises are not
allowed to engage in the foregoing services. Under the Online Publishing Regulations, internet operators distributing online publications via internet are
required to obtain an Online Publishing Service Permit from the SAPPRFT.
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Each of Guangzhou Kugou, Beijing Kuwo and Tencent Music Shenzhen plans to apply for the Online Publishing Service Permit.
Regulations on Internet Culture Activities
Pursuant to the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, promulgated by the Ministry of Culture on
February 17, 2011 and amended on December 15, 2017, internet culture activities include: (i) production, reproduction, import, release or broadcasting of
internet culture products (such as online music, online game, online performance and cultural products by certain technical means and copied to the internet
for spreading); (ii) distribution or publication of cultural products on internet; and (iii) exhibitions, competitions and other similar activities concerning
internet culture products. The Internet Culture Provisions further classifies internet cultural activities into commercial internet cultural activities and non-
commercial internet cultural activities. Entities engaging in commercial internet cultural activities must apply to the relevant authorities for an Online
Culture Operating Permit, while non-commercial cultural entities are only required to report to related culture administration authorities within 60 days of
the establishment of such entity. If any entity engages in commercial internet culture activities without approval, the cultural administration authorities or
other relevant government may order such entity to cease to operate internet culture activities as well as levying penalties including administrative warning
and fines up to RMB30,000. In addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services except online music.
Currently, each of Guangzhou Kugou, Beijing Kuwo, Tencent Music Shenzhen and Shenzhen Ultimate Music holds a valid Online Culture Operating
Permit.
Regulations on Virtual Currency
On January 25, 2007, the Ministry of Public Security, the Ministry of Culture, the MIIT and the GAPP jointly issued a circular regarding online
gambling which has implications on the issuance and use of virtual currency. To curtail online games that involve online gambling while addressing
concerns that virtual currency might be used for money laundering or illicit trade, the circular (a) prohibits online game operators from charging
commissions in the form of virtual currency in connection with winning or losing of games; (b) requires online game operators to impose limits on use of
virtual currency in guessing and betting games; (c) bans the conversion of virtual currency into real currency or property; and (d) prohibits services that
enable game players to transfer virtual currency to other players. To comply with the relevant section of the circular that bans the conversion of virtual
currency into real currency or property, in relation to online music and entertainment, our virtual currency currently can only be used by users to exchange
into virtual items to be used to show support for performers or gain access to privileges and special features in the channels which are services in nature
instead of “real currency or property.” Once the virtual currency is exchanged by users for virtual items or the relevant privileged services, the conversion
transaction is completed and we immediately cancel the virtual item in our internal system.
In February 2007, fourteen PRC regulatory authorities jointly issued a circular to further strengthen the oversight of internet cafes and online games.
In accordance with the circular, the People’s Bank of China has the authority to regulate virtual currency, including: (a) setting limits on the aggregate
amount of virtual currency that can be issued by online game operators and the amount of virtual currency that can be purchased by an individual; (b)
stipulating that virtual currency issued by online game operators can only be used for purchasing virtual products and services within the online games and
not for purchasing tangible or physical products; (c) requiring that the price for redemption of virtual currency shall not exceed the respective original
purchase price; and (d) banning the trading of virtual currency.
On June 4, 2009, the Ministry of Culture and the Ministry of Commerce jointly issued the Circular on Strengthening the Administration of Online
Game Virtual Currency, or the Virtual Currency Circular. The Virtual Currency Circular requires businesses that (a) issue online game virtual currency (in
the form of prepaid cards or pre-payment or prepaid card points), or (b) offer online game virtual currency trading services, to apply for approval from the
Ministry of Culture through its provincial branches. Businesses that issue virtual currency for online games are prohibited from offering services of trading
virtual currency, or vice versa. Any company that fails to file the necessary application for approval of the Ministry of Culture will be subject to sanctions,
including but not limited to mandatory corrective actions and fines.
Under the Virtual Currency Circular, online games virtual currency trading service provider refers to business that provides platform services related
to trading virtual game of online games among game users. The Virtual Currency Circular further requires an online game virtual currency trading service
provider to comply with relevant e-commerce regulations issued by the Ministry of Commerce. According to the Guiding Opinions on Online Trading
(Interim) issued by the Ministry of Commerce on March 6, 2007, online platform services are trading services provided to online buyers and sellers through
a computer information system operated by the service provider. The Virtual Currency Circular regulates, among others, the amount of virtual currency a
business can issue, the retention period of user records, the function of virtual currency and the return of unused virtual currency upon the termination of
online services. Online game operators are prohibited from distributing virtual items or virtual currencies to players through random selection methods such
as lottery, betting or lottery, and the player directly pays cash or virtual currency. Game operators are prohibited from issuing virtual currency to game
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players in any way other than legal tender purchases. Any business that provides online game virtual currency trading services is required to adopt technical
measures to restrict the transfer of online game virtual currency among accounts of different game players. On December 1, 2016, Ministry of Culture
released the Circular on Regulating Online Game Operation and Strengthening Concurrent and Ex-Post Supervision, to be implemented from May 2017,
which restate and introduce a series of regulatory requirements governing the online game operation, including clarifications on online game operation and
operators, virtual items rules, random-event rules, user protection measures, and reiteration of Ministry of Culture’s approval and filing requirements. On
May 14, 2019, the Ministry of Culture and Tourism announced that it would no longer assume the responsibility for overseeing online games industry.
Each of Guangzhou Kugou and Beijing Kuwo holds a valid Online Culture Operating Permit covering the issuance of virtual currency. We issue
different virtual currencies and prepaid tokens to users on our platform for them to purchase various virtual gifts to be used in live streaming or online game
platforms; however, our service does not constitute virtual currency trading services because users may not transfer or trade virtual currency among
themselves.
Regulations on Online Music
On November 20, 2006, the Ministry of Culture issued the Several Opinions of the Ministry of Culture on the Development and Administration of
Online Music, or the Online Music Opinions, which became effective on the same date. The Online Music Opinions provide that, among other things, an
internet music service provider must obtain an Online Culture Operating Permit. On October 23, 2015, the Ministry of Culture promulgated the Circular on
Further Strengthening and Improving the Content Administration of Online Music, effective as of January 1, 2016, which provides that internet culture
operating entities shall report to a nationwide administrative platform the details of its self-monitoring activities on a quarterly basis.
In 2010 and 2011, the Ministry of Culture greatly intensified its regulations on online music products by issuing a series of circulars regarding online
music industry, such as the Circular on Regulating the Market Order of Online Music Products and Renovating Illegal Conducts of Online Music Websites
and the Circular on Investigating Illegal Online Music Websites in 2010. In addition, the Ministry of Culture issued the Circular on Clearing Illegal Online
Music Products, which clarified that entities engaging in any of the following conducts will be subject to relevant penalties or sanctions imposed by the
Ministry of Culture: (i) providing online music products or relevant services without obtaining corresponding qualifications; (ii) importing online music
products that have not been reviewed by the Ministry of Culture; or (iii) providing domestically developed online music products that have not been filed
with the Ministry of Culture.
On July 8, 2015, the National Copyright Administration issued the Circular regarding Ceasing Transmitting Unauthorized Music Products by Online
Music Service Providers, which requires that (i) all unauthorized music products on the platforms of online music services providers shall be removed prior
to July 31, 2015, and (ii) the National Copyright Administration investigate and punish the online music services providers who continue to transmit
unauthorized music products following July 31, 2015.
Regulations on Commercial Performances
The Administrative Regulations on Commercial Performances (2016 Revision) was promulgated by the State Council and put into effect on February
6, 2016. According to these regulations, to legally engage in commercial performances, a culture and arts performance group shall have full-time
performers and equipment in line with its performing business, and file an application with the culture administrative department of the people’s
government at the county level for approval. To legally engage in commercial performances, a performance brokerage agency shall have three or more full-
time performance brokers and funds for the relevant business, and file an application with the culture administrative department of the people’s government
of a province, autonomous region or municipality directly under central government. The culture administrative department shall make a decision within 20
days from the receipt of the application whether to approve the application, and upon approval, will issue a performance permit. Anyone or any entity
engaging in commercial performance activities without approval may be imposed a penalty, in addition to being ordered to cease its actions. Such penalty
may include confiscation of his or its performance equipment and illegal proceeds, and a fine of 8 to 10 times of the illegal proceeds. Where there are no
illegal proceeds or the illegal proceeds are less than RMB10,000, a fine of RMB50,000 to RMB100,000 will be imposed. Currently, each of Guangzhou
Kugou and Beijing Kuwo holds a valid Commercial Performance License.
Regulations on Online Advertising Services
On April 24, 2015, the Standing Committee of the National People’s Congress enacted the revised Advertising Law of the PRC, or the Advertising
Law, effective on September 1, 2015 which was further amended on October 26, 2018. The Advertising Law increases the potential legal liability of
advertising services providers and strengthens regulations of false advertising. The Advertising Law sets forth certain content requirements for
advertisements including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content
involving obscenities, superstition, violence, discrimination or infringement of the public interest.
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On July 4, 2016, the State Administration for Industry and Commerce (currently known as the State Administration for Market Regulations) issued
the Interim Measures on the Administration of Online Advertising, or the SAIC Interim Measures, which came into effect on September 1, 2016. The
Advertising Law and the SAIC Interim Measures require that online advertisements may not affect users’ normal use of internet and internet pop-up ads
must display a “close” sign prominently and ensure one-key closing of the pop-up windows. The SAIC Interim Measures provide that all online
advertisements must be marked “advertisement” so that consumers can distinguish them from non-advertisement information. Moreover, the SAIC Interim
Measures require that, among other things, sponsored search advertisements shall be prominently distinguished from normal research results and it is
forbidden to send advertisements or advertisement links by email without the recipient’s permission or induce internet users to click on an advertisement in
a deceptive manner.
Regulations on Internet Security
On December 28, 2000, the Standing Committee of the National People’s Congress enacted the Decision on the Protection of Internet Security, as
amended on August 27, 2009, which provides that the following activities conducted through the internet are subject to criminal liabilities: (a) gaining
improper entry into any of the computer information networks relating to state affairs, national defensive affairs, or cutting-edge science and technology;
(b) spreading rumor, slander or other harmful information via the internet for the purpose of inciting subversion of the state political power; (c) stealing or
divulging state secrets, intelligence or military secrets via internet; (d) spreading false or inappropriate commercial information; or (e) infringing on the
intellectual property. The Ministry of Public Security issued the Administrative Measures on Security Protection for International Connections to Computer
Information Networks on December 16, 1997 and amended it on January 8, 2011, which prohibits using internet to leak state secrets or to spread socially
destabilizing content.
On December 13, 2005, the Ministry of Public Security issued the Provisions on the Technical Measures for the Protection of the Security of the
internet, which requires that internet services providers shall have the function of backing up the records for at least 60 days. Also, internet services
providers shall (a) set up technical measures to record and keep the information as registered by users; (b) record and keep the corresponding relation
between the internet web addresses and internet web addresses as applied by users; (c) record and follow up the net operation and have the functions of
security auditing.
On January 21, 2010, the MIIT promulgated the Administrative Measures for Communications Network Security Protection, which requires that all
communication network operators including telecommunications services providers and internet domain name service providers divide their own
communication networks into units. The unit category shall be classified in accordance with degree of damage to national security, economic operation,
social order and public interest. In addition, the communication network operators must file the division and ratings of their communication network with
MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or
impose a fine up to RMB30,000 in case such violation is not duly rectified.
Regulations on Privacy Protection
On December 29, 2011, the MIIT promulgated the Several Provisions on Regulation of Order of Internet Information Service Market, which prohibit
internet information service providers from collecting personal information of any user without prior consent. Internet information service providers shall
explicitly inform the users of the means of collecting and processing personal information, the scope of contents, and purposes. In addition, internet
information service providers shall properly keep the personal information of users, if the preserved personal information of users is divulged or may
possibly be divulged, internet information service providers shall immediately take remedial measures and report any material leak to the
telecommunications regulatory authority.
On December 28, 2012, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National
People’s Congress emphasizes the need to protect electronic information that contains individual identification information and other private data. The
decision requires internet service providers to establish and publish policies regarding the collection and use of electronic personal information and to take
necessary measures to ensure the security of the information and to prevent leakage, damage or loss.
In July 2013, the MIIT promulgated the Regulations on Protection of Personal Information of Telecommunications and Internet Users, or the
Regulations on Network Information Protection, effective on September 1, 2013, to enhance and enforce legal protection over user information security
and privacy on the internet. The Regulations on Network Information Protection require internet operators to take various measures to ensure the privacy
and confidentiality of users’ information.
Pursuant to the Ninth Amendment to the Criminal Law of the PRC issued by the Standing Committee of the National People’s Congress on August
29, 2015, effective on November 1, 2015, any internet service provider that fails to fulfill the
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obligations related to internet information security as required by applicable laws and refuses to take corrective measures, will be subject to criminal
liability for (i) any large-scale dissemination of illegal information; (ii) any severe effect due to the leakage of users’ personal information; (iii) any serious
loss of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (a) sells or provides personal information to others
unlawfully or (b) steals or illegally obtains any personal information will be subject to criminal liability in severe situations.
On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the Cybersecurity Law of the PRC, or the
Cybersecurity Law, which came into effect on June 1, 2017. Pursuant to the Cybersecurity Law, network operators shall follow their cybersecurity
obligations according to the requirements of the classified protection system for cybersecurity, including: (a) formulating internal security management
systems and operating instructions, determining the persons responsible for cybersecurity, and implementing the responsibility for cybersecurity protection;
(b) taking technological measures to prevent computer viruses, network attacks, network intrusions and other actions endangering cybersecurity; (c) taking
technological measures to monitor and record the network operation status and cybersecurity incidents; (d) taking measures such as data classification, and
back-up and encryption of important data; and (e) other obligations stipulated by laws and administrative regulations. In addition, network operators shall
follow the principles of legitimacy to collect and use personal information and disclose their rules of data collection and use, clearly express the purposes,
means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered.
On January 23, 2019, the Office of the Central Cyberspace Affairs Commission and other three authorities jointly issued the Circular on the Special
Campaign of Correcting Unlawful Collection and Usage of Personal Information via Apps. Pursuant to this 2019 circular, (i) app operators are prohibited
from collecting any personal information irrelevant to the services provided by such operator; (ii) information collection and usage policy should be
presented in a simple and clear way, and such policy should be consented by the users voluntarily; (iii) authorization from users should not be obtained by
coercing users with default or bundling clauses or making consent a condition of a service. App operators violating such rules can be ordered by authorities
to correct its incompliance within a given period of time, be reported in public; or even quit its operation or cancel its business license or operational
permits. Furthermore, the Provisions on the Cyber Protection of Children’s Personal Information issued by the Office of the Central Cyberspace Affairs
Commission came into effect on October 1, 2019, which requires, among others, that network operators who collect, store, use, transfer and disclose
personal information of children under the age of 14 shall establish special rules and user agreements for the protection of children’s personal information,
inform the children’s guardians in a noticeable and clear manner, and shall obtain the consent of the children’s guardians. Furthermore, the authorities
issuing the circular has pledged to initiate a campaign to correct unlawful collection and usage of personal information via apps from January 2019 through
December 2019.
Regulations on Infringement upon Intellectual Property Rights via Internet
The Tort Liability Law of the PRC, which was adopted by the Standing Committee of the National People’s Congress on December 26, 2009 and
became effective on July 1, 2010, provides that (i) an online service provider should be held liable for its own tortious acts in providing online services; (ii)
where an online user conducts tortious acts by utilizing online services provided by the online service provider, the infringed party has the right to request
such online service provider to take necessary measures, including deleting, blocking and disconnecting the access to the infringing content promptly. If the
online service provider fails to take necessary measures in a timely manner upon receipt of notice of such infringement, such online service provider will be
held jointly liable with the relevant online users for the additional damages that should not have been incurred if the online service provider took proper
actions; and (iii) where the online service provider is aware that online users are infringing upon the civil right or interest of a third party and fail to take
necessary measures, the online service provider should be jointly liable for such infringement with the online users.
Regulations on Intellectual Property Rights
Copyright
China has enacted various laws and regulations relating to the protection of copyright. China is also a signatory to some major international
conventions on protection of copyright and became a member of the Berne Convention for the Protection of Literary and Artistic Works, the Universal
Copyright Convention in October 1992, and the Agreement on Trade-Related Aspects of Intellectual Property Rights upon its accession to the World Trade
Organization in December 2001.
The Copyright Law of the PRC, adopted in 1990 and revised in 2001 and 2010, or the Copyright Law, and its implementing regulations adopted in
2002 and amended in 2011 and 2013, provide that Chinese citizens, legal persons, or other organizations will, whether published or not, enjoy copyright in
their works, which include music works. Copyright will generally be conferred upon the authors, or in case of works made for hire, upon the employer of
the author. Copyright holders enjoy personal and economic rights. The personal rights of a copyright holder include rights to publish works, right to
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be named as the author of works, right to amend the works and right to keep the works intact; while economic rights of a copyright holder include, but not
limited to, reproduction right, distribution right, performance right, information network dissemination right, etc. In addition, the rights of performers with
respect to their performance, rights of publishers with respect to their design of publications, rights of producers with respect to their video or audio
productions, and rights of broadcasting or TV stations with respect to their broadcasting or TV programs are classified as copyright-related interest and
protected by the Copyright Law. For a piece of music works, it may involve the copyright of lyricist and of composers, which are collectively referred to as
the “music publishing rights” elsewhere in this annual report, and the copyright-related interests of recording producers and of performers, which can be
collectively referred to as the “musical recording rights” elsewhere in this annual report.
The copyright holders may license others to exercise, or assign all or part of their economic rights attaching to their works. The license can be made
on an exclusive or non-exclusive basis. With a few exceptions, an exclusive license or an assignment of copyright should be evidenced in a written
contract.
Pursuant to the Copyright Law and its implementing regulations, copyright infringers are subject to various civil liabilities, such as stopping
infringing activities, issuing apologies to the copyright owners and compensating the copyright owners for damages resulting from such infringement. The
damages should be calculated based on actual loss or income made by an infringer.
The Provisional Measures on Voluntary Registration of Works, promulgated by the National Copyright Administration on December 31, 1994 and
effective on January 1, 1995, provides for a voluntary registration system as administered by the National Copyright Administration and its local
counterparts.
The Computer Software Copyright Registration Measures, or the Software Copyright Measures, promulgated by the State Council on February 20,
2002, regulates registrations of software copyright, exclusive licensing contracts for software copyright and assignment agreements. The National
Copyright Administration administers software copyright registration, and the Copyright Protection Center of China is designated as the software
registration authority. The Copyright Protection Center of China shall grant registration certificates to the Computer Software Copyright applicants which
meet the requirements of both the Software Copyright Measures and the Computer Software Protection Regulations (2013 Revision).
The Measures for Administrative Protection of Copyright Related to Internet, which were jointly promulgated by the National Copyright
Administration and the MIIT on April 29, 2005 and became effective on May 30, 2005, provide that upon receipt of an infringement notice from a
legitimate copyright holder, an internet content service provider must take remedial actions immediately by removing or disabling access to the infringing
content. If an internet content service provider knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of
infringement that harms public interest, the internet content service provider could be subject to administrative penalties, including an order to cease
infringing activities, confiscation by the authorities of all income derived from the infringement activities, or payment of fines.
On May 18, 2006, the State Council promulgated the Regulations on the Protection of the Right to Network Dissemination of Information, as
amended in 2013. Under these regulations, an owner of the network dissemination rights with respect to written works or audio or video recordings who
believes that information storage, search or link services provided by an internet service provider infringe his or her rights may require that the internet
service provider delete, or disconnect the links to, such works or recordings.
National Copyright Administration
The Copyright Law provides that holders of copyright or copyright-related rights may authorize a collective copyright management organization to
exercise their copyright or copyright-related rights. Upon authorization, the collective copyright administration organization is entitled to exercise the
copyright or copyright-related rights in its own name for the holders of copyright or copyright-related rights, and participate as a party in court or
arbitration proceedings concerning the copyright or copyright-related rights. On December 7, 2013, the State Council promulgated the Regulations on
Collective Administration of Copyright, or the Collective Administration Regulations (2013 Revision). The Collective Administration Regulations clarified
that the collective copyright management organization is allowed to (i) enter into license agreement with users of copyright or copyright-related rights, (ii)
charge royalty from users, (iii) pay royalty to holders of copyright or copyright-related rights, and (iv) participate in court or arbitration proceedings
concerning the copyright or copyright-related rights. Pursuant to the Collective Administration Regulations, performance right, filming right, broadcasting
right, rental right, information network dissemination right, reproduction right and other rights stipulated by the Copyright Law which are hard to be
exercised effectively by the right holders may be collectively administrated by a collective copyright administration organization. Foreigners and stateless
persons may, through an overseas collective copyright management organization having a mutual representation contract with the collective copyright
management organization in China, authorize the
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collective copyright management organization in China to manage copyright or copyright-related rights in China. The aforesaid mutual representation
contract means a contract under which the collective copyright management organization in China and its overseas peers authorize each other to conduct
collective copyright administration within their respective home countries or regions. In 1992, the National Copyright Administration and Chinese
Musicians Association jointly established the Music Copyright Society of China.
The Collective Administration Regulations also prescribes that unauthorized establishments of collective administrations or branches and
unauthorized collective copyrights administration activities shall be banned by the copyrights administration department or the civil administration
department of the State Council in accordance with their respective scope of functions and relevant illegal gains shall be confiscated, meanwhile if it
constitutes a crime, criminal responsibility shall be investigated according to law.
Trademark
According to the Trademark Law of the PRC, adopted in 1982 and latest amended in 2019, as well as the Implementation Regulation of the
Trademark Law of the PRC adopted by the State Council in 2002 and subsequently amended in 2014, registered trademarks are granted a term of ten years
which may be renewed for consecutive ten-year periods upon request by the trademark owner. Trademark license agreements must be filed with the
Trademark Office for record. Conducts that shall constitute an infringement of the exclusive right to use a registered trademark include but not limited to:
using a trademark that is identical with or similar to a registered trademark on the same or similar goods without the permission of the trademark registrant,
selling goods that violate the exclusive right to use a registered trademark, etc. Pursuant to the Trademark Law of the PRC, in the event of any of the
foregoing acts, the infringing party will be ordered to stop the infringement immediately and may be fined; the counterfeit goods will be confiscated. The
infringing party may also be held liable for the right holder’s damages, which will be equal to gains obtained by the infringing party or the losses suffered
by the right holder as a result of the infringement, including reasonable expenses incurred by the right holder for stopping the infringement.
Patent
In China, the Patent Administrative Department of the State Council is responsible for administering patents, uniformly receiving, examining and
approving patent applications. In 1984, the National People’s Congress adopted the Patent Law of the PRC, which was subsequently amended in 1992,
2000 and 2008. In addition, the State Council promulgated the Implementing Rules of the Patent Law in 2001, as amended in 2002 and 2010 respectively,
pursuant to which a patentable invention and utility model must meet three conditions: novelty, inventiveness and practical applicability, and designs must
be obviously different from current designs or combinations thereof. Patents cannot be granted for scientific discoveries, rules and methods for intellectual
activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation. A patent is valid
for a term of twenty years with respect to an invention and a term of ten years with respect to a utility model or design, starting from the application date.
Except under certain circumstances specifically provided by law, any third party user must obtain consent or a proper license from the patent owner to use
the patent, or else the use will constitute an infringement of the rights of the patent holder.
Domain Names
In China, the administration of PRC internet domain names are mainly regulated by the MIIT, under supervision of the China Internet Network
Information Center, or CNNIC. On August 24, 2017, the MIIT promulgated the Measures on Administration of Internet Domain Names, which became
effective as of November 1, 2017 and replaced the Measures on Administration of Domain Names for the Chinese Internet issued by the MIIT on
November 5, 2004, which adopt “first to file” rule to allocate domain names to applicants, and provide that the MIIT shall supervise the domain names
services nationwide and publicize PRC’s domain name system. On May 28, 2012, the CNNIC issued a circular to authorize a domain name dispute
resolution institution acknowledged by the CNNIC to decide relevant disputes. On January 1, 2018, the Circular of the Ministry of Industry and
Information Technology on Regulating the Use of Domain Names in Providing Internet-based Information Services issued by the MIIT became effective,
which stipulated that an internet access service provider shall, pursuant to requirements stated in the Anti-Terrorism Law of the PRC and the Cybersecurity
Law of the PRC, verify the identities of internet-based information service providers, and the internet access service providers shall not provide access
services for those who fail to provide their real identity information.
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Regulations on Taxation
Enterprise Income Tax
On March 16, 2007, the Standing Committee of the National People’s Congress promulgated the Enterprise Income Tax Law of the PRC which were
amended on February 24, 2017 and December 29, 2018; and on December 6, 2007, the State Council enacted the Implementation Regulations for the
Enterprise Income Tax Law of the PRC, or collectively, the PRC EIT Law. Under the PRC EIT Law, both resident enterprises and non-resident enterprises
are subject to tax in the PRC. Resident enterprises are defined as enterprises that are established in China in accordance with PRC laws, or that are
established in accordance with the laws of foreign countries but are actually or in effect controlled from within the PRC. Non-resident enterprises are
defined as enterprises that are organized under the laws of foreign countries and whose actual management is conducted outside the PRC, but have
established institutions or premises in the PRC, or have no such established institutions or premises but have income generated from inside the PRC. Under
the PRC EIT Law and relevant implementing regulations, a uniform enterprise income tax rate of 25% is applied. However, if non-resident enterprises have
not formed permanent establishments or premises in the PRC, or if they have formed permanent establishment or premises in the PRC but there is no actual
relationship between the relevant income derived in the PRC and the established institutions or premises set up by them, enterprise income tax is set at the
rate of 10% with respect to their income sourced from inside the PRC.
Pursuant to the PRC EIT Law, the EIT tax rate of a high and new technology enterprise, or HNTE, is 15%. According to the Administrative Measures
for the Recognition of HNTEs, effective on January 1, 2008 and amended on January 29, 2016, for each entity accredited as HNTE, its HNTE status is
valid for three years if it meets the qualifications for HNTE on a continuing basis during such period. Each of Guangzhou Kugou, Beijing Kuwo and
Guangzhou Fanxing Entertainment Information Technology Co., Ltd. has been recognized as a HNTE. Pursuant to the PRC EIT Law, an entity qualified as
software enterprise or SE is entitled to an exemption from income taxation for the first two years, counting from the first year the entity makes profit, and a
reduction of half EIT tax rate for the next three years. Each of Yeelion Online and Tencent Music Entertainment Technology (Shenzhen) Co., Ltd. has been
assessed and qualified as a SE.
Tencent Music Entertainment Technology (Shenzhen) Co., Ltd., or TME Tech Shenzhen, was established in Qianhai, Bonded Zone of Shenzhen in
2017 and was entitled to a preferential tax rate of 15% as it met the requirements set out by local tax authorities, and accordingly income tax for TME Tech
Shenzhen was provided and paid at the preferential tax rate of 15% for the year ended December 31, 2017. However, TME Tech Shenzhen was further
assessed and approved by the relevant government authorities as a SE in 2018 and entitled to the relevant tax holiday which became applicable since the
year ended December 31, 2017. Refund for the income tax paid for 2017 was received and recognized in 2018. After the tax holiday, TME Tech Shenzhen
was entitled to a reduced tax rate of 12.5% for the year ended December 31, 2019.
In addition, for the years ended December 31, 2018 and 2019, certain subsidiaries of the Group were established in a special economic development
zone and entitled to a tax concession of exemption from CIT for five years, commencing from the first profitable year. Furthermore, the Group also has
certain subsidiaries subject to other preferential tax treatment for certain reduced tax rates of 5% to 10%.
Value-added Tax
The Provisional Regulations on Value-added Tax of the PRC were promulgated by the State Council on December 13, 1993 and came into effect on
January 1, 1994 which were subsequently amended on November 10, 2008 and came into effect on January 1, 2009, and were further amended on February
6, 2016 and November 19, 2017. The Detailed Rules for the Implementation of Provisional Regulations on Value-added Tax of the PRC were promulgated
by the Ministry of Finance on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively, VAT Law. On
November 19, 2017, the State Council promulgated the Order on Abolishing the Provisional Regulations of the PRC on Business Tax and Amending the
Provisional Regulations on Value-added Tax of the PRC, or Order 691. According to the VAT Law and Order 691, all enterprises and individuals engaged
in the sale of goods, the provision of processing, repair and replacement services, sales of services, intangible assets, real property and the importation of
goods within the territory of the PRC are the taxpayers of VAT. The VAT rates generally applicable are simplified as 17%, 11% and 6%, and the VAT rate
applicable to the small-scale taxpayers is 3%.
On April 4, 2018, the Ministry of Finance and the State Administration of Taxation jointly issued a circular to cut down the VAT rate for sale of goods
from 17% to 16%. On March 20, 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs further
adjusted the tax rate for sale of goods from 16% to 13%, effective from April 1, 2019.
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As of the date of this annual report, our PRC subsidiaries and consolidated affiliated entities are generally subject to VAT rates of 3%, 6% or 13%
(which was 16% prior to April 1, 2019).
Dividend Withholding Tax
The PRC EIT Law provides that since January 1, 2008, an enterprise income tax rate of 10% will normally be applicable to dividends declared to
non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but
the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within
the PRC.
Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement and other applicable PRC
laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under
such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives
from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend
Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009 by the State Administration of Taxation, or the SAT, if the relevant PRC tax
authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-
driven, such PRC tax authorities may adjust the preferential tax treatment. According to the Circular on Several Issues regarding the “Beneficial Owner” in
Tax Treaties, which was issued on February 3, 2018 by the SAT, effective as of April 1, 2018, when determining the applicant’s status of the “beneficial
owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether
the applicant is obligated to pay more than 50% of its income in twelve months to residents in third country or region, whether the business operated by the
applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax
exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual
circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall
submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident
Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
Tax on Indirect Transfer
On February 3, 2015, the SAT issued the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident
Enterprises, or SAT Circular 7. Pursuant to SAT Circular 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-
PRC resident enterprises, may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable
commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax. When determining whether there is a “reasonable commercial purpose” of the transaction
arrangement, features to be taken into consideration include, inter alia, whether the main value of the equity interest of the relevant offshore enterprise
derives directly or indirectly from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consist of direct or indirect investment
in China or if its income is mainly derived from China; and whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable
assets have real commercial nature which is evidenced by their actual function and risk exposure. According to SAT Circular 7, where the payor fails to
withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of
applicable tax will subject the transferor to default interest. SAT Circular 7 does not apply to transactions of sale of shares by investors through a public
stock exchange where such shares were acquired on a public stock exchange. On October 17, 2017, the SAT issued the Circular on Issues of Tax
Withholding regarding Non-PRC Resident Enterprise Income Tax, or SAT Circular 37, which further elaborates the relevant implemental rules regarding
the calculation, reporting and payment obligations of the withholding tax by the non-resident enterprises. Nonetheless, there remain uncertainties as to the
interpretation and application of SAT Circular 7. SAT Circular 7 may be determined by the tax authorities to be applicable to our offshore transactions or
sale of our shares or those of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved.
Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents
General Rules
The core regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations of the PRC, promulgated
by the State Council in 1996 and most recently amended in August 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations,
payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign
currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, the conversion of Renminbi into other
currencies and remittance of the converted foreign currency outside the PRC to pay capital expenses such as the repayment of foreign currency-
denominated loans or foreign currency is to be remitted into China under the capital account or foreign
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currency such as a capital increase or foreign currency loans to our PRC subsidiaries, prior approval from or registration with appropriate government
authorities is required.
Pursuant to the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, or SAFE
Circular 59 promulgated by SAFE on November 19, 2012, which became effective on December 17, 2012, and were further amended on May 4, 2015 and
October 10, 2018, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange
capital accounts and guarantee accounts, the reinvestment of Renminbi proceeds by foreign investors in the PRC, and remittance of foreign exchange
profits and dividends by a foreign invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple
capital accounts for the same entity may be opened in different provinces, which was not possible previously.
In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable
to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. SAFE Circular 13 cancels the administrative approval requirements of
foreign exchange registration of foreign direct investment and overseas direct investment, and simplifies the procedure of foreign exchange-related
registration, and foreign exchange registrations of foreign direct investment and overseas direct investment will be handled by the banks designated by the
foreign exchange authority instead of SAFE and its branches.
The Circular on the Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19
which was issued by SAFE on March 30, 2015 and effective from June 1, 2015, allows foreign-invested enterprises, within the scope of business, to settle
their foreign exchange capital on a discretionary basis according to the actual needs of their business operation and provides the procedures for foreign-
invested enterprises to use Renminbi converted from foreign currency-denominated capital for equity investment.
In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness
and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from
domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit
distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous
years’ losses before remitting the profits. Further, according to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital
and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an
outbound investment.
Offshore Investment
The Circular of SAFE on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip
Investment by Domestic Residents via Special Purpose Vehicles, or SAFE Circular 37, which became effective on July 4, 2014, regulates foreign exchange
matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round
trip investment in China. Under the Circular 37, an SPV refers to offshore enterprises directly established or indirectly controlled by PRC residents for the
purpose of seeking offshore equity financing or making offshore investment, using legitimate domestic or offshore assets or interests, while “round trip
investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain
the ownership, control rights and management rights. SAFE Circular 37 requires that, before making contribution into an SPV, PRC residents or entities are
required to register with the local SAFE branch.
Pursuant to SAFE Circular 13, PRC residents or entities can register with qualified banks instead of SAFE or its local branch in connection with their
establishment of an SPV.
An amendment to registration or subsequent filing with qualified banks by such PRC resident is also required if there is a material change with
respect to the capital of the offshore company, such as any change of basic information (including change of such PRC residents, change of name and
operation term of the SPV), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. Failure to comply with
the registration procedures set forth in SAFE Circular 37 and SAFE Circular 13, misrepresent on or failure to disclose controllers of foreign-invested
enterprise that is established through round-trip investment, may result in bans on the foreign exchange activities of the relevant onshore company,
including the payment of dividends and other distributions to its offshore parent or affiliates, and may also subject relevant PRC residents to penalties under
the Foreign Exchange Administration Regulations of the PRC.
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Employee Stock Incentive Plan
SAFE issued the Circular of SAFE on Issues Concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in
Equity Incentive Plans of Overseas Listed Companies, or SAFE Circular 7 in 2012. Pursuant to SAFE Circular 7, employees, directors, supervisors, and
other senior officers who participate in any equity incentive plan of publicly-listed overseas companies and who are PRC citizens or non-PRC citizens
residing in China for a consecutive period of no less than one year, subject to a few exceptions, are required to register with SAFE or its local branches
through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed companies, and complete other procedures with respect to the
equity incentive plan. In addition, the PRC agent is required to amend SAFE registration with respect to the equity incentive plan if there is any material
change to the equity incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of these individuals who have the right to
exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with these
individuals’ exercise of the employee share options. Such individuals’ foreign exchange income received from the sale of stocks and dividends distributed
by the overseas listed company and any other income shall be fully remitted into a collective foreign currency account in China opened and managed by the
PRC subsidiaries of the overseas listed company or the PRC agent before distribution to such individuals.
We and our executive officers and other employees who are PRC citizens or non-PRC citizens residing in China for a consecutive period of not less
than one year and have been granted awards are subject to these regulations. Failure of our PRC option holders or restricted shareholders to complete their
SAFE registrations may subject us and these employees to fines and other legal sanctions.
In addition, the State Administration of Taxation has issued certain notices concerning employee share options and restricted shares. Under these
notices, employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC
subsidiaries are required to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual
income taxes of employees who exercise their share options or purchase restricted shares. If the employees fail to pay or the PRC subsidiaries fail to
withhold their income taxes in accordance with relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or
other PRC governmental authorities.
Loans by Foreign Companies to their PRC Subsidiaries
Loans made by foreign investors as shareholders in foreign invested enterprises established in China are considered to be foreign debts and are mainly
regulated by the Regulation of the People’s Republic of China on Foreign Exchange Administration, the Interim Provisions on the Management of Foreign
Debts, the Statistical Monitoring of Foreign Debts Tentative Provisions, the Detailed Rules for the Implementation of Provisional Regulations on Statistics
and Supervision of External Debt, and the Administrative Measures for Registration of Foreign Debts. Pursuant to these regulations and rules, a
shareholder loan in the form of foreign debt made to a PRC entity does not require the prior approval of SAFE, but such foreign debt must be registered
with and recorded by SAFE or its local branches within 15 business days after such foreign debt contract has been entered into. Under these regulations and
rules, the balance of the foreign debts of a foreign invested enterprise shall not exceed the difference between the total investment and the registered capital
of the foreign invested enterprise, or Total Investment and Registered Capital Balance.
The Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or
PBOC Notice No. 9, issued by the PBOC on January 12, 2017, provides that within a transition period of one year from January 12, 2017, the foreign
invested enterprises may adopt the currently valid foreign debt management mechanism, or Current Foreign Debt Mechanism, or the mechanism as
provided in PBOC Notice No. 9, or Notice No. 9 Foreign Debt Mechanism, at their own discretion. PBOC Notice No. 9 provides that enterprises may
conduct independent cross-border financing in RMB or foreign currencies as required. According to the PBOC Notice No.9, the outstanding cross-border
financing of an enterprise (the outstanding balance drawn, here and below) shall be calculated using a risk-weighted approach, or Risk-Weighted Approach,
and shall not exceed the specified upper limit, namely: risk-weighted outstanding cross-border financing ≤ the upper limit of risk-weighted outstanding
cross-border financing. The upper limit of risk-weighted outstanding cross-border financing of an enterprise = its net assets × the leverage rate of cross-
border financing × the macro-prudential adjustment parameter, among which the leverage rate of cross-border financing of an enterprise shall be 2 and the
macro-prudential adjustment parameter shall be 1. Furthermore, the macro-prudential adjustment parameter has been increased to 1.25 pursuant to the
Notice of the People’s Bank of China and SAFE on Adjusting the Macro-Prudential Adjustment Parameter for Full-Covered Cross-Border Financing, or
the PBOC Notice No. 64, issued by the PBOC and SAFE on March 11, 2020. Therefore, as of the date hereof, the upper limit of risk-weighted outstanding
cross-border financing of a PRC enterprise is 250% of its net assets, or Net Asset Limits. Enterprises shall file with SAFE in its capital item information
system after entering into a cross-border financing agreement, but no later than three business days before making a withdrawal.
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In addition to the foregoing, pursuant to SAFE Circular 28, our PRC subsidiaries established in the pilot regions, which refers to Guangdong-Hong
Kong-Macao Greater Bay Area and Hainan province, are not required to register each of their foreign debts with SAFE or its local branches but to
complete foreign debts registration with SAFE or its local branches in the amount of 250% of the net asset of the relevant PRC subsidiary. Upon such
registrations, our relevant PRC subsidiaries will be allowed to procure foreign loan within the registered amount and complete the formalities for inward
and outward remittance of funds, purchase and settlement of foreign currency directly with a bank, and are required to make declaration of international
balance of payments pursuant to applicable regulations. However, since it is relatively new, uncertainties still exist in relation to its interpretation and
implementation.
Based on the foregoing, if we provide funding to our wholly foreign owned subsidiaries through shareholder loans, the balance of such loans shall not
exceed the Total Investment and Registered Capital Balance and we will need to register such loans with SAFE or its local branches in the event that the
Current Foreign Debt Mechanism applies, or the balance of such loans shall be subject to the Risk-Weighted Approach and the Net Asset Limits and we
will need to file the loans with SAFE in its information system in the event that the Notice No. 9 Mechanism applies. Under the PBOC Notice No. 9, after a
transition period of one year from January 11, 2017, the PBOC and SAFE will determine the cross-border financing administration mechanism for the
foreign-invested enterprises after evaluating the overall implementation of PBOC Notice No. 9. As of the date hereof, neither the PBOC nor SAFE has
promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by the
PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. Despite neither the Foreign
Investment Law nor its Implementing Regulation prescribes whether the certain concept “total investment amount” with respect to foreign-invested
enterprises will still be applicable, no PRC laws and regulations have been officially promulgated to abolish the Current Foreign Debt Mechanism.
Regulations on Employment and Social Welfare
Employment
The Labor Law of the PRC which was promulgated by the Standing Committee of the National People’s Congress on July 5, 1994, effective since
January 1, 1995, and were further amended on August 27, 2009 and December 29, 2018, the Labor Contract Law of the PRC which was promulgated by
the Standing Committee of the National People’s Congress on June 29, 2007 and amended on December 28, 2012, and the Implementing Regulations of
the Labor Contract Law of the PRC which was promulgated by the State Council on September 18, 2008, are the principal regulations that govern
employment and labor matters in the PRC. Under the above regulations, labor relationships between employers and employees must be executed in written
form, and wages shall not be lower than local standards on minimum wages and shall be paid to employees timely. In addition, employers must establish a
system for labor safety and sanitation, strictly abide by state standards and provide relevant training to its employees. Employers are also prohibited from
forcing employees to work above certain time limit and employers shall pay employees for overtime work in accordance to national regulations.
Social Insurance and Housing Fund
According to the Social Insurance Law of the PRC promulgated by the National People’s Congress of the PRC on October 28, 2010, effective since
July 1, 2011 and amended on December 29, 2018, together with other relevant laws and regulations, the PRC establishes a social insurance system
including basic pension insurance, basic medical insurance, occupational injury insurance, unemployment insurance and maternity insurance. Any
employer shall register with the local social insurance agency within 30 days after its establishment and shall register for the employee with the local social
insurance agency within 30 days after the date of hiring. An employer shall declare and make social insurance contributions in full and on time. The
occupational injury insurance and maternity insurance shall only be paid by employers while the contributions of basic pension insurance, medical
insurance and unemployment insurance shall be paid by both employers and employees.
According to the Regulation on the Administration of Housing Fund promulgated by the State Council on April 3, 1999 and amended on March 24,
2002, employers are required to register at the designated administrative centers, open bank accounts for depositing employees’ housing fund and make
housing fund contributions for employees in the PRC. Employer who fails to make housing fund contributions may be ordered to rectify the noncompliance
and pay the required contributions within a stipulated deadline.
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Regulations on Anti-Monopoly
The Anti-Monopoly Law of the PRC promulgated by the Standing Committee of the National People’s Congress, or the Anti-Monopoly Law, which
became effective on August 1, 2008, prohibits undertakings from monopolistic conducts such as:
•
•
•
Entering into monopolistic agreements, which means agreements or concerted practices to eliminate or restrict competition. For example,
agreements for fixing or altering prices of goods, limiting the output or sales volume of goods, fixing the price of goods for resale to third
parties, among others, unless such agreements satisfy the specific exemptions prescribed therein, such as improving technologies or
increasing the efficiency and competitiveness of small and medium-sized undertakings. Sanctions against such violations include an order
to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue in the preceding year, or a fine
up to RMB500,000 if the intended monopolistic agreement has not been performed);
Abuse of dominant market position. For example, selling goods at unfairly high prices or purchasing goods at unfairly low prices, selling
goods at prices below cost or refusing to trade with a trading party without any justifiable cause. Sanctions for such violations include an
order to cease the relevant activities, confiscation of the illegal gains and fines (from 1% to 10% of sales revenue in the preceding year);
and
Concentration of undertakings which has or may have an effect of eliminating or restricting competition. Pursuant to the Anti-Monopoly
Law and the Guiding Opinions of the Anti-monopoly Bureau of the State Administration for Market Regulation on the Declaration of
Concentration of Business Operators (2018 Revision) require that the anti-monopoly agency (i.e., the State Administration for Market
Regulation) shall be notified in advance of any concentration of undertaking if certain filing thresholds (i.e., during the previous fiscal
year, (i) the total global turnover of all operators participating in the transaction exceeded RMB10 billion in the preceding fiscal year and at
least two of these operators each had a turnover of more than RMB400 million within China in the preceding fiscal year, or (ii) the total
turnover within China of all the operators participating in the concentration exceeded RMB2 billion in the preceding fiscal year, and at
least two of these operators each had a turnover of more than RMB400 million within China in the preceding fiscal year) are triggered, and
no concentration shall be implemented until the anti-monopoly enforcement agency clears the anti-monopoly filing.
Pursuant to the Measures for Declaration of Concentration of Business Operators and the Measures for Examination and Approval of Concentration
of Business Operators promulgated by the Ministry of Commerce in November 2009, concentration refers to (i) a merger of undertakings; (ii) acquiring
control over other undertakings by acquiring equities or assets; or (iii) acquisition of control over, or the possibility of exercising decisive influence on, an
undertaking by contract or by any other means.
If business operators fail to comply with the mandatory declaration requirement, the anti-monopoly authority is empowered to terminate and/or
unwind the transaction, dispose of relevant assets, shares or businesses within certain periods and impose fines of up to RMB500,000.
Regulations on M&A and Overseas Listings
In 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or the CSRC, jointly adopted the M&A Rules,
amended in 2009. The M&A Rules purport, among other things, to require an offshore special purpose vehicle controlled by PRC companies or individuals
and formed for overseas listing purposes through acquisitions of PRC domestic interest held by such PRC companies or individuals, to obtain the approval
from the CSRC prior to publicly listing their securities on an overseas stock exchange. In 2006, the CSRC published a notice on its official website
specifying documents and materials required to be submitted to it by the offshore special purpose vehicle seeking CSRC approval of its overseas listing.
While the application of the M&A Rules remains unclear, our PRC counsel, Han Kun Law Offices, has advised us that based on its understanding of
current PRC laws, rules and regulations and the M&A Rules, prior approval from the CSRC is not required under the M&A Rules for the listing and
trading of the ADSs given that (i) our PRC subsidiaries were directly established by us as wholly foreign-owned enterprises and we have not acquired any
equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial
owners after the effective date of the M&A Rules, and (ii) no provision in the M&A Rules clearly classifies the contractual arrangements as a type of
transaction subject to the M&A Rules.
However, our PRC counsel has further advised us that uncertainties still exist as to how the M&A Rules will be interpreted and implemented and its
opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the
M&A Rules. If the CSRC or other PRC regulatory agencies subsequently determine that prior CSRC approval was required, we may face regulatory
actions or other sanctions from the CSRC or other PRC regulatory agencies.
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The M&A Rules also establish procedures and requirements that could make some acquisitions of PRC companies by foreign investors more time-
consuming and complex, including requirements in some instances that the anti-monopoly law enforcement agency be notified in advance of any change-
of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In addition, the Rules on Implementation of Security Review
System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by the Ministry of Commerce in 2011 specify that mergers and
acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may
acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and
prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control
arrangement. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China—The M&A Rules and certain other PRC
regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to
pursue growth through acquisitions in China.”
4.C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report, including our significant subsidiaries and VIEs.
Notes:
(1)
Shareholders of Xizang Qiming are Mr. Dejun Gu, the head of our human resources department and Mr. Qihu Yang, our General Counsel, each holding 50% of its equity
interests.
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(2)
(3)
(4)
(5)
Shareholders of Guangzhou Kugou and their respective shareholdings and relationship with our company are as follows: (i) Linzhi Lichuang Information Technology Co.,
Ltd. (54.87%), an entity controlled by Tencent; (ii) Mr. Guomin Xie (a registered holder of 9.99% equity interests), our former co-president and director; (iii) Mr. Zhongwei
Qiu (9.99%), a nominee shareholder designated by affiliates of PAG Capital Limited, a minority shareholder of our company; (iv) Shenzhen Litong Industry Investment Fund
Co., Ltd. (6.77%), an entity controlled by Tencent; (v) Mr. Zhenyu Xie (6.59%), our President, Chief Technology Officer and director; (vi) Mr. Liang Tang (2.73%), our
director and a nominee shareholder designated by certain controlling affiliates of the CICFH entities, which are minority shareholders of our company; (vii) certain
individuals and entities, including Kashi Tianshan Red Sea Venture Capital Co., Ltd. (2.94%), Mr. Jianming Dong (1.48%), Ms. Huan Hu (1.18%), Ms. Yaping Gao (1.10%),
Hangzhou Yong Xuan Yong Ming Capital Investment Partnership (Limited Partnership) (0.74%) and Mr. Hanjie Xu (0.55%), as nominee shareholders designated by certain
minority shareholders of our company; and (viii) Guangzhou Lekong Investment Partnership (Limited Partnership) (1.08%), an employee equity incentive platform of
Guangzhou Kugou, with Mr. Zhenyu Xie being its general partner. Guangzhou Kugou operates Kugou Music and Kugou Live. Mr. Guomin Xie entered into a share transfer
agreement to transfer all of his equity interests in Guangzhou Kugou to his spouse, Ms. Meiqi Wang. Pursuant to the terms of such agreement, such transfer has become
effective since Guangzhou Kugou obtained pre-clearance by the competent PRC governmental authorities for the renewal of their respective AVSP to reflect the applicable
proposed transfer in August 2019. We plan to submit the application for registration with competent local branch of State Administration for Market Regulation with respect
to such transfer and amend the existing contractual arrangements concerning Guangzhou Kugou concurrently with or immediately after completion of such registration. The
existing contractual arrangements concerning Guangzhou Kugou to which Mr. Guomin Xie is a party will remain effective and binding until such amendment is made. For
more information, see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry—China’s internet and music entertainment industries are
highly regulated. Our failure to obtain and maintain requisite licenses or permits or to respond to any changes in government policies, laws or regulations may materially and
adversely impact our business, financial condition and results of operation.”
Shareholders of Beijing Kuwo and their respective shareholdings and relationship with our company are as follows: (i) Linzhi Lichuang Information Technology Co., Ltd.
(61.64%), an entity controlled by Tencent; (ii) Ms. Meiqi Wang (23.02%), spouse of our former Co-President and director, Mr. Guomin Xie; and (iii) Mr. Lixue Shi (15.34%),
our Group Vice President. Beijing Kuwo operates Kuwo Music and Kuwo Live.
Shareholders of Shenzhen Ultimate Music and their respective shareholdings and relationship with our company are as follows: (i) Tencent Music Shenzhen (96.10%), a
wholly-owned subsidiary of Guangzhou Kugou; and (ii) Mr. Xiudong Ma (1.95%) and Mr. Gang Ding (1.95%), both of whom are employees of our company.
Tencent Music Shenzhen operates QQ Music and WeSing.
Contractual Arrangements with Our VIEs and Their Respective Shareholders
Currently, substantially all of our users and business operations are located in the PRC and we do not have plans for any significant overseas
expansion, as our primary focus is the PRC online music entertainment market, which we believe possesses tremendous growth potential and attractive
monetization opportunities.
Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added
telecommunication services, internet audio-video program services and certain other businesses. The Special Administrative Measures for Entrance of
Foreign Investment (Negative List) (2019 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests
in a value-added telecommunication service provider other than providers of e-commerce, domestic multiparty communication, store-and-forward or call
center service, and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major
foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications
services overseas and maintain a good track record. In addition, foreign investors are prohibited from investing in companies engaged in certain online and
culture related businesses. See “Item 4. Information of the Company—B. Business Overview—Regulation—Regulations on Foreign Investment—Special
Administrative Measures for Entrance of Foreign Investment (Negative List) (2019 Version).” We are a company incorporated in the Cayman Islands. Our
PRC subsidiaries, including Beijing Tencent Music, Yeelion Online and Shenzhen Ultimate Xiangyue, among others, are considered foreign-invested
enterprises. To comply with the foregoing PRC laws and regulations, we primarily conduct our business in China through our VIEs, including Guangzhou
Kugou, Beijing Kuwo, Shenzhen Ultimate Music and Xizang Qiming, among others, and their respective subsidiaries in the PRC, based on a series of
contractual arrangements. As a result of these contractual arrangements, we exert effective control over our VIEs and consolidate their operating results in
our consolidated financial statements under IFRS. These contractual arrangements may not be as effective as direct ownership in providing us with control
over our VIEs. If our VIEs or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be
limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur
substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including
seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For details of these and
other risks associated with our VIE structure, see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure.”
The following is a summary of the contractual arrangements by and among Yeelion Online, Beijing Kuwo and the shareholders of Beijing Kuwo. The
contractual arrangements by and among us (through our wholly-owned PRC subsidiaries) and each of our VIEs as well as their respective shareholders, are
substantially similar to the corresponding contractual arrangements discussed below, unless otherwise indicated. In addition, the spouses of certain
shareholders of VIEs have also signed spousal consents, the key terms of which are summarized below.
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In the opinion of Han Kun Law Offices, our PRC counsel:
•
•
the ownership structures of our VIEs and our wholly-owned PRC subsidiaries as of the date of this annual report do not and will not
contravene any PRC laws or regulations currently in effect; and
the contractual arrangements among our wholly-owned PRC subsidiaries, our VIEs and their respective shareholders governed by PRC
laws as of the date of this annual report are valid and binding upon each party to such arrangements and enforceable against each party
thereto in accordance with their terms and applicable PRC laws and regulations currently in effect.
There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. We have been further
advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our value-added
telecommunication services, online cultural services, internet audio-video program services and certain other businesses and related business do not comply
with PRC government restrictions on foreign investment in such businesses, we could be subject to severe penalties including being prohibited from
continuing operations. For a description of the risks related to these contractual arrangements and our corporate structure, please see “Item 3. Key
Information—3.D. Risk Factors—Risks Related to Our Corporate Structure.”
Equity Interests Pledge Agreement
Pursuant to the equity interests pledge agreement dated October 1, 2019 by and among Yeelion Online, Beijing Kuwo and the shareholders of Beijing
Kuwo, the shareholders of Beijing Kuwo pledged all of their equity interests in Beijing Kuwo to Yeelion Online, to guarantee Beijing Kuwo’s and its
shareholders’ performance of their obligations under, where applicable, the exclusive option agreement, exclusive technical service agreement, voting trust
agreement and loan agreement. If Beijing Kuwo or any of its shareholders breach their contractual obligations under these agreements, Yeelion Online will
be entitled to certain rights, including but not limited to the rights to auction or sell the pledged equity interests. Without the prior written consent of
Yeelion Online, the shareholders of Beijing Kuwo shall not transfer the pledged equity interests, create or permit to be created any new pledge or any other
security interest on the pledged equity interests.
Exclusive Option Agreement
Pursuant to the exclusive option agreement dated October 1, 2019 by and among Yeelion Online, Beijing Kuwo and the shareholders of Beijing
Kuwo, the shareholders of Beijing Kuwo irrevocably granted Yeelion Online or its designated person, an exclusive option to purchase at its discretion, all
or part of the equity interests held by the shareholders of Beijing Kuwo at the price agreed by the parties to the extent permitted by PRC law. Without the
prior written consent of Yeelion Online, the shareholders of Beijing Kuwo shall not transfer or otherwise dispose of, or create any encumbrances or third
party interests upon their equity interests in Beijing Kuwo. In addition, Beijing Kuwo irrevocably granted Yeelion Online or its designated party an
exclusive option to purchase at its discretion, all or part of the assets held or entitled to be used by Beijing Kuwo, to the extent permitted under PRC law.
Exclusive Technical Service Agreement or Business Cooperation Agreement
Pursuant to the exclusive technical service agreement dated July 12, 2016 by and between Yeelion Online and Beijing Kuwo, Yeelion Online or its
designated person has the sole and exclusive right to provide specified business support, technical service and consulting service to Beijing Kuwo. Beijing
Kuwo agrees to accept such services and, without the prior written consent of Yeelion Online, may not accept the same or similar services provided by any
third party during the term of the agreement. Beijing Kuwo agrees to pay to Yeelion Online specified service fees, which represents 90% of the annual net
operating income of Beijing Kuwo together with other service fees charged for other ad hoc services provided, while United Culture Entertainment agrees
to pay to Simo Music (Beijing) Co., Ltd. (“Simo Music”) 100% of its annual net operating income as service fees under the exclusive business cooperation
agreement between United Culture Entertainment and Simo Music.
Under (i) the exclusive technical service agreements between Xizang Qiming, Shenzhen Ultimate Music and our respective applicable subsidiary; and
(ii) the exclusive business cooperation agreement between Niannian Youyu and our applicable subsidiary, there is no specific number or percentage of
service fees that our subsidiary is entitled to charge for the services provided to each such VIE. Instead, the services fee can be agreed by Xizang Qiming,
Shenzhen Ultimate Music, Niannian Youyu and our respective applicable subsidiary by taking into account the complexity of services provided, the time
consumed and seniority of staff involved and other factors.
In addition, under the business cooperation agreement and certain other agreement between Beijing Huateng Xiangfeng Technology Co., Ltd
(“Huateng Xiangfeng”), Shengxiang Hudong Music (Beijing) Co., Ltd (“Shengxiang Hudong”) and
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certain other parties, Huateng Xiangfeng has the right to provide specified business support, technical service and consulting service to Shengxiang
Hudong, and Shengxiang Hudong agrees to pay on a quarterly basis to Huateng Xiangfeng not less than 95% of annual revenue of Shengxiang Hudong
minus relevant costs of Shengxiang Hudong as service fees.
Loan Agreement
Pursuant to the loan agreement dated July 12, 2016 by and among Yeelion Online, Mr. Guomin Xie and Mr. Lixue Shi, Yeelion Online provided loans
to Mr. Xie and Mr. Shi solely for the purpose of acquiring equity interests of Beijing Kuwo. Yeelion Online has the sole discretion to determine the method
of repayment, including requiring Mr. Xie and Mr. Shi to transfer their equity interests in Beijing Kuwo to Yeelion Online or its designated person. There is
no such loan agreement between either Shenzhen Ultimate Xiangyue or Shengxiang Hudong and their respective shareholders.
Debt Assignment and Offset Agreement
Pursuant to the debt assignment and offset agreement dated August 28, 2019 by and among Mr. Guomin Xie, Ms. Meiqi Wang and Yeelion Online,
Mr. Guomin Xie (as the assignor) transferred, and Ms. Meiqi Wang (as the assignee) agreed to undertake, the Assignor’s obligations to repay the loan (and
its interest) under the Loan Agreement. As consideration for the Assignee to undertake the Assignor’s obligations to repay the loan (and its interest) under
the Loan Agreement, the transfer consideration equal to the amount of outstanding loan under the Loan Agreement in the share transfer agreement with
respect to equity interest of Beijing Kuwo between the Assignor and the Assignee shall be regarded as has been paid by the Assignee to the Assignor. There
is no such debt assignment and offset agreement between Shenzhen Ultimate Xiangyue, Shengxiang Hudong, Niannian Youyu Culture Media (Wuhan) Co.,
Ltd. (“Niannian Youyu”), United Culture Entertainment (Shenzhen) Co., Ltd. (“United Culture Entertainment”) and their respective shareholders.
Voting Trust Agreement
Pursuant to the voting trust agreement dated October 1, 2019 by and among Yeelion Online, Beijing Kuwo and the shareholders of Beijing Kuwo, the
shareholders of Beijing Kuwo each irrevocably granted Yeelion Online or any person designated by Yeelion Online as their attorney-in-fact to vote on their
behalf on all matters of Beijing Kuwo by issuing a voting proxy.
Spousal Consents
The spouses of certain individual shareholders of our VIEs have each signed a spousal consent letter. Under the spousal consent letter, the signing
spouse unconditionally and irrevocably approved the execution by his or her spouse of the above-mentioned equity interests pledge agreement, exclusive
option agreement and voting proxy, as applicable, and that his or her spouse may perform, amend or terminate such agreements without his or her consent.
Moreover, the spouse confirmed he or she has no rights, and will not assert in the future any right, over the equity interests in the applicable VIEs held by
his or her spouse. In addition, in the event that the spouse obtains any equity interest in the applicable VIEs held by his or her spouse for any reason, he or
she agrees to be bound by and sign any legal documents substantially similar to the contractual arrangements entered into by his or her spouse, as may be
amended from time to time.
4.D. Property, Plant and Equipment
Our principal executive offices are located in Shenzhen, China. We also have offices in Beijing and Guangzhou, China. These facilities have an
aggregate of approximately 31,468 square meters and currently accommodate our management headquarters, as well as most of our product development,
content acquisition and management, sales and marketing, as well as general and administrative activities. Our main IT infrastructure includes internet data
centers (IDC) and content delivery networks (CDN).
We lease all of the facilities that we currently occupy. We believe that the facilities that we currently lease are adequate to meet our needs for the
foreseeable future.
ITEM 4A.UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual
report. This discussion contains forward-looking statements that involve risks and
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uncertainties. Our actual results and timing of events could differ materially from those anticipated in these forward-looking statements as a result of
various factors, including those set forth under “Item 3.D. Risk Factors” and elsewhere in this annual report. You should note that Tencent’s acquisition of
CMC was completed on July 12, 2016. As a result, the historical results of operations of CMC before July 12, 2016 are not included in our consolidated
financial statements presented in this annual report and our historical financial information for the years ended December 31, 2016, 2017, 2018 and 2019
may not be directly comparable. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry-Our historical financial
information for the years ended December 31, 2016, 2017, 2018 and 2019 may not be directly comparable due to our consolidation of CMC’s financial
results since July 2016, which may make it difficult for you to evaluate our business and prospects.”
5.A.
Operating Results
General Factors Affecting Our Results of Operations
Our business and results of operations are affected by a number of general factors affecting China’s online music entertainment industry, which
include:
•
•
•
•
•
•
•
•
our growth strategies;
our future business development, financial condition and results of operations;
our ability to retain, grow and engage our user base and expand our music entertainment content and experience offering;
expected changes in our revenues, content-related costs and operating margins;
our ability to retain key personnel and attract new talent;
competition in China’s online music entertainment industry;
general economic, political, demographic and business conditions in China and globally; and
the regulatory environment in which we operate.
Unfavorable changes in any of these general conditions could negatively affect demand for our services and materially and adversely affect our results
of operations.
Specific Factors Affecting Our Results of Operations
Our ability to maintain and grow our user base and further increase their engagement level
We generate revenues primarily through the sales of memberships and virtual gifts. Therefore, our ability to generate revenues is affected by the
number of our users and the level of their engagement. Our ability to continue to grow our user base and engagement is driven by various factors, including
our ability to increase the breadth and attractiveness of our content offerings; provide personalized content recommendations; deliver differentiated user
experiences; encourage users to use multiple services across our platform; improve the social interaction features of our platform; and enhance our brand
reputation.
The following table sets forth details of our mobile MAUs for the periods indicated. These figures have not been adjusted to eliminate duplicate
access of different products and services by the same user during any given period.
Online music mobile MAUs
Social entertainment mobile MAUs
For the Year Ended December 31,
2017
2018
(in millions)
2019
606
201
642
226
653
232
We adopt a holistic approach to operating our online music services and social entertainment services to foster synergies between them. We leverage
our strong product functions and content recommendation and technology capabilities to further enhance product integration between these two services.
For example, users can directly access the sing page of a song on our social entertainment apps from the listening page of the song on our online music
apps. We also provide real-time
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recommendations of live streaming content based on what music our users are listening to on our online music apps. With our extensive music content
library and comprehensive suite of services offerings, user engagement on our platform has increased over time.
Certain factors may cause the actual results to be materially different from our expectations. Particularly, we are faced with short-term uncertainties
surrounding our users’ level of engagement due to the recent COVID-19 outbreak. See “Item 3. Key Information—3.D. Risk Factors—If we fail to
anticipate user preferences to provide online music entertainment content catering to user demands, our ability to attract and retain users may be materially
and adversely affected” and “Item 3. Key Information—3.D. Risk Factors—We face risks related to accidents, disasters and public health challenges in
China and globally.”
Our ability to increase paying ratio and strengthen our monetization capability
Our results of operations depend largely on our ability to convert our vast user base into paying users.
The table below sets forth the number of paying users, paying ratio and monthly ARPPU for our online music services and social entertainment
services for the periods indicated. These figures have not been adjusted to eliminate duplicate access of different products and services by the same user
during any given period.
Paying users(1) (in millions)
Online music services
Social entertainment services
Paying ratio (1)
Online music services
Social entertainment services
Monthly ARPPU (1) (RMB)
Online music services (2)
Social entertainment services (3)
Notes:
2017
For the Year Ended December 31,
2018
2019
17.4
7.4
2.9%
3.7%
8.8
88.2
24.4
9.8
3.8%
4.3%
8.5
114.4
33.7
11.6
5.2%
5.0%
8.8
131.3
(1)
(2)
(3)
For the definitions, see “Introduction.”
The revenues used to calculate the monthly ARPPU of online music services include revenues from subscriptions only. The revenues from subscriptions for the periods
indicated were RMB1,841 million, RMB2,499 million and RMB3,563 million, respectively.
The revenues used to calculate the monthly ARPPU of social entertainment services include revenues from social entertainment and others.
Historically, while the number of mobile MAUs, paying users and paying ratio have generally been increasing for both of our online music services
and social entertainment services, the smaller number of mobile MAUs and paying users for our social entertainment services have generated the majority
of our revenues for two reasons. First, users in China historically had a relatively lower willingness to pay for music as compared with more developed
markets, and therefore we, in the past, have mainly focused on providing attractive music content and functionalities for our online music services, with a
view towards cultivating users’ habits and willingness to pay in the long term. Second, as compared with online music services where users typically only
pay once a month for a subscription package, our social entertainment services provide more opportunities for user interactions and thus lead to more paid
consumption scenarios that allow users to pay without any limit (e.g., through purchasing and sending virtual gifts). Nevertheless, we believe that the
integration between the online music services and the social entertainment services allows us to further drive user engagement and paying user conversion
for both services in the future.
Our ability to continue to monetize our user base is affected by a number of factors, such as our ability to enhance user engagement, our ability to
cultivate users’ willingness to pay for online music services and social entertainment services, as well as our ability to integrate more monetization models
including, for example, the pay-for-streaming model introduced in early 2019, into the overall user experience on our platform. See “Item 4. Information on
the Company—4.B. Business Overview - How We Generate Revenue - Online Music Services – Paid Music” for more information of the pay-for-
streaming model. Monetization of our user base is also affected by our ability to optimize our pricing strategy and fee models. We also seek to explore new
monetization opportunities by leveraging our comprehensive content offerings, vast user base and strong relationships with music labels and other content
providers. We expect the number of our paying users to continue to grow. Our ability to monetize may also be affected by macroeconomic factors affecting
China’s economy in general and its online music entertainment industry in particular. For example, the mandatory quarantines and travel restrictions
imposed by the PRC government to contain the spread of COVID-19 has caused a short-term decline in the level of activities of our live streaming
performers and as a result, our ability to generate revenues from sales of virtual gifts, in the first quarter of
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2020. See “Item 3. Key Information—3.D. Risk Factors—We face risks related to accidents, disasters and public health challenges in China and globally.”
Our ability to continue to deliver diverse, attractive and relevant content offerings
We believe that users are attracted to our platform and choose to pay for our services primarily because of the diverse and attractive content we offer.
Accordingly, we have focused our content strategies on offering a wide range of content catering to users’ tastes and preferences, as well as improving our
platform, including our curation and recommendation capabilities.
We currently have the largest library of music content in China across a wide range of content formats, including songs, karaoke songs, live streaming
of music performances, recorded video and audio content, as well as reviews and articles. Our continued success largely depends on our ability to stay
abreast of users’ evolving needs and preferences and dynamics in the entertainment industry. We seek to identify trend-setting and potentially viral content,
which in turn allows us to offer more comprehensive content.
We plan to continue to enrich our content portfolio. For example, in order to further diversify our content offerings and to capture potential
opportunities in niche music markets, we intend to acquire more long-tail content, particularly those that belong to niche genres.
Our ability to enhance returns on our spending on content
Our ability to enhance returns on our spending on content depends on our ability to identify new content and effectively monetize our content while
maintaining our commitment to copyright protection.
Our service costs mainly include content-related cost, which mainly comprise: (i) royalties paid to music labels and other content partners for music
content used to support both our online music services and social entertainment services; and (ii) revenues shared with performers and/or their talent
agencies and other content providers which are primarily associated with our social entertainment services. Service costs have historically accounted for the
majority of our cost of revenues as we have made substantial investments in building and enriching our portfolio of licensed content and attracting
performers to perform on our platform.
Our results of operations and our ability to sustain profitability may also be affected by our obligations to make payments for minimum guarantee and
revenue-sharing royalties to the licensors under our license agreements. See “Item 4. Information on the Company—4.B. Business Overview—Content
Sourcing Arrangements” for more information about the pricing structure of our licensed content. Historically we have been primarily paying minimum
guarantees to our licensors. We expect our minimum guarantee and revenue-sharing royalties to increase in absolute amounts in the near term as we
continue to scale up our operations.
We are committed to protecting music copyright, and our leading role in China’s music copyright protection efforts has made us a partner of choice
for major domestic and international music labels and other content partners. This has helped us maintain long-term collaborative relationships with our
content partners, which, in turn, enables us to source content on favorable terms.
Our cost of revenues is expected to increase in absolute amounts in the near future as we continue to expand our content offerings to cater to the
evolving customer needs. We believe, however, that our collaborative relationships with content partners and our diversified monetization models enable us
to maintain and enhance returns on content spending without compromising our commitment to copyright protection.
Key Components of Results of Operations
Revenues
We derive our revenues from (i) online music services; and (ii) social entertainment services and others.
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The following table sets forth a breakdown of our revenues, in absolute amounts and as percentages of total revenues, for the periods indicated.
Revenues
Online music services
Social entertainment services
and others
Total revenues
2017
2018
RMB
%
RMB
%
RMB
2019
US$
%
(in millions, except for percentages)
For the Year Ended December 31,
3,149
28.7
5,536
29.2
7,152
1,027
28.1
7,832
10,981
71.3
100.0
13,449
18,985
70.8
100.0
18,282
25,434
2,626
3,653
71.9
100.0
Online music services. We generate revenues from our online music services primarily from subscriptions, namely from paid music through sale of
subscription packages for a fixed monthly fee. In 2017, 2018 and 2019, revenue from subscriptions was RMB1,841 million, RMB2,499 million and
RMB3,563 million (US$512 million), respectively. In addition, we also generate revenues from: (i) selling digital music singles and albums to users on our
platform; (ii) sublicensing music content licensed from content providers to other online music platforms and other third parties; (iii) offering display and
performance-based advertising solutions on our platform with pricing arrangements based on various factors, including the form and size of the
advertisements, level of sponsorship and popularity of the content; and (iv) providing various other music-related services, such as providing music
solutions to smart device and automobile manufacturers.
Social entertainment services and others. We generate our social entertainment and other services revenues through live streaming, online karaoke,
sales of music-related merchandise and certain other services. We generate revenues from live streaming and online karaoke services primarily through
sales of virtual gifts. Generally, a portion of the revenues is shared with the content creators, including live streaming performers and their agents, based on
an agreed-upon percentage. We also generate a small portion of the revenues from selling premium memberships to our users.
In addition, we also generate a small portion of revenues through the sales of music-related merchandise, including headsets, smart speakers and other
hardware products. See “Item 4. Information on the Company—4.B. Business Overview—Other Music Services.”
Our chief operating decision maker has determined that we have only one reportable segment.
Cost of revenues
The following table sets forth the components of our cost of revenues, in absolute amounts and as percentages of total cost of revenues, for the
periods indicated.
Cost of revenues
Service costs
Other cost of revenues
Total cost of revenues
2017
2018
RMB
%
RMB
%
RMB
2019
US$
%
(in millions, except for percentages)
For the Year Ended December 31,
6,142
1,029
7,171
85.6
14.4
100.0
10,323
1,385
11,708
88.2
11.8
100.0
14,967
1,794
16,761
2,150
258
2,408
89.3
10.7
100.0
Our cost of revenues primarily includes service costs, which mainly comprise (i) content costs, which primarily consist of royalties paid to music
labels and other content partners and our in-house production costs. Such costs are used to support both our online music services and social entertainment
services; (ii) fees paid to content creators pursuant to revenue sharing arrangements associated with our online social entertainment services, including live
streaming performers, their agencies and other users who perform on our platform; and (iii) content delivery costs relating primarily to server, cloud
services and bandwidth costs paid to telecommunications carriers and other related service providers which are used to support both our online music
services and social entertainment services.
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Other cost of revenues also includes employee benefits expenses, advertising agency fees and others. Employee benefit expenses consist primarily of
the salaries and other benefits paid to our employees supporting the operations of our platform. Advertising agency fees consist primarily of commissions
paid to advertising agencies. Others mainly include fees paid to online payment gateways and costs associated with sales of music-related merchandise.
Our music content is critical to expanding our product offerings, attracting users and driving monetization for our online music services over time.
Music content also drives the growth of our social entertainment services. For example, users may engage in online karaoke singing of a track that they
discover through listening to music via our online music services. As such, we believe music content helps drive user engagement and monetization
opportunities for our social entertainment services.
Based on these factors, we expect that our cost of revenues including, in particular, our service costs, will increase in absolute amount in the
foreseeable future as we continue to acquire and offer attractive content to grow our user base and enhance engagement and returns from our content.
Operating expenses
The following table sets forth a breakdown of our operating expenses, in absolute amounts and as percentages of total operating expenses, for the
periods indicated.
Operating expenses
Selling and marketing
expenses
General and administrative
expenses(1)
Total operating expenses
Note:
2017
2018
RMB
%
RMB
%
RMB
2019
US$
%
(in millions, except for percentages)
For the Year Ended December 31,
913
37.5
1,714
43.2
2,041
293
43.0
1,521
2,434
62.5
100.0
2,258
3,972
56.8
100.0
2,703
4,744
388
681
57.0
100.0
(1)
Includes R&D expenses of RMB797 million, RMB937 million and RMB1,159 million (US$166 million) in 2017, 2018 and 2019, respectively.
Selling and marketing expenses. Our selling and marketing expenses consist primarily of (i) branding and user acquisition costs; (ii) salaries and other
benefits paid to our sales and marketing personnel; and (iii) amortization of intangible assets resulting from Tencent’s acquisition of CMC in 2016 and our
acquisition of a subsidiary in 2017. We expect our selling and marketing expenses to increase in absolute amount in the foreseeable future, as we engage in
more activities to promote our brand, attract new users, convert existing users to paying users, and further increase user spending on our platform.
General and administrative expenses. Our general and administrative expenses consist primarily of (i) R&D expenses, including salaries and other
benefits paid to our R&D personnel; (ii) salaries and other benefits paid to our general and administrative personnel; (iii) fees and expenses associated with
the legal, accounting and other professional services; and (iv) amortization of intangible assets resulting from Tencent’s acquisition of CMC in 2016. We
expect our general and administrative expenses to increase in absolute amount in the foreseeable future as we continue to introduce new products and
services, improve our platform and technology to stay abreast of technological developments and innovations, expand our monetization channels, as well as
to increase legal fees associated with copyright protection.
Other gains/(losses), net
Our other gains/(losses) primarily include government grants and tax rebates. Our gains in 2017 include a deemed gain on our acquisition of a
subsidiary in 2017. We recorded other gains of RMB124 million in 2017, other losses of RMB29 million in 2018 and other gains of RMB78 million
(US$11 million) in 2019.
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Share-based payments in respect of issuance of ordinary shares to music label partners
Share-based payments in respect of issuance of ordinary shares to music label partners represent the excess of the fair value of the ordinary shares we
issued to Warner and Sony in October 2018 over the aggregate consideration received by us.
Taxation
We had income tax expenses of RMB278 million, RMB171 million and RMB563 million (US$81 million) in 2017, 2018 and 2019, respectively. We
are subject to various rates of income tax under different jurisdictions. The following summarizes major factors affecting our applicable tax rates in the
Cayman Islands, Hong Kong and the PRC.
Cayman Islands
We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income, corporation or capital gains
tax in the Cayman Islands.
Hong Kong
Our subsidiaries in Hong Kong, including Tencent Music Entertainment Hong Kong Limited, our wholly-owned subsidiary, are subject to Hong Kong
profits tax on their activities conducted in Hong Kong at a uniform tax rate of 16.5%. Under Hong Kong tax law, our subsidiaries in Hong Kong are
exempted from income tax on their foreign-derived income and there is no withholding tax in Hong Kong on remittance of dividends. No provision for
Hong Kong profits tax was made as we had no estimated assessable profit that was subject to Hong Kong profits tax during 2017, 2018 or 2019.
PRC
Our subsidiaries and consolidated VIEs in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax
on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the Enterprise Income Tax Law of the PRC, or the PRC EIT
Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and
domestic enterprises, except where a special preferential rate applies. The enterprise income tax is calculated based on the entity’s global income as
determined under PRC tax laws and accounting standards.
Guangzhou Kugou, Beijing Kuwo and Guangzhou Fanxing Entertainment Information Technology Co., Ltd. have been recognized as HNTE by
relevant government authorities and were entitled to preferential tax rate of 15% for the years ended December 31, 2017, 2018 and 2019. Yeelion Online
was qualified as SE and has entitled to tax holiday starting from the year ended December 31, 2017 (i.e. its first profitable year in 2017). Yeelion Online
was entitled to a reduced tax rate of 12.5% for the year ended December 31, 2019.
TME Tech Shenzhen was established in Qianhai, Bonded Zone of Shenzhen in 2017 and was entitled to a preferential tax rate of 15% as it met the
requirements set out by local tax authorities, and accordingly income tax for TME Tech Shenzhen was provided and paid at the preferential tax rate of 15%
for the year ended December 31, 2017. However, TME Tech Shenzhen was further assessed and approved by the relevant government authorities as a SE
in 2018 and entitled to the relevant tax holiday which became applicable since the year ended December 31, 2017. Refund for the income tax paid for 2017
was received and recognized in 2018. After the tax holiday, TME Tech Shenzhen was entitled to a reduced tax rate of 12.5% for the year ended December
31, 2019.
In addition, for the years ended December 31, 2018 and 2019, certain subsidiaries of the Group were established in a special economic development
zone and entitled to a tax concession of exemption from CIT for five years, commencing from the first profitable year. Furthermore, the Group also has
certain subsidiaries subject to other preferential tax treatment for certain reduced tax rates of 5% to 10%.
As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries through Tencent Music Entertainment Hong Kong
Limited. The PRC EIT Law and its implementing rules provide that dividends paid by a PRC entity to a non-resident enterprise for income tax purposes is
subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between
Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced
to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Circular on Certain Issues
with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or SAT Circular 81, a Hong Kong resident enterprise must meet the following
conditions, among others, in order to
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apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the
PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to
receiving the dividends. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-resident Taxpayers to
Enjoy Treatment under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident
enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax. Instead, non-resident
enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met,
directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to
post-tax filing examinations by the relevant tax authorities. Accordingly, Tencent Music Entertainment Hong Kong Limited may be able to benefit from the
5% withholding tax rate for the dividends it receives from its PRC subsidiaries, if it satisfies the conditions prescribed under SAT Circular 81 and other
relevant tax rules and regulations. However, according to SAT Circular 81 and SAT Circular 60, if the relevant tax authorities consider the transactions or
arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding
tax in the future.
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC
EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—3.D. Risk Factors—Risks
Related to Doing Business in China-We may be classified as a ‘PRC resident enterprise’ for PRC enterprise income tax purposes, which could result in
unfavorable tax consequences to us and our non-PRC shareholders and ADS holders and have a material adverse effect on our results of operations and the
value of your investment.”
Critical Accounting Policies, Judgments and Estimates
We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. Preparing these financial statements in conformity
with IFRS as issued by the IASB requires the use of certain critical accounting estimates and also requires us to exercise judgments in the process of
applying our accounting policies. We evaluate our estimates and judgments on an ongoing basis. Our estimates are based on historical experience and
various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates.
The critical accounting policies, judgments and estimates that we believe to have the most significant impact on our consolidated financial statements
are described below.
Consolidation of VIEs
PRC laws and regulations prohibit or restrict foreign ownership of companies that provide internet-based business, which include activities and
services provided by us. We operate our business operations in the PRC through a series of contractual arrangements entered into among the company, our
wholly-owned subsidiaries, VIEs that are legally owned by our authorized individuals (collectively, “Contractual Arrangements”). Under the Contractual
Arrangements, we have power to control the management, as well as financial and operating policies of the VIEs, have the rights or exposure to variable
returns from the VIEs, and have ability to use our power over the VIEs to affect the amount of our return. As a result, all these VIEs are accounted for as
controlled structured entities of the company and their financial statements have also been consolidated in our consolidated financial statements.
Goodwill
Goodwill is not amortized but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be
impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill
relating to the entity sold.
Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. The allocation is made to those cash-generating units
or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are
identified at the lowest level at which goodwill is monitored for internal management purposes, below the operating segments.
Revenue recognition
Revenue from online music services
Our music service revenues primarily include revenues from subscriptions, sales of digital music singles and albums, content sublicensing and online
advertising on our music platforms.
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We provide to our users certain subscription packages which entitle paying subscribers a fixed amount of non-accumulating downloads per month and
unlimited “ad-free” streaming of our full music content offerings with certain privilege features on our music platforms. The subscription fee for these
packages is time-based and is collected upfront from subscribers. The terms of time-based subscriptions range from one month to twelve months. The
receipt of subscription fee is initially recorded as deferred revenue. We satisfy our various performance obligations by providing services throughout the
subscription period and revenue is recognized over time accordingly.
We also provide our users with services that allow them to purchase early release access to certain new digital music singles and albums. These
singles and albums can be downloaded and streamed only through our platform. Such music singles and albums will be made available to all users to
access after the initial launch period. We consider that we provide the early access to the newly launched singles and albums within our platform as
opposed to providing functional intellectual property to the users. As a result, the performance obligation of providing early access is satisfied over time.
The above services can be paid directly through online payment channels or through various third party platforms. We record revenue on a gross basis
according to the criteria stated in “principal agent consideration” below and recognize service fees levied by online payment channels or third party
platforms (“Channel Fees”) as the cost of revenues in the same period as the related revenue is recognized.
We sublicense certain of our music content to other music platforms for a fixed period of time, typically one year, that falls within the original license
period. We are obliged to replicate the licensed content library for any subsequent changes in the contents, including any new content or removal of
existing content, updated by the content partners any time during the sublicense period. As a result, we determine sublicense of content as a single
performance obligation. Revenues from sublicensing the content is recognized over the sublicense period. We only recognize revenue when it is highly
probable that this will not result in a significant reversal of revenue when any uncertainty is resolved. We do not adjust the promised amount of
consideration for the effects of any significant financing component as the sublicense period is typically one year.
Advertising revenue is primarily generated through display ads on our platforms. Advertising contracts are signed to establish the fixed price and
advertising services to be provided based on cost per display (“CPD”) or cost per mille (“CPM”) arrangements. When the collectability is reasonably
assured, advertising revenues from the CPD arrangements are recognized ratably over the contract period of display based on a time-based measure of
progress as the performance obligation is expended evenly over the period, while revenue from the CPM arrangements are recognized based on the number
of times that the advertisement has been displayed. We allocate revenue to each performance obligation on a relative stand-alone selling price basis which
is determined with reference to the prices charged to customers.
We also enter into contracts with advertising agencies both third-party and controlled by Tencent, which represent us in negotiation and contracting
with advertisers. We share with these advertising agencies a portion of the revenues we derive from our advertisers. Revenues are recognized on a gross or
net basis based on assessment according to the criteria stated in “Principal agent consideration” below. If revenues for advertising through these advertising
agencies are recorded at the gross amount, the portion remitted to advertising agencies, including any cash incentive in the form of commissions, is
recorded as cost of revenues. If revenues for advertising through these advertising agencies are recorded at the net amount, cash incentives, in the form of
commissions to any advertising agencies based on volume and performance, are accounted for as a reduction of revenue, based on expected performance.
Revenue from social entertainment services and others
We offer virtual gifts to users for free or sell virtual gifts to users on our online karaoke and live streaming platforms. The virtual gifts are sold to
users at different specified prices as pre-determined by us. The utilization of each virtual gift sold to users is considered as the performance obligation and
we allocate revenue to each performance obligation on a relative stand-alone selling price basis, which are determined based on the prices charged to
customers.
Virtual gifts are categorized as consumable, time-based and durable. Consumable virtual gifts are consumed upon purchase and use while time-based
virtual gifts can be used for a fixed period. We do not have further obligations to the user after the virtual gifts are consumed immediately or after the stated
period of time for time-based items. The revenue for the sale of consumable virtual gifts on the online streaming platforms is recognized immediately when
a virtual item is consumed or, in the case of a time-based virtual item, recognized ratably over the useful life of the items, which generally do not exceed
one year. We do not have further obligations to the user after the virtual gifts are consumed. We recognize the revenue for sale of durable virtual gifts on the
online karaoke platform over their estimated lifespans of no longer than six months, which are determined by the management based on the expected
service period derived from past experiences, given there is an implicit obligation of us to maintain the virtual gifts operated on our platform.
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We may share with performers a portion of the revenues derived from the sale of the virtual gifts on the online karaoke and live streaming platforms.
Revenues for the sale of virtual gifts are recorded at the gross amount while the portion remitted to performers is recorded as cost of revenues as we
consider ourselves as the primary obligor in the sale of virtual gifts with the latitude in establishing prices, and the rights to determine the specifications or
change the virtual gifts.
In addition to virtual item sales, we also generate revenue from online karaoke and live streaming services by selling premium memberships that
provide paying users with certain privileges. The fees for these packages are time-based ranging from one month to twelve months and are collected up-
front from subscribers. The receipt of subscription fee is initially recorded as deferred revenue. We satisfy our performance obligation by providing services
over the subscription period and revenue is recognized ratably over the subscription period.
We also generated advertising revenue from our social entertainment platforms and the policies for recognized advertising revenue are described in
advertising revenue from music services.
Principal agent consideration
We report the revenue on a gross or net basis depending on whether we are acting as a principal or an agent in a transaction. The determination of
whether to report our revenues on a gross or net basis is based on an evaluation of various factors, including but not limited to whether we (i) are the
primary obligor in the arrangement; (ii) have latitude in establishing the selling price; (iii) change the product or perform part of the service; and (iv) have
involvement in the determination of product and service specifications.
We do not disclose the information about the remaining performance obligations as our performance obligations have an expected duration of one
year or less.
Contract liabilities and contract costs
A contract liability is the Group’s obligation to transfer goods or services to a customer for which we have received consideration (or an amount of
consideration is due) from the customer. Contract costs include incremental costs of obtaining a contract and costs to fulfill a contract.
Income taxes
We are subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes.
Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and
deferred income tax in the period in which such determination is made.
Share-based Compensation Expense and Valuation of Our Ordinary Shares
Share-based compensation relating to TME Incentive Plans
We maintain three share-based compensation plans, namely, the 2014 Share Incentive Plan (the “2014 Share Incentive Plan”) that was adopted in
2014 and the 2017 Option Plan and 2017 Restricted Share Scheme that were adopted in 2017 (together with the 2014 Share Incentive Plan, the “TME
Incentive Plans”). The share-based equity awards granted under the TME Incentive Plans are measured at fair value and recognized as an expense, net of
estimated forfeitures, over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied, and credited to
equity. Forfeitures are estimated at the time of grant and revised in the subsequent periods if actual forfeitures differ from those estimates.
2014 Share Incentive Plan
The 2014 Share Incentive Plan was approved by the then board of directors of our company in October 2014 prior to Tencent’s acquisition of CMC.
As of the date of this annual report, according to the 2014 Share Incentive Plan, 101,785,456 ordinary shares have been reserved to be issued to qualified
employees, directors, non-employee directors and consultants as determined by the board of directors of our company. The options granted pursuant to the
2014 Share Incentive Plan will be exercisable only if the option holder continues employment or provides services through each vesting date. The
maximum term of any issued stock option is ten years from the grant date.
2017 Option Plan and 2017 Restricted Share Scheme
Binomial model is used to measure the fair value of equity awards granted pursuant to the 2017 Option Plan and 2017 Restricted Share Scheme. The
determination of the fair value is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the
expected share price volatility, expected forfeiture rate, risk-free interest rates, contract life and expected dividends.
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Assumptions used in such determination of fair value are presented below.
Risk free interest rate
Expected dividend yield
Expected volatility range
Exercise multiples
Contractual life
2017
Granted in
2018
2019
2.1%-2.5%
0%
55%-60%
2.2-2.8
10 years
2.97%-3.21%
0%
50%-60%
2.8
10 years
2.08%
0%
40%
2.2-2.8
10 years
Subsequent to our initial public offering in December 2018, the market price of our publicly traded ADSs is used as an indicator of fair value of our
ordinary shares for purposes of recording share-based compensation in connection with the equity awards granted pursuant to the 2017 Option Plan and the
2017 Restricted Share Scheme.
Fair value of ordinary shares
Prior to our initial public offering, we were a private company with no quoted market prices for our ordinary shares. We therefore needed to make
estimates of the fair value of our ordinary shares at various dates for the purpose of determining the fair value of our ordinary shares at the date of the grant
of share-based compensation awards to our employees as one of the inputs into determining the grant date fair value of the award.
For purposes of recording share-based compensation in connection with the equity awards granted prior to our initial public offering in December
2018, we, with the assistance of an independent valuation firm, evaluated the use of three generally accepted valuation approaches: market, cost and
income approaches to estimate the ordinary shares of our company. For the award grant dates where there were equity financing transactions with
independent third parties within half year after transaction, we adopted market approach by referring to the transaction prices as the fair value indication of
our ordinary share prices. For the award grant dates where there were no equity financing transactions within half year, we applied an income approach,
specifically a discounted cash flow, or DCF, analysis based on our projected cash flows using management’s best estimates as of the valuation date. The
income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. However, these fair values are
inherently uncertain and highly subjective.
The major assumptions used in calculating the fair value of our ordinary shares using income approach include:
•
•
•
Discount Rates. The discount rates listed out in the table below were based on the weighted average cost of capital, which was determined
based on a number of factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systemic risk
factors.
Comparable Companies. In deriving the weighted average cost of capital used as the discount rates under the income approach as of
August 31, 2017 and July 12, 2018, seven and eleven publicly traded companies were respectively selected for reference as our guideline
companies. The guideline companies were selected based on the following criteria: (i) they operate in the digital entertainment industry
and (ii) their shares are publicly traded in the renowned stock markets, namely United States, Hong Kong and Korea.
Discount for Lack of Marketability, or DLOM. DLOM was quantified by the Black-Scholes option pricing model. Under this option-
pricing method, the cost of the put option, which could be used to hedge the price change before the privately held shares can be sold, was
considered as a basis to determine the DLOM. The key assumptions of such model include risk-free rate, timing of a liquidity event (such
as an initial public offering), and estimated volatility of our shares. The further the valuation date is from an expected liquidity event, the
higher the put option value and thus the higher the implied DLOM. The lower DLOM is used for the valuation, the higher is the
determined fair value of the ordinary shares.
The determination of the equity value requires complex and subjective judgments to be made regarding prospects of the industry and the products at
the valuation date, our projected financial and operating results, our unique business risks and the liquidity of our shares.
Subsequent to our initial public offering in December 2018, the market price of our publicly traded ADSs is used as an indicator of fair value of our
ordinary shares.
85
Share-based compensation relating to Tencent Incentive Plans
Prior to July 2016, certain of the employees associated with Tencent’s online music business in the PRC were granted equity awards pursuant to
certain share-based compensation plans of Tencent (collectively, the “Tencent Incentive Plans”). In July 2016, after Tencent acquired the control of CMC,
Tencent’s online music business in the PRC, together with the associated employees, was transferred to us and, accordingly, the share-based compensation
expense arising from such grants was allocated to us and recognized as share-based compensation expense in our consolidated financial statements. Equity
awards granted to our employees pursuant to the Tencent Incentive Plans are measured at the grant date based on the fair value of equity instruments and
are recognized as an expense over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied, and credited
to “contribution from shareholder” under equity.
For share options granted to our employees under the Tencent Incentive Plans, the total amount to be expensed is determined by reference to the fair
value of the share options granted by using the binomial model.
Assumptions used in such determination of fair value are presented below.
Risk free interest rate
Expected dividend yield
Expected volatility range
Exercise multiples
Contractual life
Granted in
2017
1.39%
0.33%
30%
7
7 years
The determination of the fair value of share options is affected by the share price as well as assumptions regarding a number of complex and
subjective variables, including the expected share price volatility, expected forfeiture rate, risk-free interest rates, contract life and expected dividends.
These assumptions involve inherent uncertainty. Had different assumptions and estimates been used, the resulting fair value of the share options and the
resulting share-based compensation expenses could have been different.
86
Results of Operations
The following table summarizes our consolidated results of operations and as percentages of total revenues for the periods presented.
For the Year Ended December 31,
2017
2018
RMB
%
RMB
%
RMB
2019
US$
%
(in millions, except for percentages)
3,149
7,832
10,981
(7,171)
3,810
28.7
71.3
100.0
(65.3)
34.7
5,536
13,449
18,985
(11,708)
7,277
29.2
70.8
100.0
(61.7)
38.3
7,152
18,282
25,434
(16,761)
8,673
1,027
2,626
3,653
(2,408)
1,246
28.1
71.9
100.0
(65.9)
34.1
(913)
(8.3)
(1,714)
(9.0)
(2,041)
(293)
(8.0)
(1,521)
(2,434)
93
(13.9)
(22.2)
0.9
(2,258)
(3,972)
282
(11.9)
(20.9)
1.5
(2,703)
(4,744)
615
(388)
(681)
88
(10.6)
(18.7)
2.4
—
124
1,593
—
1.1
14.5
(1,519)
(29)
2,039
4
—
1,597
(278)
1,319
—
—
14.5
(2.5)
12.0
(1)
(35)
2,003
(171)
1,832
(8.0)
(0.2)
10.7
—
(0.2)
10.5
(0.9)
9.6
—
78
4,622
(18)
(64)
4,540
(563)
3,977
—
11
664
(3)
(9)
652
(81)
571
Revenues
Online music services
Social entertainment services and others
Total revenues
Cost of revenues(1)
Gross profit
Operating expenses
Selling and marketing expenses(1)
General and administrative
expenses(1)
Total operating expenses
Interest income
Share-based payments in respect of
issuance of ordinary shares to music
label partners
Other gains/(losses), net
Operating profit
Share of net profit/(loss) of
investments accounted for
using equity method
Finance cost
Profit before income tax
Income tax expenses
Profit for the year
Note:
(1)
Share-based compensation expenses were allocated as follows:
Cost of revenues
Selling and marketing expenses
General and administrative expenses
Total
2017
RMB
For the Year Ended December 31,
2018
RMB
2019
RMB
US$
27
12
345
384
(in millions)
22
13
452
487
41
12
466
519
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenues
Our revenues increased by 34.0% from RMB18,985 million in 2018 to RMB25,434 million (US$3,653 million) in 2019.
87
—
0.3
18.2
(0.1)
(0.3)
17.9
(2.2)
15.6
6
2
67
75
Online music services
Our revenues generated from online music services increased by 29.2% from RMB5,536 million in 2018 to RMB7,152 million (US$1,027 million) in
2019, mainly driven by the increases in the revenues from music subscriptions and sales of digital music albums, partially offset by a decrease in
sublicensing revenues from other online music platforms.
Our revenues generated from music subscriptions increased by 42.6% from RMB2,499 million in 2018 to RMB3,563 million (US$512 million) in
2019, which was mainly attributable to an increase of 38.1% in the number of paying users from 24.4 million in 2018 to 33.7 million in 2019 and an
increase of 3.5% in the monthly ARPPU from RMB8.5 in 2018 to RMB8.8 (US$1.3) in 2019. From 2018 to 2019, the mobile MAUs of our online music
services grew from approximately 642 million to 653 million. The paying ratio for our online music services grew from 3.8% in 2018 to 5.2% in 2019 as
we continued to cultivate our users’ willingness to pay for premium music content with improved paying user retention, as well as due to the early success
of our pay-for-streaming initiative.
The increased revenues from sales of digital music albums was mainly due to new and hit releases from top artists and top TV shows in 2019, as we
intensified our effort to build our platform into a go-to destination for top artists to release their digital albums, as well as for fans to interact and support
their idols.
Social entertainment services and others
Our revenues generated from social entertainment services and others increased by 35.9% from RMB13,449 million in 2018 to RMB18,282 million
(US$2,626 million) in 2019, mainly driven by the increases in the revenues generated from our live streaming services and online karaoke services.
The increase in the revenues generated from live streaming and online karaoke services was mainly driven by the increases in the number of paying
users and average revenue per paying user, reflecting increased user engagement as we enhanced the quality of the content and social functions offered.
From 2018 to 2019, the mobile MAUs of our social entertainment services increased from approximately 226 million to 232 million, and the number
of paying users of our social entertainment services grew from approximately 9.8 million to 11.6 million.
Cost of revenues
Our cost of revenues increased by 43.2% from RMB11,708 million in 2018 to RMB16,761 million (US$2,408 million) in 2019, primarily driven by
increases in service costs by 45.0% from RMB10,323 million in 2018 to RMB14,967 million (US$2,150 million) in 2019. The increase in service costs
was primarily due to the increase in content costs and revenue sharing fees. The increase in content costs was mainly attributable to increased market price
of music content and increased amount of music content licensed from music labels and other content partners. We also increased our in-house content
productions in 2019. The increase in revenue sharing fees reflected the increased sales of virtual gifts driven by the growth in our online karaoke and live
streaming services. In addition, we introduced more professionally generated content to our social entertainment platform through talent agencies and
shared a portion of our revenues with these agencies.
Other cost of revenues increased by 29.5% from RMB1,385 million in 2018 to RMB 1,794 million (US$258 million) in 2019. Such increase was
primarily attributable to higher payment channel fees and higher personnel costs.
Gross profit
As a result of the foregoing, our gross profit increased by 19.2% from RMB7,277 million in 2018 to RMB8,673 million (US$1,246 million) in 2019.
Our gross margin decreased from 38.3% in 2018 to 34.1% in 2019.
Operating expenses
Our operating expenses increased by 19.4% from RMB3,972 million in 2018 to RMB4,744 million (US$681 million) in 2019.
Selling and marketing expenses
Our selling and marketing expenses increased by 19.1% from RMB1,714 million in 2018 to RMB2,041 million (US$293 million) in 2019, which was
primarily due to increased spending to promote the Company's brands, products, and content offering.
88
General and administrative expenses
Our general and administrative expenses increased by 19.7% from RMB2,258 million in 2018 to RMB2,703 million (US$388 million) in 2019
primarily due to the increase in personnel-related costs, primarily as we continued to expand our R&D teams to support our products and technology
efforts.
Interest income
Our interest income was RMB615 million (US$88 million) in 2019, as compared to RMB282 million in 2018. The increase was primarily due to
increased balances of our cash and cash equivalents and term deposits throughout 2019.
Other (losses)/gains, net
Our other gains, net, were RMB78 million (US$11 million) in 2019, as compared to other losses, net of RMB29 million in 2018. The increase was
mainly attributable to government grant and tax rebate received during the year, and partly offset by the impairment loss of an associate.
Share-based payments in respect of issuance of ordinary shares to music label partners
We recorded a one-off share-based accounting charge of RMB1,519 million in respect of issuance of ordinary shares to music label partners in 2018,
which represents the excess of the then-prevailing fair value of the ordinary shares we issued to Warner and Sony in October 2018 over the aggregate
consideration received by us.
Operating Profits
As a result of the foregoing, our operating profit for the period increased by 126.7% to RMB4,622 million (US$664 million) in 2019, from
RMB2,039 million in 2018. Operating margin increased to 18.2% for the year of 2019 from 10.7% in 2018 mostly due to a one-off share-based accounting
charge of 1,519 million recorded in the fourth quarter of 2018 and the improvement of operating leverage.
Income tax expense
We had an income tax expense of RMB171 million in 2018 and RMB563 million (US$81 million) in 2019. Our income tax expense in 2018 and 2019
resulted from the net profit position of certain operating entities in the PRC. Our effective tax rate was 12.4% in 2019, as opposed to 8.5% in 2018. The
increase in our effective tax rate was mainly due to the change in the preferential tax rates of certain subsidiaries.
Profit for the period
As a result of the foregoing, our profit for the period increased from RMB1,832 million in 2018 to RMB3,977 million (US$571 million) in 2019.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenues
Our revenues increased by 72.9% from RMB10,981 million in 2017 to RMB18,985 million in 2018.
Online music services
Our revenues generated from online music services increased by 75.8% from RMB3,149 million in 2017 to RMB5,536 million in 2018, mainly
driven by increased revenues from (i) user subscriptions; (ii) sublicensing music content to third-party platforms; and (iii) sales of digital music singles and
albums to users.
The increased revenues from sales of digital singles and albums and from user subscriptions were primarily driven by the continuous growth of the
user base of our online music services and their increased paying ratio. Revenue from paid music through the sales of subscription packages was RMB2.50
billion, up from RMB1.84 billion in 2017. The increase in our sublicensing revenues was primarily due to the increased number of sublicensing
arrangements we entered into with other online music platforms in China. From 2017 to 2018, the mobile MAUs of our online music services grew from
approximately 606 million to 642 million, and the number of paying users of our online music services grew from approximately 17.4 million to 24.4
million. During the same period, the paying ratio for our online music services grew from 2.9% to 3.8%. Such growth was primarily driven by the
enhanced quantity and quality of our paid music content offerings.
89
Social entertainment services and others
Our revenues generated from social entertainment services and others increased by 71.7% from RMB7,832 million in 2017 to RMB13,449 million in
2018, mainly driven by increased revenues generated from our live streaming services and online karaoke services.
The increase in the revenues generated from online karaoke and live streaming services was mainly due to (i) increased average revenue per paying
user, which was attributable to the introduction of additional functions, such as virtual karaoke rooms and premium memberships on WeSing, that began to
gain momentum in the second half of 2017; (ii) increased paying ratio, driven by the enhanced willingness of our users to purchase virtual gifts, primarily
due to increase in the activity of performers and the enhanced quality of the live streaming content offered on our social entertainment platform; and (iii)
growth of our user base, which was driven by our efforts to deliver an integrated music entertainment experience to effectively attract users of our online
music services to use our online karaoke and live streaming services. Our paying user base and user spending continued to grow in 2018 as compared to
2017.
From 2017 to 2018, the mobile MAUs of our social entertainment services grew from approximately 201 million to 226 million, and the number of
paying users of our social entertainment services grew from approximately 7.4 million to 9.8 million. During the same period, the paying ratio for our
social entertainment services increased from 3.7% to 4.3%.
Cost of revenues
Our cost of revenues increased by 63.3% from RMB7,171 million in 2017 to RMB11,708 million in 2018, primarily driven by increases in service
costs by 68.1% from RMB6,142 million in 2017 to RMB10,323 million in 2018. The increase in service costs was primarily due to the increase in content
costs and revenue sharing fees. The increase in content costs was mainly attributable to increased market price of music content and increased amount of
music content licensed from music labels and other content partners. We also increased our in-house productions in 2018. The increase in revenue sharing
fees reflected the increased sales of virtual gifts driven by the growth in our online karaoke and live streaming services.
Other cost of revenues increased by 34.6% from RMB1,029 million in 2017 to RMB1,385 million in 2018. Such increase was primarily attributable
to higher payment channel fees and higher personnel costs.
Gross profit
As a result of the foregoing, our gross profit increased by 91.0% from RMB3,810 million in 2017 to RMB7,277 million in 2018. Our gross margin
increased from 34.7% in 2017 to 38.3% in 2018.
Operating expenses
Our operating expenses increased by 63.2% from RMB2,434 million in 2017 to RMB3,972 million in 2018.
Selling and marketing expenses
Our selling and marketing expenses increased by 87.7% from RMB913 million in 2017 to RMB1,714 million in 2018, which was mainly driven by
increased spending to promote our brands, products and content offerings.
General and administrative expenses
Our general and administrative expenses increased by 48.5% from RMB1,521 million in 2017 to RMB2,258 million in 2018, which was mainly
attributable to (i) an increase in our employee benefit expenses in connection with the increase in our personnel and employee incentives; and (ii) the
professional fees incurred in connection with our initial public offering completed in December 2018.
Other (losses)/gains, net
Our other losses, net, were RMB29 million in 2018, as compared to other gains, net of RMB124 million in 2017. The change was mainly due to net
foreign exchange losses of RMB31 million in 2018 as opposed to net foreign exchange gains of RMB18 million in 2017 as a result of appreciation of US
dollars against RMB, which was partially offset by an increase in government grants.
90
Share-based payments in respect of issuance of ordinary shares to music label partners
We recorded a one-off share-based accounting charge of RMB1,519 million in respect of issuance of ordinary shares to music label partners in the
fourth quarter of 2018, which represents the excess of the then-prevailing fair value of the ordinary shares we issued to Warner and Sony in October 2018
over the aggregate consideration received by us.
Operating profit
As a result of the foregoing, our operating profit for the period increased by 28.0% to RMB2,039 million in 2018, from RMB1,593 million in 2017.
Operating margin decreased to 10.7% for the year of 2018 from 14.5% in 2017 mostly due to the one-off share-based accounting charge of RMB1,519
million recorded in the fourth quarter of 2018.
Income tax expense
We had an income tax expense of RMB278 million in 2017 and RMB171 million in 2018. Our income tax expense in 2017 and 2018 resulted from
the net profit position of certain operating entities in the PRC. The decrease in our income tax expense from 2017 to 2018 was mainly because of the lower
Software Enterprise income tax rate enjoyed by Tencent Music Shenzhen in 2018 although our income before income tax has increased during the same
period and a tax refund recorded in 2018 in respect of tax holiday applicable to Tencent Music Shenzhen that took effect since 2017.
Profit for the period
As a result of the foregoing, our profit for the period increased from RMB1,319 million in 2017 to RMB1,832 million in 2018.
Non-IFRS Financial Measure
We use adjusted profit for the year, which is a non-IFRS financial measure, in evaluating our operating results and for financial and operational
decision-making purposes. We believe that adjusted profit for the year helps identify underlying trends in our business that could otherwise be distorted by
the effect of certain expenses that we include in our profit for the year. We believe that adjusted profit for the year provides useful information about our
results of operations, enhances the overall understanding of our past performance and future prospects and allows for greater visibility with respect to key
metrics used by our management in its financial and operational decision-making.
Adjusted profit for the year should not be considered in isolation or construed as an alternative to operating profit, profit for the year or any other
measure of performance or as an indicator of our operating performance. Investors are encouraged to review adjusted profit for the year and the
reconciliation to its most directly comparable IFRS measure. Adjusted profit for the year presented here may not be comparable to similarly titled measures
presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to
our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
91
Adjusted profit for the year represents profit for the year excluding an amortization of intangible and other assets arising from business combinations,
share-based compensation expenses, share-based payments in respect of the issuance of ordinary shares to music label partners, gains/losses from
investments and fair value change on puttable shares and income tax effects. The table below sets forth a reconciliation of our profit for the year to adjusted
profit for the years indicated.
For the Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
US$
(in millions, except for share and per share data)
1,319
1,832
3,977
329
384
—
(70)
—
(58)
1,904
1,911
(7)
0.74
0.72
306
487
1,519
52
35
(57)
4,174
4,175
(1)
1.36
1.32
362
519
—
79
37
(71)
4,903
4,908
(5)
1.50
1.47
571
52
75
—
11
5
(10)
704
705
(1)
0.22
0.21
2,593,157,207
2,639,466,412
3,076,314,670
3,159,220,888
3,272,754,403
3,347,572,338
3,272,754,403
3,347,572,338
—
—
—
—
2.71
2.64
3.00
2.93
0.43
0.42
1,538,157,335
1,579,610,444
1,636,377,201
1,673,786,169
1,636,377,201
1,673,786,169
Profit for the year
Adjustments:
Amortization of intangible and other assets arising from business
combinations(1)
Share-based compensation expenses
Share-based payments in respect of issuance of ordinary shares to
music label partners(2)
(Gains)/losses from equity investments
Fair value change on puttable shares(3)
Income tax effects(4)
Adjusted profit for the year
Attributable to
Non-IFRS equity holders of the Company
Non-controlling interests
Earnings per share for Class A and Class B ordinary shares
Basic
Diluted
Shares used in earnings per Class A and Class B
ordinary share computation
Basic
Diluted
Earnings per ADS(5)
Basic
Diluted
ADS used in earnings per ADS computation
Basic
Diluted
Notes:
(1)
(2)
(3)
(4)
(5)
Represents the amortization of identifiable assets, including intangible assets and prepayments for music content, resulting from Tencent's acquisition of CMC in 2016 and
certain acquisitions and combination transactions, net of related deferred taxes.
Represents the excess of the then fair value of the ordinary shares we issued to certain investors over the aggregate consideration we received in October 2018.
Represents the fair value changes on the put liability of certain shares issued in 2018.
Represents the income tax effects of amortization of identifiable assets, including intangible assets and prepayments for music content, resulting from business combinations.
Each ADS represents two of our Class A ordinary shares.
Recent Accounting Pronouncements
For detailed discussion on recent accounting pronouncements, see Note 2.2 to the consolidated financial statements of Tencent Music Entertainment
Group included elsewhere in this annual report.
92
5.B.
Liquidity and Capital Resources
Cash flows and working capital
Our principal sources of liquidity have been cash generated from operating activities and contributions from shareholders. As of December 31, 2019,
we had RMB15,426 million (US$2,216 million) in cash and cash equivalents, a significant portion of which were held by our PRC subsidiaries and VIEs
and their subsidiaries in China and Tencent Music Entertainment Hong Kong Limited, our wholly-owned subsidiary in Hong Kong. Our cash and cash
equivalents consist primarily of bank deposits and highly liquid investments, which have original maturities of three months or less when purchased. Our
cash and cash equivalents are primarily denominated in Renminbi. We believe that our current cash and anticipated cash flow from operations will be
sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months. We
collect the majority of our revenues from users who pay in advance.
On December 17, 2019, we announced a share repurchase program under which we may repurchase up to $400 million of our Class A ordinary shares
in the form of ADSs pursuant to relevant SEC rules during a twelve-month period commencing on December 15, 2019. We currently plan to fund
repurchases from our existing cash balance. In March and up to the date of this report, we have repurchased ADSs from the open market for an aggregate
amount of approximately US$16 million in cash pursuant to the share repurchase program.
We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and funds raised
from financing activities, including the net proceeds we received from our initial public offering in December 2018. We may, however, require additional
cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing
cash is insufficient to meet our requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be
unavailable in the amounts we need or on terms acceptable to us, if at all. Issuance of additional equity securities, including convertible debt securities,
would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and
could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain
additional equity or debt financing as required, our business operations and prospects may suffer.
As a holding company with no material operations of our own, we conduct our operations primarily through our PRC subsidiaries and our
consolidated VIEs in China. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries in China through capital
contributions or loans, subject to the approval of government authorities and limits on the amount of capital contributions and loans. In addition, our
subsidiaries in China may provide Renminbi funding to our consolidated VIEs only through entrusted loans. See “Item. 3. Key Information—3.D. Risk
Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and
governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering in December 2018 to make
loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund
and expand our business” and “Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds—14.E. Use of Proceeds.” The
ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. See
“Item. 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity
paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make
payments to us could have a material and adverse effect on our ability to conduct our business” and “Item. 3. Key Information—3.D. Risk Factors—Risks
Related to Doing Business in China—We may be classified as a ‘PRC resident enterprise’ for PRC enterprise income tax purposes, which could result in
unfavorable tax consequences to us and our non-PRC shareholders and ADS holders and have a material adverse effect on our results of operations and the
value of your investment.”
93
The following table presents our selected consolidated cash flow data for the periods indicated.
Selected Consolidated Cash Flow Data:
Net cash generated from operating activities
Net cash used in investing activities
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Exchange differences on cash and cash equivalents
Cash and cash equivalents at end of the year
Operating activities
For the Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
US$
2,500
(483)
99
2,116
3,071
(13)
5,174
(in millions)
5,632
(1,190)
7,741
12,183
5,174
(1)
17,356
6,200
(8,102)
(31)
(1,933)
17,356
3
15,426
891
(1,164)
(4)
(278)
2,493
-
2,216
Net cash generated from operating activities was RMB6,200 million (US$891 million) in 2019. The difference between our profit before income tax
of RMB4,540 million (US$652 million) and the net cash generated from operating activities was mainly due to (i) the increase in other operating liabilities
of RMB1,164 million (US$167 million) largely due to our overall business growth; (ii) the increase in accounts payable of RMB717 million (US$103
million); and (iii) depreciation and amortization of RMB583 million (US$84 million), partially offset by (i) the increase in accounts receivables of
RMB733 million (US$105 million); and (ii) interest income of RMB615 million (US$88 million).
Net cash generated from operating activities was RMB5,632 million in 2018. The difference between our profit before income tax of RMB2,003
million and the net cash provided by operating activities was mainly due to (i) non-cash share based payment expense in respect of issuance of ordinary
shares to music label partners of RMB1,519 and share-based compensation expense of RMB487 million; (ii) the increase in operating liabilities of
RMB2,361 million largely due to our overall business growth; and (iii) depreciation and amortization of RMB369 million, partially offset by (i) the
increase in operating assets of RMB975 million, which was mainly driven by our overall business growth; and (ii) income taxes paid in an amount of
RMB221 million.
Net cash generated from operating activities was RMB2,500 million in 2017. The difference between our profit before income tax of RMB1,597
million and the net cash provided by operating activities was mainly due to (i) the increase in other operating liabilities of RMB1,051 million largely due to
our overall business growth; (ii) depreciation and amortization of RMB379 million; and (iii) non-cash share-based compensation expense of RMB362
million, partially offset by (i) the increase in account receivables of RMB447 million, which was mainly driven by our overall business growth; and (ii)
income taxes paid in an amount of RMB207 million.
Investing activities
Net cash used in investing activities was RMB8,102 million (US$1,164 million) in 2019, which was primarily attributable to (i) placement of term
deposits with initial terms of over three months of RMB12,050 million (US$1731 million); (ii) purchase of intangible assets of RMB191 million (US$27
million); and (iii) our purchases of property, plant and equipment of RMB95 million (US$14 million), partially offset by receipt from maturity of term
deposits with initial terms of over three months of RMB4,550 million (US$654 million).
Net cash used in investing activities was RMB1,190 million in 2018, which was primarily attributable to (i) payment for acquired business, net of
cash acquired of RMB1,090 million; (ii) payments for financial assets and equity investments in certain companies of RMB339 million; and (iii) our
purchases of property, plant and equipment and intangible assets of RMB144 million, partially offset by net cash received for business combination under
common control of RMB397 million.
Net cash used in investing activities was RMB483 million in 2017, which was primarily attributable to (i) settlement of pre-acquisition dividend
payables of RMB591 million; (ii) our purchase of property, plant and equipment of RMB75 million; and (iii) our payment for business combination, net of
cash acquired, of RMB72 million, in connection with our acquisition of a subsidiary in 2017, partially offset by (i) net proceeds from short-term
investments, which mainly included financial products offered by commercial banks and financial institutions in China, of RMB261 million; and (ii)
proceeds from disposal of investments accounted for using equity method of RMB57 million.
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Financing activities
Net cash used in financing activities in 2019 was RMB31 million (US$4 million), which was mainly due to (i) payment for acquisition of non-
controlling interests in non-wholly-owned subsidiaries of RMB79 million (US$11 million); (ii) payment for lease liabilities of RMB63 million (US$9
million); and (iii) share withheld for share award schemes of RMB31 million (US$4 million), partially offset by the proceeds from exercise of share options
of RMB127 million (US$18 million).
Net cash generated from financing activities in 2018 was RMB7,741 million, which was mainly the proceeds we received from the issuance of
ordinary shares, including our initial public offering, of RMB7,319 million and puttable shares of RMB422 million.
Net cash generated from financing activities in 2017 was RMB99 million, which was mainly the proceeds we received from the exercise of certain
employee share options of RMB79 million.
Capital Expenditures
Our capital expenditures are incurred primarily in connection with purchases of property and equipment and intangible assets. Our capital
expenditures were RMB77 million, RMB144 million and RMB286 million (US$41 million), in 2017, 2018 and 2019, respectively. We intend to fund our
future capital expenditures with our existing cash balance and proceeds from our initial public offering in December 2018. We will continue to make capital
expenditures to meet the expected growth of our business.
Holding Company Structure
Tencent Music Entertainment Group is a holding company with no material operations of its own. We conduct our operations primarily through our
PRC subsidiaries and our consolidated VIEs. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries which, in turn,
depends on the payment of the service fees and royalty payments to our PRC subsidiaries by our consolidated VIEs in the PRC pursuant to certain
contractual arrangements. See “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with Our VIEs and Their
Respective Shareholders.” In 2017, 2018 and 2019, the amount of such services fees and royalty payments paid to our PRC subsidiaries from our VIEs was
RMB2,535.5 million, RMB7,377.0 million and RMB9,142 million (US$1,313 million), respectively. We expect that the amounts of such service fees and
royalty payments will increase in the foreseeable future as our business continues to grow. If our subsidiaries or any newly formed subsidiaries incur debt
on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.
In addition, our subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with
the Accounting Standards for Business Enterprise as promulgated by the Ministry of Finance, or PRC GAAP. In accordance with PRC company laws, our
PRC subsidiaries and consolidated VIEs in China must make appropriations from their after-tax profit to non-distributable reserve funds including (i)
statutory surplus fund and (ii) discretionary surplus fund. The appropriation to the statutory surplus fund must be at least 10% of the after-tax profits
calculated in accordance with PRC GAAP. Appropriation is not required if the statutory surplus fund has reached 50% of the registered capital of our PRC
subsidiaries and consolidated VIEs. Appropriation to discretionary surplus fund is made at the discretion of our PRC subsidiaries and consolidated VIEs.
As an offshore holding company, we are permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund raising
activities to our PRC subsidiaries only through loans or capital contributions, and to our consolidated affiliated entity only through loans, in each case
subject to the satisfaction of the applicable government registration and approval requirements. See “Item 3. Key Information—3.D. Risk Factors—Risks
Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental
control of currency conversion may delay or prevent us from using the proceeds of our initial public offering in December 2018 to make loans to or make
additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our
business.” As a result, there is uncertainty with respect to our ability to provide prompt financial support to our PRC subsidiaries and consolidated VIEs
when needed. Notwithstanding the foregoing, our PRC subsidiaries may use their own retained earnings (rather than Renminbi converted from foreign
currency denominated capital) to provide financial support to our consolidated affiliated entity either through entrustment loans from our PRC subsidiaries
to our consolidated VIEs or direct loans to such consolidated affiliated entity’s nominee shareholders, which would be contributed to the consolidated
variable entity as capital injections. Such direct loans to the nominee shareholders would be eliminated in our consolidated financial statements against the
consolidated affiliated entity’s share capital.
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The table below sets forth the respective revenues contribution and assets of Tencent Music Entertainment Group and its wholly-owned subsidiaries
and consolidated VIEs as of the dates and for the periods indicated:
For the
Year Ended
December 31,
2017
Total Revenues(1)
For the
Year Ended
December 31,
2018
For the
Year Ended
December 31,
2019
As of
December 31,
2017
Total Assets
As of
December 31,
2018
As of
December 31,
2019
—
—
0.3%
99.7%
100.0%
—
—
0.1%
99.9%
100.0%
—
—
0.2%
99.8%
100.0%
53.6%
12.6%
3.5%
30.3%
100.0%
53.6%
10.3%
6.7%
29.4%
100.0%
48.6%
10.4%
12.3%
28.7%
100.0%
Tencent Music Entertainment
Group
Wholly-owned subsidiaries outside
the PRC
Wholly-owned subsidiaries in
the PRC
Consolidated VIEs
Total
Note:
(1)
Percentages exclude inter-company transactions between Tencent Music Entertainment Group and its wholly-owned subsidiaries and the consolidated VIEs.
In 2019, our wholly-owned PRC subsidiaries only generated a minimal portion of our total revenues because substantially all of our businesses are
subject to foreign investment restrictions under PRC law and therefore can only be conducted through our consolidated VIEs. In contrast, most of our
assets are held by our offshore incorporated entities and wholly-owned PRC subsidiaries, mostly in the forms of goodwill and cash that do not generate
revenues.
5.C.
Research and Development
We have focused on and will continue to invest in our technology system, which supports all key aspects of our online platform and is designed to
optimize for scalability and flexibility.
Our R&D expenses were RMB797 million, RMB937 million and RMB1,159 million (US$166 million) in 2017, 2018 and 2019.
5.D.
Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year
ended December 31, 2019 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.
5.E.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated
financial statements and the notes thereto. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity
that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
We did not have any off-balance sheet arrangements as of December 31, 2019.
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5.F.
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and commitments as of December 31, 2019.
Payment due by period
Total
Less than 1 year
1 – 3 years
RMB
US$
RMB
US$
RMB
US$
3 – 5 years
More than 5 years
RMB US$ RMB US$
235
7,217
198
34
1,037
28
233
4,513
198
(in millions)
33
648
28
2
2,703
-
-
388
-
-
1
-
-
-
-
-
-
-
-
-
-
Operating commitments(1)
Content royalties(2)
Investment commitments(3)
Notes:
(1)
(2)
(3)
Represents our future minimum commitments under non-cancelable operating arrangements, which are mainly related to rental of bandwidth.
Represents the minimum royalty payments associated with license agreements to which we are subject.
Represents commitments to acquire the equity interests in certain entities.
See “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results—Specific Factors Affecting our Results of Operations—Our
ability to enhance returns on our spending on content” for a discussion of the future trend of our content royalties.
In addition, on December 31, 2019, the Group proposed to join a consortium (the “Consortium”) led by Tencent to acquire a 10% equity stake in
Universal Music Group (“UMG”), at an enterprise value of EUR30 billion, up to a 10% equity interest in the Consortium. The Consortium will also have
the option to purchase an additional 10% equity stake in UMG at the same enterprise value pursuant to the terms of the transaction documents. The
Transaction is subject to regulatory approvals and other customary closing conditions, and is expected to close by the first half of 2020.
Prior to the closing of the Transaction, the Group and UMG also intend to enter into a second agreement that grants the Group an option to acquire a
minority equity stake in UMG's Greater China business.
Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December
31, 2019.
5.G.
Safe harbor
See “Forward-Looking Information.”
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A.
Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
Directors and Executive Officers
Tong Tao Sang
Cussion Kar Shun Pang
Zhenyu Xie
Martin Lau
James Gordon Mitchell
Brent Richard Irvin
Tak-Wai Wong
Liang Tang
Edith Manling Ngan
Min Hu
Cheuk Tung Tony Yip
Linlin Chen
Dennis Tak Yeung Hau
Lixue Shi
Tsai Chun Pan
Age
46
46
45
47
46
47
43
42
55
48
39
39
44
45
45
Position/Title
Chairman
Chief Executive Officer, Director
President, Chief Technology Officer, Director
Director
Director
Director
Independent Director
Independent Director
Independent Director
Chief Financial Officer
Chief Strategy Officer, Head of Ultimate Music
Group Vice President, Kugou
Group Vice President, QQ Music and WeSing
Group Vice President, Kuwo
Group Vice President, Copyright Management
Tong Tao Sang currently serves as the Chairman of our board of directors. Mr. Tong currently also serves as the senior executive vice president of
Tencent and the president of Cloud and Smart Industries Group. Starting as a technical architect, Mr. Tong led the product development of Tencent’s social
network platform, Qzone. Since May 2012, Mr. Tong has been responsible for various product lines of Tencent, including the QQ messaging and Qzone
social networking platforms, QQ Music and the Tencent Cloud services. Prior to joining Tencent, Mr. Tong worked at Sendmail, Inc., where he led the
development of operator-scale email and messaging systems. Mr. Tong also worked for Oracle Corporation (NYSE: ORCL), where he managed the
development and testing of its servers and applications. Mr. Tong earned a Master of Science degree in Electrical Engineering from Stanford University and
a Bachelor of Science degree in Computer Engineering from the University of Michigan.
Cussion Kar Shun Pang has been our chief executive officer since July 2016 and a member of our board of directors since May 2014 and is
responsible for our strategic planning, business development, product strategy and management. Mr. Pang joined Tencent in 2008 and was appointed the
company's Vice President in 2013. He has extensive experience across multiple businesses within Tencent including online games, e-commerce and social
networking since 2008. Prior to joining Tencent, Mr. Pang worked for a number of publicly listed companies in telecommunications, internet and media
industries, such as PCCW (HKEX: 6832). Since his first Internet project in 1996, Mr. Pang has experienced the various development stages of the Internet
industry. Mr. Pang received a bachelor’s degree in mathematics (honors), business administration and information systems from University of Waterloo.
Zhenyu Xie currently serves as our President and Chief Technology Officer and has been a member of our board of directors since April 2014 and
currently oversees our Kugou business. Mr. Xie founded Kugou Music in 2004 and has been committed to Internet technology innovation and the
development of the digital music industry for more than a decade. Before founding Kugou Music, he founded SoGua in 2001, which was the first digital
music search engine in China. Mr. Xie also served as a senior technical engineer from 1998 to 2001 at China Merchants Bank Co., Ltd. and graduated from
Sun-Yat Sen University in 1997 with a bachelor’s degree in computer science.
Martin Lau has served as a member of our board of directors since July 2016. Mr. Lau joined Tencent in 2005 and currently serves as an executive
director and the president of Tencent. Prior to joining Tencent, Mr. Lau worked as an executive director at Goldman Sachs (Asia) L.L.C.’s investment
banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, Mr. Lau worked at McKinsey & Company,
Inc. as a management consultant. On July 28, 2011, Mr. Lau was appointed as a non-executive director of Kingsoft Corporation Limited, an Internet-based
software developer, distributor and software service provider listed in Hong Kong. On March 10, 2014, Mr. Lau was appointed as a director of JD.com,
Inc., an online direct sales company in China, which has been listed on NASDAQ since May 2014. On March 31, 2014, Mr. Lau was appointed as a
director of Leju Holdings Limited, an online-to-offline real estate services provider in China, which has been listed on the New York Stock Exchange since
April 2014. On December 29, 2017, Mr. Lau was appointed as a director of Vipshop Holdings Limited, an online discount retailer company listed on the
New York Stock Exchange. On September 4, 2018, Mr. Lau was appointed as a non-executive director of Meituan Dianping, a Chinese leading e-
commerce platform for services which has been listed on the Hong Kong Stock Exchange since
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September 2018. Mr. Lau received a bachelor’s degree in Electrical Engineering from University of Michigan, a master’s degree in Electrical Engineering
from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University.
James Gordon Mitchell has served as a member of our board of directors since December 2018. Mr. Mitchell serves as a senior executive vice
president and chief strategy officer of Tencent, where he has worked since July 2011. Mr. Mitchell is also the chairman and a non-executive director of the
board of China Literature Limited (HKEX: 0772) and serves as a director of several listed companies including Yixin Group Limited (HKEX: 2858),
Frontier Developments (LSE AIM: FDEV) and NIO Inc. (NYSE: NIO). He also holds directorships in various unlisted companies. Prior to Tencent, Mr.
Mitchell was a managing director at Goldman Sachs. He received a bachelor’s degree in history from the University of Oxford.
Brent Richard Irvin has served as a member of our board of directors since July 2016. Mr. Irvin joined Tencent in January 2010 and currently serves
as a vice president and the general counsel of Tencent. He is also the Head of Tencent America, responsible for the operation of the Tencent’s U.S. offices.
Mr. Irvin also serves as a director of the Tencent Research Institute, and as a member of Stanford Law School’s board of visitors. Mr. Irvin is also a non-
executive director of Tongcheng-Elong Holdings Limited (HKEX: 0780) since March 2018. Prior to that, Mr. Irvin worked as a corporate lawyer in Silicon
Valley from 2003 to 2009, first at Shearman & Sterling and later at Wilson Sonsini Goodrich & Rosati. He also holds directorships in various unlisted
companies. Mr. Irvin received a bachelor’s degree in history from Carleton College in 1994, a master’s degree in Asian Studies from Yale University in
1995, and a juris doctorate degree from Stanford Law School in 2003.
Tak-Wai Wong has served as a member of our board of directors since July 2016. Mr. Wong currently serves as a managing director with PAG Asia
Capital, an affiliate of Pacific Alliance Group. Mr. Wong has also been a non-executive director at Yingde Gases Group Company Limited since 2017.
Between 2006 and 2010, Mr. Wong worked at the Hong Kong and Beijing offices of TPG Capital. Between 1999 and 2005, Mr. Wong worked in Morgan
Stanley’s investment banking division in Hong Kong, San Francisco and Beijing. Mr. Wong received a bachelor’s degree in business administration and a
bachelor’s degree in Asian studies from University of California, Berkeley.
Liang Tang has served as a member of our board of directors since April 2014. Mr. Tang currently serves as president of China Investment Financial
Holdings Fund Management Company Limited since 2014, director and manager of Zhongke Zhiyun Technology Co., Ltd since June 2018, and
independent non-executive director of CMGE Technology Group Limted (HKEX: 0302) since September 2019. Mr. Tang is also the chairman of China
HeFei FoF, the chairman of Zhongde Yangtze Financial Holdings, a founding shareholder of the Hubei Yangtze Industrial Fund, the chairman of China
Film CICFH Cinema M&A Fund co-founded with China Film Co. Ltd., the chairman of Asia Culture and Entertainment Group. Mr. Tang had previously
worked as a corporate lawyer at Wilson Sonsini Goodrich & Rosati, headquartered in Silicon Valley. Mr. Tang has established a number of industrial funds,
and led investments in internet, entertainment, AI, new energy and environmental protection sectors. Mr. Tang received a bachelor’s degree in law from
Peking University, a master’s degree in law from Yale University and Stanford University.
Edith Manling Ngan has served as a member of our board of directors since December 2018. Ms. Ngan currently serves as the alternate chair of the
Pay Trend Survey Committee of the Hong Kong SAR Government Standing Commission on Civil Service Pay and Conditions of Service and as a member
of various investment committees of government funds. Prior to her retirement in 2017 as regional managing director, East Asia of the Royal Institute of
Chartered Surveyors (RICS), a global leading professional body for qualifications and standards in land, property, infrastructure and construction, she was
chief executive from 2012 to 2016 of the Hong Kong Securities and Investment Institute, which sets and administers the licensing examinations for the
Hong Kong Securities and Futures Commission. Between 1996 and 2010, Ms. Ngan had worked for ABN AMRO Fund Services (Asia) Ltd, Principal
International (Asia) Ltd. and Invesco Asia Limited in regional management roles before she moved to non-profits and served as an executive director of
Asia Society Hong Kong Center. Ms. Ngan received her bachelor’s degree in industrial engineering and engineering management from Stanford University
and is a fellow of the Institute of Chartered Accountants in England and Wales (ICAEW), the Hong Kong Institute of Certified Public Accountants
(HKICPA) and the Hong Kong Institute of Directors (HKIoD).
Min Hu currently serves as our Chief Financial Officer, in charge of our finance and corporate IT functions. Ms. Hu served various controller roles in
Tencent’s business groups, including the Interactive Entertainment Group, the Mobile Internet Group, the Social Network Group and the Technology and
Engineering Group from 2007 to 2016. Prior to joining Tencent, Ms. Hu served as the director of internal audit department at Huawei. Ms. Hu has more
than 20 years of comprehensive experience in finance, such as financial management, capital operation, operation management, mergers and acquisitions,
internal control and internal audit. Ms. Hu is a member of Chartered Institute of Management Accountants (CIMA), CPA Australia, China Institute of
Certified Public Accountants (CICPA), and a Certified Internal Auditor (CIA). Ms. Hu received a bachelor’s degree in Industrial Foreign Trade from Xi’an
Jiaotong University in China and a master’s degree in system engineering from Beijing Jiaotong University in China.
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Cheuk Tung Tony Yip currently serves as our Chief Strategy Officer and oversees Ultimate Music, a business unit that provides online music services
to smart devices and automobile manufacturers, as well as our overall strategic development, M&A, investments, investor relations, and capital markets
activities. Prior to joining us, Mr. Yip was vice president of Baidu, Inc. (NASDAQ: BIDU) since September 2015, where he served as the chief financial
officer of Baidu’s search business group and Baidu’s head of investments, mergers and acquisitions. Mr. Yip served on the board of directors of Ctrip.com
International, Ltd. (NASDAQ: CTRP) from October 2015 to November 2017. Prior to that, Mr. Yip worked at Goldman Sachs from 2007 and served as a
managing director in technology, media and telecom investment banking. Mr. Yip has over 16 years of experience originating, structuring and executing
corporate transactions including initial public offerings, mergers and acquisitions, divestitures, corporate restructurings, and equity and debt financings. Mr.
Yip obtained his bachelor of commerce degree in finance and accounting from University of Queensland in Australia.
Linlin Chen is one of the founding members of Kugou and is currently overseeing our Kugou business. Ms. Chen has extensive management
experience in product operations, marketing and corporate governance. Ms. Chen holds an EMBA degree from Sun-Yat Sen University.
Dennis Tak Yeung Hau has been our Vice President from December 2016, in charge of the operation and management of QQ Music and WeSing. Mr.
Hau joined Tencent in 2007 and served as deputy general manager of the International Business Department and general manager of the Digital Music
Division of the Social Network Group. Before joining Tencent, Mr. Hau worked at Oracle Corporation (NYSE: ORCL) for over 10 years on business
intelligence, data analysis and research and management work. Mr. Hau received an EMBA degree from Kellogg-HKUST Executive MBA program and a
bachelor’s degree in business computing from the University of Winnipeg, Canada.
Lixue Shi currently serves as our Group Vice President and currently oversees our Kuwo business. Prior to joining TME in November 2012, Mr. Shi
served as the assistant general manager of the Online Media Group at Tencent from 2008 to 2012. In addition, Mr. Shi served as the general manager of
Business Objects North China and sales head at SAS Institute China Inc. from 2004 to 2007. Mr. Shi was a senior customer representative and a regional
sales manager of IBM China Company Limited from 1998 to 2004. Mr. Shi graduated from Tsinghua University in 1998 with a bachelor's degree in
mechanical engineering.
Tsai Chun Pan is currently responsible for the overall strategies and daily management of our copyright initiatives. Prior to joining us as a Group Vice
President, Mr. Pan worked as the head of entertainment services for Nokia Greater China from 2005 to 2013, and in 2014, he established Ultimate Music,
which was acquired by TME in 2017. Mr. Pan graduated from the School of Oriental and African Studies, University of London, with a bachelor's degree
in Japanese studies in 1999 and obtained a master's degree in marketing management from Cranfield University in the UK in 2000.
6.B.
Compensation
Compensation
In 2019, we paid an aggregate cash compensation of approximately RMB65.0 million (US$9.0 million) to our directors and executive officers. We
have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC
subsidiaries and consolidated VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension
insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund. Our board of directors may determine
compensation to be paid to the directors and the executive officers. The compensation committee will assist the directors in reviewing and approving the
compensation structure for the directors and the executive officers.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Each of our executive officers is employed for a specified time
period, which can be renewed upon both parties’ agreement before the end of the current employment term. We may terminate an executive officer’s
employment for cause at any time without advance notice in certain events. We may terminate an executive officer’s employment by giving a prior written
notice or by paying certain compensation. An executive officer may terminate his or her employment at any time by giving a prior written notice.
Each executive officer has agreed to hold, unless expressly consented to by us, at all times during and after the termination of his or her employment
agreement, in strict confidence and not to use, any of our confidential information or the confidential information of our customers and suppliers. In
addition, each executive officer has agreed to be bound by certain non-competition and non-solicitation restrictions during the term of his or her
employment and for two years following the last date of employment.
100
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to
indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason
of their being a director or officer of our company.
Share Incentive Plans
2014 Share Incentive Plan
Prior to Tencent’s acquisition of CMC, CMC adopted an employee share incentive plan on October 22, 2014, or the 2014 Share Incentive Plan. The
purpose of the 2014 Share Incentive Plan is to promote the long term success of the company and the creation of shareholder value by offering employees,
officers, directors and consultants the opportunity to share in such long-term success by acquiring a proprietary interest in the company. Tencent’s
acquisition of CMC in July 2016 constituted a “change of control” for the purpose of the 2014 Share Incentive Plan in which case, pursuant to the 2014
Share Incentive Plan, all the outstanding awards granted thereunder shall be subject to applicable agreement of merger or reorganization. Pursuant to the
share subscription agreement entered into by and between CMC and Min River on July 6, 2016 in connection with Tencent’s acquisition of CMC, all the
outstanding awards granted under the 2014 Share Incentive Plan shall remain and continue to be subject to the original vesting schedules under such
awards and shall not be accelerated.
Under the 2014 Share Incentive Plan, the maximum aggregate number of ordinary shares we are authorized to issue pursuant to all awards is
101,785,456 ordinary shares. As of the date of this annual report, options to purchase a total of 10,847,956 ordinary shares are outstanding under the 2014
Share Incentive Plan.
The following paragraphs summarize the terms of the 2014 Share Incentive Plan.
Types of Awards. The 2014 Share Incentive Plan permits the awards of options (including incentive share options and non-statutory share options),
share appreciation rights, share grants and restricted share units, or RSUs.
Plan Administration. The 2014 Share Incentive Plan shall be administered by our board or a committee appointed by the board. Members of any such
committee shall serve for such period of time as the board may determine and shall be subject to removal by the board at any time. The board may also at
any time terminate the functions of the committee and reassume all powers and authority previously delegated to the committee. With respect to the awards
granted to non-employee directors, the board shall administer the 2014 Share Incentive Plan.
Eligibility. Our employees, directors, non-employee directors and consultants are eligible to participate in the 2014 Share Incentive Plan.
Award Agreement. Each award under the 2014 Share Incentive Plan shall be evidenced and governed exclusively by an award agreement executed by
the company and the grantees, including any amendments thereto. The provisions of the various award agreements entered into under the 2014 Share
Incentive Plan need not to be identical.
Conditions of Award. The plan administrator of the 2014 Share Incentive Plan shall determine the provisions, terms, and conditions of each award
including, but not limited to, the award vesting schedule, number of options or shares to be granted, exercise price and form of payment upon settlement of
the award.
Acceleration of Awards upon Change in Control. The plan administrator may determine, at the time of grant or thereafter, that an award shall
become vested and exercisable, in full or in part, in the event that a change in control of the company occurs.
Protection against Dilution. In the event of a subdivision of the outstanding shares of our company, a declaration of a dividend payable in our shares,
a declaration of a dividend payable in a form other than shares in an amount that has a material effect on the price of our shares, a combination or
consolidation of our outstanding shares (by reclassification or otherwise) into a lesser number of shares, a recapitalization, a spin-off or a similar
occurrence, the plan administrator shall make appropriate adjustments to protect the participants from dilution.
Transfer Restrictions. Except as otherwise provided in the applicable award agreement and then only to the extent such transfer is otherwise
permitted by applicable laws, no awards or interest therein shall be transferred, assigned, pledged or hypothecated by the participant during his or her
lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process, other than by will or by the laws of
descent and distribution.
Amendment, Suspension or Termination of the 2014 Share Incentive Plan. The 2014 Share Incentive Plan shall terminate on October 22, 2024
provided that our board may amend or terminate the 2014 Share Incentive Plan at any time and for any reason. Any such termination of the 2014 Share
Incentive Plan, or any amendment thereof, shall not impair any
101
award previously granted under the 2014 Share Incentive Plan. An amendment of the 2014 Share Incentive Plan shall be subject to the approval of our
shareholders only to the extent such approval is required by applicable laws, regulations or rules.
2017 Option Plan
We adopted an employee share incentive plan, or the 2017 Option Plan, on April 15, 2017. The purpose of the 2017 Option Plan is to motivate and
reward our employees and other individuals who are expected to contribute significantly to our success to perform at the highest level and to further the
best interests of the company and our shareholders. Under the 2017 Option Plan, the maximum aggregate number of ordinary shares we are authorized to
issue pursuant to equity awards granted thereunder is 97,951,238 ordinary shares. As of the date of this annual report, options to purchase a total of
26,365,188 ordinary shares are outstanding under the 2017 Option Plan, and 5,897,124 of such options had vested and become exercisable.
The following paragraphs summarize the terms of the 2017 Option Plan.
Types of Awards. The 2017 Option Plan permits the awards of options.
Plan Administration. The 2017 Option Plan shall be administrated by the board or the compensation committee of the board, or such other committee
as may be designated by the board.
Eligibility. Any employee or any other individual who provides services to us or our affiliates as determined by the plan administrator and holders of
options and other types of awards granted by a company acquired by us or with which we combine shall be eligible to be selected to receive an award under
the 2017 Option Plan, to the extent an offer of an award or a receipt of such award is permitted by applicable law, stock market or exchange rules and
regulations or accounting or tax rules and regulations.
Award Agreement. Each award under the 2017 Option Plan shall be evidenced and governed exclusively by an award agreement executed by the
company and the participants, including any amendments thereto. The provisions of the various award agreements entered into under the 2017 Option Plan
need not to be identical.
Conditions of Award. The administrator of the 2017 Option Plan shall determine the provisions, terms, and conditions of each award including, but
not limited to, the types of awards, award vesting schedule, number of shares to be covered by the awards, exercise price, non-competition requirements,
and term of each award.
Acceleration of Awards upon Change in Control. The plan administrator may cause an award to be canceled in consideration of the full acceleration
of such award or the grant of a substitute award, in the event that a change in control of our company occurs.
Protection against Dilution. In the event of any division or other distribution (whether in the form of cash, shares or other securities),
recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or
other securities of the company, issuance of warrants or other rights to purchase shares or other securities of the company, or other similar corporate
transaction or event affecting the shares, or of changes in applicable laws, regulations or accounting principles, the plan distributor may make appropriate
equitable adjustments to the outstanding awards as well as number and types of shares available for future awards to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the 2017 Option Plan.
Transfer Restrictions. Except as may be permitted by the plan administrator or as specifically provided in an award agreement, no award and no right
under any award shall be assignable, alienable, saleable or transferable by a grantee other than by will or by designating a beneficiary following procedures
approved or accepted by the plan administrator.
Amendment, Suspension or Termination of the 2017 Option Plan. Except to the extent prohibited by applicable law and unless otherwise expressly
provided in an award agreement or in the 2017 Option Plan, the plan administrator may amend, alter, suspend, discontinue or terminate the Plan or any
portion thereof at any time; provided, however, that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i)
shareholder approval if such approval is required by applicable law or the rules of the stock exchange, if any, on which the Shares are principally quoted or
trade; or (ii) the consent of the affected grantee, if such action would materially and adversely affect the rights of such grantee under any outstanding
Award.
102
2017 Restricted Share Scheme
We adopted a restricted share award scheme, or the 2017 Restricted Share Scheme, on May 17, 2017, which was amended on May 15, 2018. The
purpose of the 2017 Restricted Share Scheme is to attract, motivate and reward suitable personnel with a view to achieving the objectives of increasing the
value of the company and aligning the interests of the selected personnel directly to the shareholders of the company through ownership of equity interests.
Under the 2017 Restricted Share Scheme, the maximum aggregate number of ordinary shares we are authorized to issue pursuant to all awards is
111,701,622 ordinary shares. As of the date of this annual report, a total of 34,583,840 restricted shares are outstanding under the 2017 Restricted Share
Scheme.
The following paragraphs summarize the terms of the 2017 Restricted Share Scheme.
Types of Awards. The 2017 Restricted Share Scheme permits the awards of restricted shares.
Scheme Administration. The 2017 Restricted Share Scheme shall be administrated by the board and the management committee established by the
board. The board and the management committee may appoint an independent trustee to assist in the administration of the 2017 Restricted Share Scheme.
Eligibility. Any employee (whether full time or part time), executives or officers, directors (including executive, non-executive and independent non-
executive directors), consultants, advisers or agents of any member of our group or any entity in which any member of our group holds an equity interest,
have contributed or will contribute to the growth and development of our group or any of our invested entity, to the extent an offer of an award or a receipt
of such award is permitted by applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations.
Grant Letter. Each award under the 2017 Restricted Share Scheme shall be evidenced by a written grant letter issued by the scheme administrator.
The grantees are required to confirm their acceptance of the award by returning to the scheme administrator a notice of acceptance duly executed by them
within 28 days after the date of grant.
Conditions of Award. The administrator of the 2017 Restricted Share Scheme shall determine the provisions, terms, and conditions of each award
including, but not limited to, vesting schedule, number of restricted shares to be granted, exercise price, and term of each award.
Protection against Dilution. In the event of any division or other distribution (whether in the form of cash, shares or other securities),
recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or
other securities of the company, issuance of warrants or other rights to purchase shares or other securities of the company, or other similar corporate
transaction or event affecting the shares, or of changes in applicable laws, regulations or accounting principles, the plan distributor may make appropriate
equitable adjustments to the outstanding or vested awards, as well as number and types of shares available for future awards, to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available under the 2017 Restricted Share Scheme.
Transfer Restrictions. Any award is personal to the grantee to whom it is made and is not assignable and no grantee may in any way sell, transfer,
charge, mortgage, encumber or create any interest in favor of any other person over or in relation to the restricted shares referable to him pursuant to such
award under the 2017 Restricted Share Scheme.
Amendment of the 2017 Restricted Share Scheme. The 2017 Restricted Share Scheme may be amended in any respect by a resolution of the plan
administrator provided that no such amendment may operate to affect adversely any subsisting rights of any grantees under the Scheme unless (i) the
written consent of the relevant grantees is obtained; or (ii) the sanction of a special resolution passed at a meeting of the grantees.
Term and Termination of the 2017 Restricted Share Scheme. The 2017 Restricted Share Scheme shall remain valid and effective unless and until
being terminated on the earlier of: (i) the 10th anniversary date of the date it was adopted; or (ii) such date of early termination as determined by the
scheme administrator provided that such termination does not affect any subsisting rights of any grantees.
103
The following table summarizes, as of the date of this annual report, the number of Class A ordinary shares under outstanding options, restricted
shares and other equity awards that we granted to our directors and executive officers.
Ordinary
Shares
Underlying
Equity
Awards
Granted
Exercise
Price
(US$/Share)
Date of Grant
Date of Expiration
Tong Tao Sang
—
—
—
—
Cussion Kar Shun Pang
* 2.3244 to 7.1411
Zhenyu Xie
Martin Lau
James Gordon Mitchell
Brent Richard Irvin
Tak-Wai Wong
Liang Tang
Edith Manling Ngan
*
—
—
—
—
—
*
0 to 7.1411
—
—
—
—
—
0
Min Hu
*
0 to 7.1411
various dates from June 16, 2017
to June 14, 2019
October 17, 2018 and
June 14, 2019
—
—
—
—
—
December 15, 2019
various dates from
June 16, 2017 to
June 14, 2019
various dates from June 16, 2027
to June 14, 2029
October 17, 2028 to
June 14, 2029
—
—
—
—
—
December 15, 2029
various dates from
June 16, 2027 to
June 14, 2029
Cheuk Tung Tony Yip
*
0 to 7.1411
June 14, 2019
various date from April 16, 2018 to
Linlin Chen
*
0 to 7.1411
Dennis Tak Yeung Hau
*
0 to 7.1411
various date from August 31, 2017 to
June 14, 2019
various dates from
June 16, 2017 to
June 14, 2019
various date from April 16, 2028 to
June 14, 2029
various date from August 31, 2027 to
June 14, 2029
various dates from
June 16, 2027 to
June 14, 2029
Lixue Shi
Tsai Chun Pan
All directors and executive
officers as a group
*
*
*
Notes:
*
Less than 1% of our total outstanding shares.
0 to 7.1411 October 17, 2018 and June 14, 2019 October 17, 2028 and June 14, 2029
0 January 21, 2019 and January 19, 2020 January 21, 2029 and January 19, 2030
Various dates from
June 16, 2027 to
January 19, 2030
Various dates from June 16, 2017 to
January 19, 2020
0 to 7.1411
As of the date of this annual report, our employees other than members of our senior management as a group held options to purchase 20,040,644
ordinary shares, with exercise prices ranging from US$0.000076 per share to US$7.1411 per share.
For discussions of our accounting policies and estimates for awards granted pursuant to the 2014 Share Incentive Plan, 2017 Option Plan and the
2017 Restricted Share Scheme, see “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results—Critical Accounting Policies,
Judgments and Estimates—Share-based compensation relating to TME Incentive Plans.”
104
6.C.
Board Practices
Board of Directors
Our board of directors consists of nine directors, including three independent directors, namely Mr. Tak-Wai Wong, Mr. Liang Tang and Ms. Edith
Manling Ngan. A director is not required to hold any shares in our company to qualify to serve as a director. The Corporate Governance Rules of the NYSE
generally require that a majority of an issuer’s board of directors must consist of independent directors. However, the Corporate Governance Rules of the
NYSE permit foreign private issuers like us to follow “home country practice” in certain corporate governance matters. We rely on this “home country
practice” exception and do not have a majority of independent directors serving on our board of directors.
A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare the
nature of his or her interest at a meeting of our directors. A general notice given to the directors by any director to the effect that he or she is a member,
shareholder, director, partner, officer or employee of any specified company or firm and is to be regarded as interested in any contract or transaction with
that company or firm shall be deemed a sufficient declaration of interest for the purposes of voting on a resolution in respect to a contract or transaction in
which he or she has an interest, and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director
may vote in respect of any contract or proposed contract or arrangement notwithstanding that he or she may be interested therein and if he or she does so,
his or her vote shall be counted and he or she may be counted in the quorum at any meeting of the directors at which any such contract or proposed contract
or arrangement is considered, subject to any separate requirement for audit committee approval under applicable law or the Corporate Governance Rules of
NYSE. Our board of directors may exercise all of the powers of our company to borrow money, to mortgage or charge its undertaking, property and
uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt,
liability or obligation of our company or of any third party. None of our directors has a service contract with us that provides for benefits upon termination
of service as a director.
Certain of our directors are also employees of Tencent. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Relationship with
Tencent—We may have conflicts of interest with Tencent and, because of Tencent’s controlling ownership interest in our company, we may not be able to
resolve such conflicts on terms favorable to us.”
Board Committees of the Board of Directors
We have established an audit committee and a compensation committee under our board of directors. We have adopted a charter for each committee.
Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Mr. Tak-Wai Wong, Ms. Edith Manling Ngan, and two non-voting observers, John Lo and
Matthew Cheng, and is chaired by Ms. Edith Manling Ngan. We have determined that each of Mr. Tak-Wai Wong and Ms. Edith Manling Ngan satisfies the
requirements of Section 303A of the Corporate Governance Rules of the NYSE and meets the independence standards under Rule 10A-3 under the
Securities Exchange Act of 1934, as amended. We have determined that Ms. Edith Manling Ngan qualifies as an “audit committee financial expert.” The
audit committee oversees our accounting and financial reporting processes, the audits of the financial statements and the related party transactions of our
company. The audit committee is responsible for, among other things:
•
•
•
•
•
reviewing and recommending to our board for approval, the appointment, re-appointment or removal of the independent auditor, after
considering its annual performance evaluation of the independent auditor;
approving the remuneration and terms of engagement of the independent auditor and pre-approving all auditing and non-auditing services
permitted to be performed by our independent auditors;
obtaining a written report from our independent auditor describing matters relating to its independence and quality control procedures;
reviewing with the independent registered public accounting firm any audit problems or difficulties and any significant disagreements with
the management;
discussing with our independent auditor, among other things, the audits of the financial statements, including whether any material
information should be disclosed, issues regarding accounting and auditing principles and practices;
105
•
•
•
•
•
•
•
•
•
•
reviewing and approving all proposed related party transactions, including those to be entered into with Tencent entities;
reviewing and recommending the financial statements for inclusion within our quarterly and interim earnings releases and to our board for
inclusion in our annual reports;
discussing the annual audited financial statements with management and the independent registered public accounting firm;
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any special steps taken to
monitor and control major financial risk exposures;
reviewing and reassessing the adequacy of the committee charter;
at least annually, approving annual audit plans, and undertaking an annual performance evaluation of the internal audit function;
overseeing and evaluating procedures for the handling of complaints and whistleblowing;
meeting separately and periodically with management, the internal auditors (or other personnel responsible for the internal audit function)
and the independent registered public accounting firm;
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our
procedures to ensure proper compliance and reporting on such compliance to our board of directors; and
reporting regularly to the board of directors.
Compensation Committee. Our compensation committee consists of Mr. Tong Tao Sang, Mr. Tak-Wai Wong and Mr. Liang Tang and is chaired by
Mr. Tong Tao Sang. We have determined that each of Mr. Tak-Wai Wong and Mr. Liang Tang satisfies the “independence” requirements of Section 303A of
the Corporate Governance Rules of the NYSE. The compensation committee assists the board in reviewing and approving the compensation structure,
including all forms of compensation, relating to our directors and executive officers. The compensation committee is responsible for, among other things:
•
•
•
•
•
•
•
overseeing the development and implementation of management succession planning in consultation with our chief executive officer;
at least annually, reviewing and approving, or recommending to the board for its approval, the compensation for our executive officers;
at least annually, reviewing periodically and approving our company’s executive compensation and benefits policies, including any
incentive compensation or equity plans, programs or other similar arrangements;
at least annually, leading our board of directors in a self-evaluation to determine whether it and its committees are functioning effectively;
at least annually, reviewing and reassessing the adequacy of the committee charter;
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s
independence from management; and
reporting regularly to the board of directors.
We will rely on the “foreign private issuer” exemption and will not have a standing nominating and corporate governance committee, though we
intend to form a corporate governance and nominating committee as and when required to do so by law or NYSE rules. As there is no standing nominating
and corporate governance committee, we do not have a nominating and corporate governance committee charter in place.
106
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in
what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe
to our company a duty to exercise the skill they actually possess and such care and diligence that a reasonable prudent person would exercise in comparable
circumstances. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably
be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with
regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors
must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights vested
thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. In limited exceptional
circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached. In accordance with our sixth
amended and restated articles of association, the functions and powers of our board of directors include, among others, (i) convening shareholders’ annual
general meetings and reporting its work to shareholders at such meetings, (ii) declaring dividends, (iii) appointing officers and determining their terms of
offices and responsibilities, and (iv) approving the transfer of shares of our company, including the registering of such shares in our register of members.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board. Each director is not subject to a term of office and holds office until such time as
his successor takes office or until the earlier of his death, resignation or removal from office by ordinary resolution or the affirmative vote of a simple
majority of the other directors present and voting at a board meeting. A director will be removed from office automatically if, among other things, the
director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be of unsound mind; (iii)
resigns by notice in writing to our company; (iv) is prohibited by law from being a director; or (v) is removed from office pursuant to any other provisions
of our sixth amended and restated memorandum and articles of association.
6.D.
Employees
Our employees are caring, talented, creative and open. Our employees love music and developing technology to allow people to interact with music in
innovative ways. We believe creativity and innovation is core to our corporate culture, which allows us to attract highly talented professionals.
We had 2,406, 3,041 and 3,610 full-time employees as of December 31, 2017, 2018 and 2019, respectively. Substantially all of our employees are
based in China. The following table sets forth the number of our full-time employees as of December 31, 2019.
Function
Research and development
Content management
Sales and marketing
Management and administration
Total
Number of
employees
2,021
641
361
587
3,610
We enter into employment contracts with our full-time employees which contain standard confidentiality and non-compete provisions. In addition to
salaries and benefits, we provide performance-based bonuses for our full-time employees and commission-based compensation for our sales and marketing
force.
Under PRC law, we participate in various employee social security plans that are organized by municipal and provincial governments for our PRC-
based full-time employees, including pension, unemployment insurance, work-related injury insurance, medical insurance and housing insurance. We are
required under PRC law to make contributions from time to time to employee benefit plans for our PRC-based full-time employees at specified percentages
of the salaries, bonuses and certain allowances of such employees, up to a maximum amount specified by the local governments in China.
We believe that we maintain a good working relationship with our employees, and we have not experienced any material labor disputes in the past.
None of our employees is represented by labor unions.
107
6.E.
Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of March 25, 2020, by:
•
•
•
each of our directors and executive officers;
all of our directors and executive officers as a group; and
each person known to us to own beneficially more than 5% of our ordinary shares.
We have adopted a dual-class ordinary share structure. The calculations in the table below are based on 3,355,065,938 outstanding ordinary shares
(consisting of 1,341,335,323 Class A ordinary shares and 2,013,730,615 Class B ordinary shares) as of March 25, 2020.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of the date of this
annual report, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not
included in the computation of the percentage ownership of any other person.
Directors and Executive
Officers†
Tong Tao Sang
Cussion Kar Shun Pang
Zhenyu Xie(1)
Martin Lau
James Gordon Mitchel
Brent Richard Irvin
Tak-Wai Wong
Liang Tang
Edith Manling Ngan
Min Hu
Cheuk Tung Tony Yip
Linlin Chen
Dennis Tak Yeung Hau
Lixue Shi
Tsai Chun Pan
All directors and executive
officers as a group
Principal Shareholders:
Tencent(2)
PAG Capital Limited(3)
Spotify(4)
Ordinary Shares Beneficially Owned as of March 25, 2020
Class A Ordinary
Shares
Class B Ordinary Shares
Total ordinary shares
Number
%
Number
%
Number
%
Percentage of
aggregate
voting
power***
— —
*
*
3.7
50,112,500
— —
— —
— —
— —
— —
*
*
*
*
*
*
*
*
*
*
*
*
— —
83,469,633
— —
— —
4.1
— —
— —
— —
— —
— —
— —
— —
—
—
*
*
— —
*
*
— —
— —
*
*
4.0
133,582,133
— —
— —
— —
— —
— —
*
*
*
*
*
*
*
*
*
*
*
*
— —
50,011,350
3.7
83,469,635
4.1
133,480,985
4.0
—
—
4.1
—
—
—
—
—
*
—
—
*
—
*
—
4.1
224,660,159
60,780,508
282,830,698
16.7
4.5
21.1
1,640,456,882
214,421,785
81.5
10.6
— —
1,865,117,041
275,202,293
282,830,698
55.6
8.2
8.4
78.7
10.4
—
Notes:
*
**
***
†
Less than 1% of our total outstanding shares.
For each person and group included in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of (i)
3,355,065,938, being the number of ordinary shares outstanding (consisting of 1,341,335,323 Class A ordinary shares and 2,013,730,615 Class B ordinary shares) as of March 25, 2020,
and (ii) the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after the date of this annual report.
For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power
of all of our ordinary shares as a single class.
Except for Mr. Tong Tao Sang, Mr. Brent Richard Irvin, Mr. Tak-Wai Wong, Mr. Liang Tang, Mr. Martin Lau, Mr. James Gordon Mitchell and Ms. Edith Manling Ngan, the business
address of our directors and executive officers is 17/F, Matsunichi Building, Kejizhongyi Road, Midwest District of Hi-tech Park, Nanshan District, Shenzhen, 518057, the People’s
Republic of China. The business address of Mr. Tong Tao Sang, Mr. Brent Richard Irvin, Mr. Martin Lau and Mr. James Gordon Mitchell is Tencent Building, Kejizhongyi Road, Hi-tech
Park, Nanshan District, Shenzhen, 518057,
108
China. The business address of Mr. Tak-Wai Wong is AIA Central, 1 Connaught Road Central, Hong Kong. The business address of Mr. Liang Tang is Building C08, Chuangye Road,
Wuqing Development Zone, Tianjin, 301701, China. The business address of Ms. Edith Manling Ngan is Wu Yee Sun College Master’s Lodge, Chinese University of Hong Kong, Shatin,
Hong Kong.
Represents 83,469,633 Class B ordinary shares held of record by OneDayDay Forever Investment Limited, a British Virgin Islands company, and 25,000,000 ADSs held by Marvellous
Mountain Investments Limited, a British Virgin Islands company wholly owned by Mr. Xie. OneDayDay Forever Investment Limited is ultimately owned by OneDayDay Trust, a trust
established under the laws of Guernsey and managed by Cantrust (Far East) Limited as the trustee. Mr. Xie is the settlor, and Mr. Xie and certain of his family members are the
beneficiaries, of OneDayDay Trust. Under the terms of the trust, Mr. Xie has the power to direct the retention or disposal of, and the exercise of any voting and other rights attached to, the
foregoing Class B ordinary shares held by OneDayDay Forever Investment Limited. The registered address of OneDayDay Forever Investment Limited is at the offices of Intertrust
Corporate Services (BVI) Limited, Ritter House, Wickhams Cay II, Road Town, Tortola, VG1110 British Virgin Islands.
The number of ordinary shares beneficially owned represents (i) 1,640,456,882 Class B ordinary shares held by Min River Investment Limited, a company incorporated in British Virgin
Islands, which is beneficially owned and controlled by Tencent; (ii) 141,415,349 Class A ordinary shares, or 50% of the 282,830,698 Class A ordinary shares held of record by Spotify AB;
the voting power of such 141,415,349 Class A ordinary shares held of record by Spotify AB is vested with Tencent pursuant to the Spotify Investor Agreement and the Tencent Voting
Undertaking, therefore Tencent is deemed to beneficially own such ordinary shares (pursuant to the Spotify Investor Agreement, Spotify has given Tencent a sole and exclusive right to
vote our securities beneficially owned by Spotify and its affiliates, while pursuant to the Tencent Voting Undertaking, Tencent is obligated to vote 50% of the securities subject to the
foregoing proxy from Spotify in proportion to votes cast for and against by non-Spotify shareholders); and (iii) 83,244,810 Class A ordinary shares held of record by certain minority
shareholders of our company; the voting power of these ordinary shares is vested with Tencent and therefore Tencent may be deemed to beneficially own these Class A ordinary shares.
Tencent disclaims pecuniary ownership for the foregoing securities subject to the Tencent Voting Undertaking and the foregoing 83,244,810 ordinary shares held by record by the minority
shareholders. The Class A ordinary shares beneficially owned by Tencent represent 224,660,159 Class A ordinary shares re-designated from the same number of ordinary shares it
beneficially owns immediately prior to our initial public offering as a result of the proxy given by certain shareholders to Tencent as discussed above. The registered address of Min River
Investment Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands.
The number of ordinary shares beneficially owned represents (i) 50,000,000 Class A Ordinary Shares in the form of ADSs and 194,047,347 Class B Ordinary Shares held by PAGAC
Music Holding II Limited, a company incorporated in Cayman Islands; (ii) 20,374,437 Class B Ordinary Shares held by PAGAC Music Holding II LP, a limited partnership incorporated in
Cayman Islands; and (iii) 10,780,508 Class A Ordinary Sares in the form of ADSs and one Class B Ordinary Share held by PAGAC Music Holding II-A LP, a limited liability partnership
incorporated in Cayman Islands. PAGAC Music Holding II Limited, PAGAC Music Holding II LP and PAGAC Music Holding II-A LP are controlled by PAG Capital Limited. The
registered address of PAGAC Music Holding II Limited is P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. The registered
address of PAGAC Music Holding II LP and PAGAC Music Holding II-A LP is PO Box 472, 2nd Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-
1106, Cayman Islands.
The number of Class A ordinary shares beneficially owned represents 282,830,698 Class A ordinary shares held by Spotify AB, a company incorporated in Sweden, which is beneficially
owned and controlled by Spotify Technology S.A. (NYSE: SPOT). See Note (2) above for a description of the voting proxy granted by Spotify AB with respect to such ordinary shares.
The registered address of Spotify AB is Birger Jarlsgatan 61, 11356 Stockholm, Sweden.
(1)
(2)
(3)
(4)
As of March 25, 2020, 972,386,118 of our Class A outstanding ordinary shares were held by one record holder in the United States, which is the
depositary of our ADS program, representing 29.0% of our total issued and outstanding ordinary shares as of such date. We are not aware of any
arrangement that may, at a subsequent date, result in a change of control of our company.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees —6.E. Share Ownership.”
7.B.
Related Party Transactions
Transactions with Tencent
We have a master business cooperation agreement with Tencent since July 2016 when Tencent acquired CMC, which had expired on July 12, 2018.
We then entered into a new master business cooperation agreement with Tencent, which became effective upon execution.
In December 2017, (i) we issued 282,830,698 ordinary shares to Spotify AB (a wholly-owned subsidiary of Spotify Technology S.A., or Spotify), and
(ii) Spotify, in exchange, issued 8,552,440 ordinary shares (after giving effect to a 40-to-one share split of Spotify’s ordinary shares) to TME Hong Kong.
In connection with its acquisition of our ordinary shares, Spotify agreed not to transfer our ordinary shares for a period of three years from December 15,
2017, subject to limited exceptions described elsewhere in this annual report. We held an approximately 2.5% equity interest in Spotify immediately
following our investment in Spotify. See “Item 4. Information on the Company—4.A. History and Development of the Company.”
In connection with our investment in Spotify, on December 15, 2017, an investor agreement was entered into by and among Spotify, TME, TME
Hong Kong, Tencent and a wholly-owned subsidiary of Tencent (together with TME, TME Hong Kong and Tencent, the “Tencent Investors”) and certain
Spotify parties, pursuant to which Spotify’s co-founder has the
109
sole and exclusive right to vote, in his sole and absolute discretion, any of Spotify’s securities beneficially owned by the Tencent Investors or their
controlled affiliates.
Contractual Arrangements
See “Item 4. Information on the Company—4.C. Organizational Structure” for a description of the contractual arrangements between our PRC
subsidiaries, our VIEs and their respective shareholders.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Employment Agreements and Indemnification Agreements.”
Share Incentives
See “Item 6. Directors, Senior Management and Employees—6.B. Compensation—Share Incentive Plan.”
Other Related Party Transactions
In the ordinary course of business, from time to time, we carry out transactions and enter into arrangements with related parties, none of which is
considered to be material.
The table below sets forth the major related parties and their relationships with us as of December 31, 2019.
Name of related parties
Tencent and its subsidiaries other than the entities controlled by
the Group (“Tencent Group”)
Relationship with the Group
The Group’s principal owner
The table below sets forth our significant related party transactions for the periods indicated.
Revenues
Online music services to Tencent Group(1)
Online music services to the Company’s associates and
associates of Tencent Group
Social entertainment services and others to Tencent Group,
the Company's associates and associates of Tencent Group
Expenses
Operation expenses recharged by Tencent Group(2)
Advertising agency cost to Tencent Group(3)
Content royalties to Tencent Group, the Company’s associates
and associates of Tencent Group(4)
Other costs to the Company's associates and associates of
Tencent Group
For the Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
US$
(in millions)
33
—
20
493
187
45
—
51
18
63
589
207
88
14
355
40
21
752
231
132
25
51
6
3
108
33
19
4
Notes:
(1)
Primarily include revenue from content sublicensing, online advertising and subscriptions provided to Tencent Group pursuant to the Business Cooperation Agreement .
(2)
(3)
(4)
Primarily include expenses associated with cloud services and certain administrative functions provided to us by Tencent Group.
Primarily include advertising fees paid to Tencent Group for our advertising services sold through Tencent Group.
Primarily include content royalty we paid to Tencent Group and music labels who are our associates or the associates of Tencent Group.
110
In addition, we invested in minority interest in certain music related media projects of Tencent Group in aggregate amount of RMB116 million in the
year of 2018.
The table below sets forth the balances with our related parties as of the dates indicated.
Included in accounts receivable from related parties:
Tencent Group
The Company’s associates and associates of Tencent Group
Included in prepayments, deposits and other assets from
related parties:
Tencent Group
The Company’s associates and associates of Tencent Group
Included in accounts payable to related parties:
Tencent Group
The Company’s associates and associates of Tencent Group
Included in other payables and accruals to related
parties:
Tencent Group
The Company’s associates and associates of Tencent Group
As of December 31,
2017
RMB
2018
RMB
2019
RMB
US$
(in millions)
651
8
59
26
104
5
59
—
971
39
28
16
529
1
135
—
1,653
49
50
23
215
15
382
19
Outstanding balances are unsecured and are payable on demand.
The table below sets forth our key management personnel compensations for the periods indicated.
For the Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
US$
46
107
153
(in millions)
64
223
287
65
233
298
Short-term employee benefits
Share-based compensation
7.C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
237
7
7
3
31
2
55
3
9
33
43
8.A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Litigation
We have been and may become a party to various legal or administrative proceedings arising in the ordinary course of our business, including matters
relating to copyright infringement, commercial disputes and competition. As of December 31, 2019, there were 132 lawsuits pending in connection with
alleged copyright infringement on our platform against us or our affiliates with an aggregate amount of damages sought of approximately RMB20.5 million
(US$2.9 million). We are currently not a party to, and we are not aware of any threat of, any such legal or administrative proceedings that, in the opinion of
our management, are likely to have any material and adverse effect on our business, financial condition, cash flow or results of operations. See also “Item
3. Key Information—3.D. Risk Factors—Risk Related to Our Business and Industry—Pending or future litigation or governmental proceedings could have
a material and adverse impact on our reputation, business, financial condition and results of operations.”
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On December 6, 2018, we became aware of an arbitration (the “Arbitration”) filed by an individual named Mr. Hanwei Guo (the “Claimant”) before
the China International Economic and Trade Arbitration Commission, or CIETAC. The Arbitration named Mr. Guomin Xie, who previously served as our
Co-President and a director, CMC, and certain affiliates of CMC as respondents. In addition, on December 5, 2018, the Claimant filed an Application and
Petition for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. § 1782 (the “Discovery Petition”) in the U.S. District Court
of the Southern District of New York (the “District Court”), whereby he seeks permission to serve subpoenas for production of documents on Deutsche
Bank Securities Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co. LLC, each of which is
an underwriter in our initial public offering, for use in the Arbitration. We and the underwriters opposed the Claimant’s Discovery Petition by filing
Oppositions in the District Court on December 21, 2018. On February 25, 2019, the Discovery Petition was denied by the District Court. On March 27,
2019, the Claimant filed a notice of appeal with the United States Court of Appeals for the Second Circuit regarding the denial of the Discovery Petition.
On February 28, 2020, oral argument on the Claimant’s appeal was held in the U.S. Court of Appeals for the Second Circuit. See also “Item 3. Key
Information—3.D. Risk Factors—Risks Related to Our Business and Industry—We, certain of our consolidated entities in the PRC and Mr. Guomin Xie,
have been named as respondents in an arbitration proceeding in the PRC.”
From time to time, we may be involved in legal proceedings in the ordinary course of our business. In September 2019 and October 2019,
respectively, the Company, and certain of its current and former directors and officers were named as defendants in two putative securities class actions
filed in the U.S. District Court for the Eastern District of New York and the Supreme Court of the State of New York, County of New York. Amended
complaints in both actions were filed in February 2020, at which time and Tencent, based on its status as our controlling shareholder, was named as a
defendant in the Eastern District of New York action, and the Company’s underwriters in its initial public offering were added as defendants in both
actions. Both actions, purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of their trading in the ADSs, allege
that our Registration Statement dated December 12, 2018 and our annual report dated April 19, 2019 on Form 20-F contained material misstatements and
omissions in violation of the U.S. federal securities laws. These actions remain in their preliminary stages. Additional complaints related to these claims
may be filed in the coming months. We are currently unable to estimate the potential loss, if any, associated with the resolution of such lawsuits, if they
proceed. We intend to defend the actions vigorously. For risks and uncertainties relating to the pending cases against us, please see “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business—We and certain of our directors and officers have been named as defendants in several
shareholder class action lawsuits, which could have a material adverse impact on our business, financial condition, results of operation, cash flows and
reputation.”
There are no other claims, lawsuits, investigations or proceedings that are expected to have a material adverse impact on our financial statements.
Dividend Policy
We currently have no plan to declare or pay any dividends in the near future on our shares or ADSs, as we currently intend to retain most, if not all, of
our available funds and any future earnings to operate and expand our business.
In December 2017, our board of directors resolved to distribute 255,185,879 ordinary shares as a fully paid share dividend to all of our shareholders
on a pro rata basis. After giving effect to the waiver from Spotify and Tencent to receive such share dividend, we distributed to our then existing
shareholders (other than Min River Investment Limited and Spotify AB) a share dividend of a total of 88,726,036 of our ordinary shares. Subsequently, in
consideration for the above-mentioned waiver from Tencent, a certain number of the ordinary shares of Spotify that we acquired in the foregoing
transactions were transferred to a wholly-owned subsidiary of Tencent for a nominal consideration of US$1, which was accounted for as a distribution to
Tencent and recognized in equity.
We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash
requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to
us. See “Item 3. Key Information—3.D. Risk Factors—Risk Related to Doing Business in China—Foreign exchange control may limit our ability to utilize
our revenues effectively and affect the value of your investment.”
112
Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our
shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under
Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may
a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of
directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our ordinary
shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying the ADSs to the depositary, as the registered
holder of such Class A ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the Class A ordinary shares
underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder.
8.B.
Significant Changes
Except as otherwise disclosed in this report, we have not experienced any significant changes since the date of the annual financial statements
included herein.
ITEM 9.
THE OFFER AND LISTING
9.A.
Offering and Listing Details
Our ADSs have been listed on the New York Stock Exchange since December 12, 2018 under the symbol “TME.” Each ADS represents two ordinary
shares, par value US$0.000083 per share.
9.B.
Plan of Distribution
Not applicable.
9.C.
Markets
The ADSs representing our Class A ordinary shares have been listed on the New York Stock Exchange since December 12, 2018 under the symbol
“TME.”
9.D.
Selling Shareholders
Not applicable.
9.E.
Dilution
Not applicable.
9.F.
Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
10.A.
Share Capital
Not applicable.
10.B.
Memorandum and Articles of Association
We are a Cayman Islands company and our affairs are governed by our sixth amended and restated memorandum and articles of association, as
amended from time to time and the Companies Law (2020 Revision) of the Cayman Islands, which we refer to as the “Companies Law” below, and the
common law of the Cayman Islands.
We incorporate by reference into this annual report our sixth amended and restated memorandum and articles of association, the form of which was
filed as Exhibit 3.2 to our registration statement on Form F-1 (File Number 333-22656) filed with the Securities and Exchange Commission on October 2,
2018. Our shareholders adopted our Sixth Amended and
113
Restated Memorandum and Articles of Association by a special resolution on September 4, 2018, which became effective immediately prior to completion
of our initial public offering of ADSs representing our Class A ordinary shares.
The following are summaries of material provisions of our sixth amended and restated memorandum and articles of association and the Companies
Law as they relate to the material terms of our ordinary shares.
Registered Office and Objects
Our registered office in the Cayman Islands is at the offices of Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George
Town, Grand Cayman KY1-9008, Cayman Islands.
According to Clause 3 of our Sixth Amended and Restated Memorandum of Association, the objects for which we are established are unrestricted and
we have full power and authority to carry out any object not prohibited by the Companies Law or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees.”
Ordinary Shares
General. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares and Class
B ordinary shares will have the same rights except for voting and conversion rights. All of our issued and outstanding ordinary shares are fully paid and
non-assessable. Our ordinary shares are issued in registered form and are issued when registered in our register of members. We may not issue share to
bearer. Our shareholders who are non-residents of the Cayman Islands may freely hold and transfer their ordinary shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to our sixth
amended and restated memorandum and articles of association and the Companies Law. In addition, our shareholders may by ordinary resolution declare a
dividend, but no dividend may exceed the amount recommended by our board of directors. Our sixth amended and restated memorandum and articles of
association provides that dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our
board of directors determine is no longer needed. Dividends may also be declared and paid out of share premium account or any other fund or account
which can be authorized for this purpose in accordance with the Companies Law. No dividend may be declared and paid unless our board of directors
determine that, immediately after the payment, we will be able to pay our debts as they become due in the ordinary course of business and we have funds
lawfully available for such purpose.
Conversion. Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time, while
Class A ordinary shares cannot be converted into Class B ordinary shares under any circumstances. Upon (i) any sale, transfer, assignment or disposition of
any Class B ordinary shares by a holder thereof to person or entity which is not an affiliate of such holder, or (ii) a change of beneficial ownership of any
Class B ordinary shares as a result of which any person who is not an affiliate of registered holders of such Class B ordinary shares becomes a beneficial
owner of such Class B ordinary shares, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary
share. There is no limit on the circumstances where holders of Class B ordinary shares may transfer or otherwise dispose of their Class B ordinary shares.
Voting Rights. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together as one class on all matters submitted to
a vote by the members at any such general meeting. Each Class A ordinary share shall be entitled to one vote on all matters subject to a vote at general
meetings of the shareholders, and each Class B ordinary share shall be entitled to 15 votes on all matters subject to a vote at general meetings of the
shareholders.
A quorum required for a meeting of shareholders consists of one or more shareholders holding a majority of all votes attaching to the issued and
outstanding shares entitled to vote at general meetings present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized
representative. As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our
sixth memorandum and articles of association provides that we may (but are not obliged to) in each year hold a general meeting as our annual general
meeting in which case we will specify the meeting as such in the notices calling it, and the annual general meeting will be held at such time and place as
may be determined by our board of directors. We, however, will hold an annual shareholders’ meeting for each fiscal year as required by the Listing Rules
of the NYSE. Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting. Shareholders’ annual general
meetings and any other general meetings of our shareholders may be called by a majority of our board of directors or our chairman of the board or upon a
requisition of shareholders holding at the date of deposit of the requisition not less than one-third of the votes attaching to the issued and outstanding shares
entitled to vote at general meetings, in which case our board of directors are obliged to call such meeting and to put the resolutions so requisitioned to a
vote at such meeting; however, our sixth amended and restated memorandum
114
and articles of association does not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general
meetings not called by such shareholders. Advance notice of at least seven days is required for the convening of our annual general meeting and other
general meetings unless such notice is waived in accordance with our articles of association.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the
ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting, while a special resolution also
requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares cast by those shareholders entitled to vote who are
present in person or by proxy at a general meeting. A special resolution will be required for important matters such as a change of name or making changes
to our sixth amended and restated memorandum and articles of association.
Transfer of Ordinary Shares. Subject to the restrictions in our sixth amended and restated memorandum and articles of association as set out below,
any of our shareholders may transfer all or any of its, his or her ordinary shares by an instrument of transfer in the usual or common form or any other form
approved by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we
have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
•
•
•
•
•
•
the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as
our board of directors may reasonably require to show the right of the transferor to make the transfer;
the instrument of transfer is in respect of only one class of shares;
the instrument of transfer is properly stamped, if required;
in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four;
the shares are free from any lien in favor of our company; and
a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our board of directors may from time to time
require is paid to us in respect thereof.
If our board of directors refuses to register a transfer it shall, within two months after the date on which the instrument of transfer was lodged, send to
each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register closed at such times and for
such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the
register closed for more than 30 calendar days in any year.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), if the assets
available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the
winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the
winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or
otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne
by our shareholders in proportion to the par value of the shares held by them. Any distribution of assets or capital to a holder of ordinary share will be the
same in any liquidation event.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any
amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 calendar days prior to the specified time of payment. The
ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Ordinary Shares. We may issue shares on terms that such shares are subject to redemption, at our option
or at the option of the holders thereof, on such terms and in such manner as may be determined, before the issuance of such shares, by our board of
directors. We may also repurchase any of our shares provided that the manner and terms of such purchase have been approved by our board of directors, or
are otherwise authorized by our sixth
115
amended and restated memorandum and articles of association. Under the Companies Law, the redemption or repurchase of any share may be paid out of
our profits or out of the proceeds of a fresh issuance of shares made for the purpose of such redemption or repurchase, or out of capital (including share
premium account and capital redemption reserve) if we can, immediately following such payment, pay our debts as they fall due in the ordinary course of
business. In addition, under the Companies Law no such share may be redeemed or repurchased (i) unless it is fully paid up, (ii) if such redemption or
repurchase would result in there being no shares outstanding, or (iii) if we have commenced liquidation. In addition, we may accept the surrender of any
fully paid share for no consideration.
Variations of Rights of Shares. If at any time our share capital is divided into different classes or series of shares, the rights attached to any class or
series of shares (unless otherwise provided by the terms of issuance of the shares of that class or series), whether or not our company is being wound-up,
may be varied with the consent in writing of the holders of not less than two-thirds of the issued shares of that class or series or with the sanction of a
resolution passed at a separate meeting of the holders of the shares of the class or series by two-thirds of the votes cast at such a meeting. The rights
conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issuance of the shares of that
class, be deemed to be varied by the creation or issuance of further shares ranking pari passu with such existing class of shares.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our
list of shareholders or our corporate records (other than our memorandum and articles of association and any special resolutions passed by our
shareholders, and the register of mortgages and charges of our company).
Issuance of Additional Shares. Our sixth amended and restated memorandum of association authorizes our board of directors to issue additional
ordinary shares, to the extent authorized but unissued, from time to time as our board of directors shall determine.
Our sixth amended and restated memorandum of association also authorizes our board of directors to establish from time to time one or more series of
preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including:
•
•
•
•
the designation of the series;
the number of shares of the series;
the dividend rights, dividend rates, conversion rights, voting rights; and
the rights and terms of redemption and liquidation preferences.
Our board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares
may dilute the voting power of holders of ordinary shares.
Anti-Takeover Provisions. Some provisions of our sixth amended and restated memorandum and articles of association may discourage, delay or
prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of
directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares
without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our sixth memorandum and articles
of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Exempted Company. We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes between
ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the
Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an
ordinary resident company except that an exempted company:
•
•
does not have to file an annual return of its shareholders with the Registrar of Companies;
is not required to open its register of members for inspection;
116
•
•
•
•
•
•
does not have to hold an annual general meeting;
may issue negotiable or bearer shares or shares with no par value;
may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);
may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
may register as a limited duration company; and
may register as a segregated portfolio company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the
company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or
other circumstances in which a court may be prepared to pierce or lift the corporate veil).
10.C.
Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report.
10.D.
Exchange Controls
The Cayman Islands currently has no exchange control regulations or currency restrictions.
10.E.
Taxation
The following discussion of Cayman Islands, PRC and United States federal income tax consequences of an investment in the ADSs or Class A
ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This
discussion does not deal with all possible tax consequences relating to an investment in the ADSs or Class A ordinary shares, such as the tax consequences
under state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Maples and
Calder (Hong Kong) LLP, our Cayman Islands counsel. To the extent that the discussion relates to matters of PRC tax law, it represents the opinion of Han
Kun Law Offices, our PRC legal counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no
taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us or holders of the ADSs or Class A ordinary shares
levied by the government of the Cayman Islands, except for stamp duties which may be applicable on instruments executed in, or after execution brought
within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by
our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of the ADSs or Class A ordinary shares will not be subject to taxation in the Cayman Islands and no
withholding will be required on the payment of a dividend or capital to any holder of the ADSs or Class A ordinary shares, nor will gains derived from the
disposal of the ADSs or Class A ordinary shares be subject to Cayman Islands income or corporation tax.
People’s Republic of China Taxation
Under the PRC EIT Law, which became effective on January 1, 2008, and were further amended on February 24, 2017 and December 29, 2018, an
enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income
tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the PRC EIT
Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business
operations, personnel and human resources, finances and properties of an enterprise.
In addition, the SAT Circular 82 issued by the SAT in April 2009 specifies that certain offshore incorporated enterprises controlled by PRC
enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are
117
located or resided in the PRC: (a) senior management personnel and departments that are responsible for daily production, operation and management; (b)
financial and personnel decision making bodies; (c) key properties, accounting books, company seal, minutes of board meetings and shareholders’
meetings; and (d) half or more of the senior management or directors having voting rights. Our company is incorporated outside the PRC. As a holding
company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of
directors and the resolutions of its shareholders) are maintained, outside the PRC. As such, we do not believe that our company meets all of the conditions
above or is a PRC resident enterprise for PRC tax purposes. For the same reasons, we believe our other entities outside of China are not PRC resident
enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with
respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that
is consistent with us. If the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. For example, a 10% withholding tax would be imposed on dividends
we pay to our non-PRC enterprise shareholders (including the ADS holders). In addition, non-resident enterprise shareholders (including the ADS holders)
may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or Class A ordinary shares, if such income is treated as sourced from
within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including the ADS
holders) and any gain realized on the transfer of ADSs or Class A ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which,
in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC
shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we
are treated as a PRC resident enterprise. See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China—We may be
classified as a ‘PRC resident enterprise’ for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-
PRC shareholders and ADS holders and have a material adverse effect on our results of operations and the value of your investment.”
U.S. Federal Income Taxation
The following are material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of the ADSs or Class
A ordinary shares, but this discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular
person’s decision to hold the ADSs or Class A ordinary shares.
This discussion applies only to a U.S. Holder that holds the ADSs or Class A ordinary shares as capital assets for U.S. federal income tax purposes. In
addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the alternative
minimum tax, the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special rules, such as:
•
•
•
•
•
•
•
•
•
certain financial institutions;
dealers or traders in securities that use a mark-to-market method of tax accounting;
persons holding ADSs or Class A ordinary shares as part of a straddle, conversion transaction, integrated transaction or similar transaction;
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
entities classified as partnerships for U.S. federal income tax purposes and their partners;
tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;
persons that own or are deemed to own ADSs or Class A ordinary shares representing 10% or more of our voting power or value;
persons who acquire our ADSs or Class A ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation; or
persons holding ADSs or Class A ordinary shares in connection with a trade or business outside the United States.
If a partnership (or other entity that is classified as a partnership for U.S. federal income tax purposes) owns ADSs or Class A ordinary shares, the
U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning
ADSs or Class A ordinary shares and their partners should consult
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their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of ADSs or Class A ordinary shares.
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions, final,
temporary and proposed Treasury regulations, and the income tax treaty between the United States and the PRC, or the Treaty, all as of the date hereof, any
of which is subject to change, possibly with retroactive effect.
As used herein, a “U.S. Holder” is a beneficial owner of the ADSs or Class A ordinary shares that is, for federal income tax purposes:
•
•
•
a citizen or individual resident of the United States;
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the
District of Columbia; or
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
In general, a U.S. Holder who owns American depositary shares will be treated as the owner of the underlying shares represented by those ADSs for
U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying Class A ordinary
shares represented by those ADSs.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of
ADSs or Class A ordinary shares in their particular circumstances.
Except as described below under “—Passive Foreign Investment Company Rules,” this discussion assumes that we are not, and will not become, a
passive foreign investment company (a “PFIC”) for any taxable year.
Taxation of Distributions
Distributions paid on the ADSs or Class A ordinary shares, other than certain pro rata distributions of ADSs or Class A ordinary shares, will be
treated as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will
be reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S. corporations under
the Code. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be taxable at favorable rates. Non-corporate U.S.
Holders should consult their tax advisers regarding the availability of these favorable rates in their particular circumstances.
Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, receipt. The amount
of any dividend income paid in foreign currency will be the U.S. dollar amount calculated by reference to the spot rate in effect on the date of receipt,
regardless of whether the payment is in fact converted into U.S. dollars on such date. If the dividend is converted into U.S. dollars on the date of receipt, a
U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the amount received. A U.S. Holder may have foreign
currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
Dividends will be treated as foreign-source income for foreign tax credit purposes. As described in “—People’s Republic of China Taxation”,
dividends paid by us may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of the dividend income will include any
amounts withheld in respect of PRC withholding tax. Subject to applicable limitations, which vary depending upon the U.S. Holder’s circumstances, and
PRC taxes withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty in the case of a U.S. Holder that is eligible
for the benefits of the Treaty) generally will be creditable against a U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits
are complex and U.S. Holders should consult their tax advisers regarding the creditability of foreign tax credits in their particular circumstances. In lieu of
claiming a credit, a U.S. Holder may elect to deduct such PRC taxes in computing its taxable income, subject to applicable limitations. An election to
deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.
Sale or Other Taxable Disposition of ADSs or Class A Ordinary Shares
A U.S. Holder will generally recognize capital gain or loss on a sale or other taxable disposition of ADSs or Class A ordinary shares in an amount
equal to the difference between the amount realized on the sale or disposition and the U.S.
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Holder’s tax basis in the ADSs or Class A ordinary shares disposed of, in each case as determined in U.S. dollars. The gain or loss will be long-term capital
gain or loss if, at the time of the sale or disposition, the U.S. Holder has owned the ADSs or Class A ordinary shares for more than one year. Long-term
capital gains recognized by non-corporate U.S. Holders may be subject to tax rates that are lower than those applicable to ordinary income. The
deductibility of capital losses is subject to limitations.
As described in “—People’s Republic of China Taxation” gains on the sale of ADSs or Class A ordinary shares may be subject to PRC taxes. A U.S.
Holder is entitled to use foreign tax credits to offset only the portion of its U.S. federal income tax liability that is attributable to foreign-source income.
Because under the Code capital gains of U.S. persons are generally treated as U.S.-source income, this limitation may preclude a U.S. Holder from
claiming a credit for all or a portion of any PRC taxes imposed on any such gains. However, U.S. Holders that are eligible for the benefits of the Treaty
may be able to elect to treat the gain as PRC-source and therefore claim foreign tax credits in respect of PRC taxes on such disposition gains. U.S. Holders
should consult their tax advisers regarding their eligibility for the benefits of the Treaty and the creditability of any PRC tax on disposition gains in their
particular circumstances.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50%
or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the
above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held
its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive
income generally includes dividends, interest, rents, royalties and certain gains. Cash is a passive asset for these purposes.
Based on the composition of our income and assets and the value of our assets, including goodwill, which is based on the price of the ADSs, we
believe that we were not a PFIC for our 2019 taxable year. However, it is not entirely clear how the contractual arrangements between us and our VIEs will
be treated for purposes of the PFIC rules, and we may be or become a PFIC if our VIEs are not treated as owned by us for these purposes. Because the
treatment of our contractual arrangements with our VIEs is not entirely clear, because we hold a substantial amount of cash, and because our PFIC status
for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in
part, by reference to the market price of the ADSs, which could be volatile), there can be no assurance that we will not be a PFIC for any taxable year.
If we were a PFIC for any taxable year and any of our subsidiaries, VIEs or other companies in which we own or are treated as owning equity
interests were also a PFIC (any such entity, a “Lower-tier PFIC”), U.S. Holders would be deemed to own a proportionate amount (by value) of the shares of
each Lower-tier PFIC and would be subject to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain
distributions by a Lower-tier PFIC and (ii) dispositions of shares of Lower-tier PFICs, in each case as if the U.S. Holders held such shares directly, even
though the U.S. Holders did not receive the proceeds of those distributions or dispositions.
In general, if we were a PFIC for any taxable year during which a U.S. Holder holds ADSs or Class A ordinary shares, gain recognized by such U.S.
Holder on a sale or other disposition (including certain pledges) of its ADSs or Class A ordinary shares would be allocated ratably over that U.S. Holder’s
holding period. The amounts allocated to the taxable year of the sale or disposition and to any year before we became a PFIC would be taxed as ordinary
income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate,
for that taxable year, and an interest charge would be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions
received by a U.S. Holder in any year on its ADSs or Class A ordinary shares exceed 125% of the average of the annual distributions on the ADSs or Class
A ordinary shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, such distributions would be subject
to taxation in the same manner. In addition, if we were a PFIC (or with respect to a particular U.S. Holder were treated as a PFIC) for a taxable year in
which we paid a dividend or for the prior taxable year, the favorable tax rates described above with respect to dividends paid to certain non-corporate U.S.
Holders would not apply.
Alternatively, if we were a PFIC and if the ADSs were “regularly traded” on a “qualified exchange,” a U.S. Holder could make a mark-to-market
election that would result in tax treatment different from the general tax treatment for PFICs described in the preceding paragraph. The ADSs would be
treated as “regularly traded” for any calendar year in which more than a de minimis quantity of the ADSs were traded on a qualified exchange on at least 15
days during each calendar quarter. The New York Stock Exchange, where the ADSs are listed, is a qualified exchange for this purpose. If a U.S. Holder
makes the mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ADSs at the end
of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs over
their fair market value at the end of the taxable year (but only to the extent
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of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis
in the ADSs will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs in a year in
which we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income
previously included as a result of the mark-to-market election, with any excess treated as capital loss). If a U.S. Holder makes the mark-to-market election,
distributions paid on ADSs will be treated as discussed under “—Taxation of Distributions” above. U.S. Holders will not be able to make a mark-to-market
election with respect to our Class A ordinary shares, or with respect to any shares of a Lower-tier PFIC, because such shares will not trade on any stock
exchange.
If we are a PFIC for any taxable year during which a U.S. Holder owns ADSs or Class A ordinary shares, we will generally continue to be treated as a
PFIC with respect to the U.S. Holder for all succeeding years during which the U.S. Holder owns the ADSs or Class A ordinary shares, even if we cease to
meet the threshold requirements for PFIC status.
If we were a PFIC for any taxable year during which a U.S. Holder owned any ADSs or Class A ordinary shares, the U.S. Holder would generally be
required to file annual reports with the Internal Revenue Service. U.S. Holders should consult their tax advisers regarding the determination of whether we
are a PFIC for any taxable year and the potential application of the PFIC rules to their ownership of ADSs or Class A ordinary shares.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be
subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other “exempt recipient” or (ii) in the case of backup
withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any
backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle
it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
10.F.
Dividends and Paying Agents
Not applicable.
10.G.
Statement by Experts
Not applicable.
10.H.
Documents on Display
We previously filed with the SEC registration statement on Form F-1 (File Number 333-227656), as amended to register our Class A ordinary shares
in relation to our initial public offering. We also filed with the SEC related registration statement on Form F-6 (File Number 333-228610) to register the
ADSs representing our Class A ordinary shares.
We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the
Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four
months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the SEC. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling
the Commission at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the
rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies
whose securities are registered under the Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of the ADSs, with our annual reports, which will include a review of operations and
annual audited consolidated financial statements prepared in conformity with IFRS, and all notices of shareholders’ meetings and other reports and
communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to
holders of ADSs and, upon our request, will mail
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to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank
deposits. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest
rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest
income may be lower than expected due to changes in market interest rates.
Foreign exchange risk
Substantially all of our revenues are denominated in Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account
transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and
by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the
Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and
June 2010, this appreciation subsided and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010,
the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. While appreciating approximately by 7% against the U.S.
dollar in 2017, the Renminbi in 2018 depreciated approximately by 5% against the U.S. dollar, and the Renminbi in 2019 depreciated approximately by 1%
against the U.S, dollar. Since October 1, 2016, the RMB has joined the International Monetary Fund’s basket of currencies that make up the Special
Drawing Right, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. With the development of the foreign exchange market and
progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the
exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It
is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the
future.
To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
To the extent that we need to convert U.S. Dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. Dollar would reduce
the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. Dollars for the purpose of making payments
for dividends on our ordinary shares or ADSs, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. Dollar against the
Renminbi would reduce the U.S. Dollar amounts available to us.
Inflation risk
Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China,
the year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 1.8%, 1.9% and 4.5%, respectively.
Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the
future by higher rates of inflation in China.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12.A.
Debt Securities
Not applicable.
12.B.
Warrants and Rights
Not applicable.
12.C.
Other Securities
Not applicable.
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12.D.
American Depositary Shares
Persons depositing or withdrawing shares or ADS holders must pay:
For:
• US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
• US$.05 (or less) per ADS
• A fee equivalent to the fee that would be payable if securities distributed to
you had been shares and the shares had been deposited for issuance of
ADSs
• US$.05 (or less) per ADS per calendar year
• Registration or transfer fees
• Expenses of the depositary
• Taxes and other governmental charges the depositary or the custodian has
to pay on any ADSs or shares underlying ADSs, such as stock transfer
taxes, stamp duty or withholding taxes
• Any charges incurred by the depositary or its agents for servicing the
deposited securities
• Issuance of ADSs, including issuances resulting from
a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
• Any cash distribution to ADS holders
• Distribution of securities distributed to holders of
deposited securities (including rights) that are
distributed by the depositary to ADS holders
• Depositary services
• Transfer and registration of shares on our share
register to or from the name of the depositary or its
agent when you deposit or withdraw shares
• Cable and facsimile transmissions (when expressly
provided in the deposit agreement)
• Converting foreign currency to U.S. dollars
• As necessary
• As necessary
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of
withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the
amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by
deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The
depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable)
to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services
are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and
maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from
ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service
providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
The depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as agent,
advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for its own
account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under the
deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account. The depositary
makes no representation that the exchange rate used or obtained in any currency conversion under the deposit agreement will be the most favorable rate that
could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s
obligations under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is available upon request.
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ITEM 13. ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
14.A. – 14.D.Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged.
14.E.
Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1 (File No. 333-227656), as amended, including the
annual report contained therein, which registered 164,000,000 Class A ordinary shares represented by 82,000,000 ADSs and was declared effective by the
SEC on December 11, 2018, for our initial public offering, which closed in December, 2018. Morgan Stanley & Co. LLC, Goldman Sachs (Asia) L.L.C.,
J.P.Morgan Securities LLC, Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated were the representatives of the
underwriters. We received net proceeds of approximately US$509 million in the aggregate from the initial public offering after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, and received additional net proceeds of US$1.8 million from the concurrent
private placement to Tencent to effect its Assured Entitlement Distribution.
For the period from December 11, 2018, the date that the registration statement on Form F-1 was declared effective by the SEC to December 31,
2019, the total expenses incurred for our company’s account in connection with our initial public offering was approximately US$45.6 million, which
included US$42.6 million in underwriting discounts and commissions for the initial public offering and approximately US$3.0 million in other costs and
expenses for our initial public offering. None of the transaction expenses included payments to directors or officers of our company or their associates,
persons owning 10% or more of our equity securities or our affiliates. None of the net proceeds from the initial public offering were paid, directly or
indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
For the period from December 11, 2018, the date that the registration statement on Form F-1 was declared effective by the SEC, to December 31,
2019, we have not yet used the proceeds received from the initial public offering.
We still intend to use the remainder of the proceeds from our initial public offering as disclosed in our registration statements on Form F-1.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required
by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2019, our disclosure controls and procedures were effective in
ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and
chief financial officer, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. As required by Rule 13a-15(c) of the Exchange Act, our management conducted an evaluation of our company's
internal control over financial reporting as of December 31, 2019 based on the framework in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over
financial reporting was effective as of December 31, 2019.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, has audited the effectiveness of our internal control
over financial reporting as of December 31, 2019, as stated in its report, which appears on page F-2 of this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the period covered by this annual report on Form 20-F that have materially affected, or that are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 16.A.Audit Committee Financial Expert
Our board of directors has determined that Ms. Edith Manling Ngan, an independent director and the chairperson of our audit committee, qualifies as
an “audit committee financial expert” within the meaning of the SEC rules and possesses financial sophistication within the meaning of Listing Rules of the
New York Stock Exchange. Ms. Edith Manling Ngan satisfies the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934,
as amended, and Section 303A of the Corporate Governance Rules of the NYSE.
ITEM 16.B.Code of Ethics
Our board of directors has adopted a code of business conduct and ethics that applies to all of our directors, officers, employees, including certain
provisions that specifically apply to our principal executive officer, principal financial officer, principal accounting officer or controller and any other
persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form
F-1 (file No. 333-227656) filed with the SEC on October 2, 2018 and posted a copy of our code of business conduct and ethics on our website at
https://ir.tencentmusic.com. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten
working days after we receive such person’s written request.
ITEM 16.C.Principal Accountant Fees and Services
Auditor Fees
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by
PricewaterhouseCoopers Zhong Tian LLP, our independent registered public accounting firm, for the periods indicated.
Services
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
Other Fees(4)
Total
2017
RMB
Year Ended December 31,
2018
RMB
(in thousands)
2019
RMB
7,000
—
—
—
7,000
6,000
13,800
400
2,000
22,200
15,000
—
—
2,690
17,690
(1) Audit Fees. Audit fees mean the aggregate fees billed for professional services rendered by our principal auditors for the audit or review of our annual
or quarterly financial statements.
(2) Audit-related Fees. Audit-related fees mean the aggregate fees billed for professional services rendered by our principal auditors for the assurance and
related services in connection with our initial public offering of our ADSs on December 14, 2018, which were not included under Audit Fees above.
(3) Tax Fees. Tax fees mean fees billed for the professional tax services rendered by our principal auditors.
(4) Other Fees. Other fees mean fees billed for services rendered by our principal auditors other than services reported under “Audit Fees”, “Audit-
Related Fees” and “Tax Fees”.
125
The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian LLP, our
independent registered public accounting firm, including audit services and audit-related services as described above, other than those for de minimus
services which are approved by the audit committee prior to the completion of the audit.
ITEM 16.D.Exemptions from the Listing Standards for Audit Committee
Not applicable.
ITEM 16.E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the
period covered by this annual report.
ITEM 16.F.Change in Registrant’s Certifying Accountant
Not applicable.
ITEM 16.G.Corporate Governance
As a company listed on the New York Stock Exchange, we are subject to the New York Stock Exchange corporate governance listing standards.
However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate
governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards.
We currently follow and intend to continue to follow Cayman Islands corporate governance practices in lieu of the corporate governance requirements of
the New York Stock Exchange that listed companies must have: (i) a majority of independent directors; (ii) a compensation committee composed entirely
of independent directors. To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they
otherwise would enjoy under New York Stock Exchange corporate governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key
Information—4.D. Risk Factors—Risks Relating to Our Ordinary Shares and ADSs—As a company incorporated in the Cayman Islands, we are permitted
to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate
governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the New York
Stock Exchange corporate governance listing standards.”
ITEM 16.H.Mine Safety Disclosure
Not applicable.
126
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
PART III
The consolidated financial statements of Tencent Music Entertainment Group are included at the end of this annual report.
ITEM 19. EXHIBITS
Exhibit
Number
1.1
2.1
2.2
2.3
2.4*
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Description of Document
The Sixth Amended and Restated Memorandum and Articles of Association of the Registrant, as currently in effect (incorporated herein by
reference to Exhibit 3.2 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on
October 2, 2018)
Form of Registrant’s Specimen American Depositary Receipt (incorporated herein by reference to Exhibit 4.1 to the registration statement
on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Registrant’s Specimen Certificate for Class A Ordinary Shares (incorporated herein by reference to Exhibit 4.2 to the registration statement
on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Form of Deposit Agreement among the Registrant, the depositary and holders of the American Depositary Shares (incorporated herein by
reference to Exhibit (a) to the registration statement on Form F-6 (File No. 333-228610), as amended, initially filed with the SEC on
November 30, 2018)
Description of Registrant’s Securities
Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to
Exhibit 10.1 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Form of Employment Agreement between the Registrant and executive officers of the Registrant (incorporated herein by reference to
Exhibit 10.2 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
The 2014 Share Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the registration statement on Form F-1 (File No. 333-
227656), as amended, initially filed with the SEC on October 2, 2018)
The 2017 Share Option Plan (incorporated herein by reference to Exhibit 10.4 to the registration statement on Form F-1 (File No. 333-
227656), as amended, initially filed with the SEC on October 2, 2018)
The 2017 Restricted Share Award Scheme (as amended and restated) (incorporated herein by reference to Exhibit 10.5 to the registration
statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and between the Registrant and Min River Investment Limited dated October 23, 2016 (incorporated
herein by reference to Exhibit 10.6 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the
SEC on October 2, 2018)
Share Subscription Agreement by and between the Registrant and PAGAC Music Holding II Limited dated October 23, 2016 (incorporated
herein by reference to Exhibit 10.7 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the
SEC on October 2, 2018)
Share Subscription Agreement by and between the Registrant and China Investment Corporation Financial Holdings dated October 23,
2016 (incorporated herein by reference to Exhibit 10.8 to the registration statement on Form F-1 (File No. 333-227656), as amended,
initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and between the Registrant and CICFH Group Limited dated October 23, 2016 (incorporated herein by
reference to Exhibit 10.9 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on
October 2, 2018)
Share Subscription Agreement by and between the Registrant and Green Technology Holdings Limited dated October 23, 2016
(incorporated herein by reference to Exhibit 10.10 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially
filed with the SEC on October 2, 2018)
Share Subscription Agreement by and between the Registrant and Pan Asia Venture Group Limited dated October 23, 2016 (incorporated
herein by reference to Exhibit 10.11 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the
SEC on October 2, 2018)
127
Exhibit
Number
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
Description of Document
Subscription Agreement by and among the Registrant, Tencent Music Entertainment Hong Kong Limited, Spotify Technology S.A. and
Spotify AB dated December 8, 2017 (incorporated herein by reference to Exhibit 10.12 to the registration statement on Form F-1 (File No.
333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Transfer Agreement by and among the Registrant, Tencent Music Entertainment Hong Kong Limited and a wholly-owned subsidiary
of Tencent Holdings Limited dated December 8, 2017 (incorporated herein by reference to Exhibit 10.13 to the registration statement on
Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Investor Agreement by and among the Registrant, Tencent Holdings Limited, Spotify Technology S.A. and Spotify AB dated December 15,
2017 (incorporated herein by reference to Exhibit 10.14 to the registration statement on Form F-1 (File No. 333-227656), as amended,
initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, CICFH Glory Limited and certain other purchasers named therein dated
January 15, 2018 (incorporated herein by reference to Exhibit 10.15 to the registration statement on Form F-1 (File No. 333-227656), as
amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, Min River Investment Limited and certain other purchasers named therein
dated February 24, 2018 (incorporated herein by reference to Exhibit 10.16 to the registration statement on Form F-1 (File No. 333-
227656), as amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, PAGAC Music Holding II Limited, PAGAC Music Holding II LP and certain
other purchasers named therein dated February 24, 2018 (incorporated herein by reference to Exhibit 10.17 to the registration statement on
Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, China Investment Corporation Financial Holdings, CICFH Group Limited,
CICFH Music Investment Limited, Green Technology Holdings Limited, Pan Asia Venture Group Limited and certain other purchasers
named therein dated February 24, 2018 (incorporated herein by reference to Exhibit 10.18 to the registration statement on Form F-1 (File
No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, Min River Investment Limited and certain other purchasers named therein
dated March 7, 2018 (incorporated herein by reference to Exhibit 10.19 to the registration statement on Form F-1 (File No. 333-227656), as
amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, PAGAC Music Holding II Limited, PAGAC Music Holding II LP and certain
other purchasers named therein dated March 7, 2018 (incorporated herein by reference to Exhibit 10.20 to the registration statement on
Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, China Investment Corporation Financial Holdings, CICFH Group Limited,
CICFH Music Investment Limited, Green Technology Holdings Limited, Pan Asia Venture Group Limited and certain other purchasers
named therein dated March 7, 2018 (incorporated herein by reference to Exhibit 10.21 to the registration statement on Form F-1 (File No.
333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Subscription Agreement by and among the Registrant, certain shareholders and option holders of United Music Entertainment
Corporation and their respective affiliates named therein dated August 23, 2018 (incorporated herein by reference to Exhibit 10.22 to the
registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Share Transfer Agreement by and among the Registrant, PAGAC Music Holding II Limited, Quantum Investments Limited and certain
other parties named therein dated August 28, 2018 (incorporated herein by reference to Exhibit 10.23 to the registration statement on Form
F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Third Amended and Restated Shareholders Agreement among the Registrant, the shareholders of the Registrant and certain other parties
named therein dated January 8, 2018 (incorporated herein by reference to Exhibit 10.24 to the registration statement on Form F-1 (File No.
333-227656), as amended, initially filed with the SEC on October 2, 2018)
Amendment Agreement dated as of September 26, 2018 to the Third Amended and Restated Shareholders Agreement among the
Registrant, the shareholders of the Registrant and certain other parties named therein (incorporated herein by reference to Exhibit 10.25 to
the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
128
Exhibit
Number
4.26*
4.27*
4.28
4.29
4.30*
4.31
4.32*
4.33
4.34*
4.35
4.36
4.37
4.38
4.39
4.40
4.41
4.42
4.43
Description of Document
English translation of Equity Interests Pledge Agreement among Beijing Tencent Music, Xizang Qiming and the shareholders of Xizang
Qiming dated September 12, 2019
English translation of Exclusive Option Agreement among Beijing Tencent Music, Xizang Qiming and the shareholders of Xizang Qiming
dated September 12, 2019
English translation of Exclusive Technical Service Agreement between Beijing Tencent Music and Xizang Qiming dated February 8, 2018
(incorporated herein by reference to Exhibit 10.28 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially
filed with the SEC on October 2, 2018)
English translation of Voting Trust Agreement granted by Mr. Qihu Yang, shareholder of Xizang Qiming dated February 8, 2018
(incorporated herein by reference to Exhibit 10.29 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially
filed with the SEC on October 2, 2018)
English translation of Power of Attorney granted by Mr. Dejun Gu, shareholder of Xizang Qiming dated September 12, 2019
English translation of Spousal Consent granted by the spouse of Mr. Qihu Yang dated February 8, 2018 (incorporated herein by reference to
Exhibit 10.30 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Mr. Dejun Gu dated September 12, 2019
English translation of the Loan Agreement between Beijing Tencent Music and Mr. Qihu Yang dated February 8, 2018 (incorporated herein
by reference to Exhibit 10.32 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on
October 2, 2018)
English translation of Debt Assignment and Offset Agreement among Ms. Min Hu, Mr. Dejun Gu and Beijing Tencent Music dated
September 12, 2019
English translation of Equity Interests Pledge Agreement among Beijing Tencent Music, Guangzhou Kugou and the shareholders of
Guangzhou Kugou dated March 26, 2018 (incorporated herein by reference to Exhibit 10.33 to the registration statement on Form F-1 (File
No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
English translation of Exclusive Option Agreement among Beijing Tencent Music, Guangzhou Kugou and the shareholders of Guangzhou
Kugou dated March 26, 2018 (incorporated herein by reference to Exhibit 10.34 to the registration statement on Form F-1 (File No. 333-
227656), as amended, initially filed with the SEC on October 2, 2018)
English translation of Exclusive Technical Service Agreement between Beijing Tencent Music and Guangzhou Kugou dated March 26,
2018 (incorporated herein by reference to Exhibit 10.35 to the registration statement on Form F-1 (File No. 333-227656), as amended,
initially filed with the SEC on October 2, 2018)
English translation of Voting Trust Agreement granted by the shareholders of Guangzhou Kugou dated March 26, 2018 (incorporated
herein by reference to Exhibit 10.36 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the
SEC on October 2, 2018)
English translation of Loan Agreement among Mr. Guomin Xie, Mr. Xiaotao Chen and Ocean Interactive (Beijing) Information Technology
Co., Ltd. (currently known as Beijing Tencent Music) dated April 21, 2014 (incorporated herein by reference to Exhibit 10.37 to the
registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
English translation of Debt Assignment and Offset Agreement among Mr. Xiaotao Chen, Mr. Zhongwei Qiu and Ocean Interactive
(Beijing) Information Technology Co., Ltd. (currently known as Beijing Tencent Music) dated April 11, 2017 (incorporated herein by
reference to Exhibit 10.38 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on
October 2, 2018)
English translation of Spousal Consent granted by the spouse of Mr. Guomin Xie dated July 28, 2018 (incorporated herein by reference to
Exhibit 10.39 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Mr. Liang Tang dated July 25, 2018 (incorporated herein by reference to
Exhibit 10.40 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Mr. Hanjie Xu dated March 26, 2018 (incorporated herein by reference to
Exhibit 10.41 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
129
Exhibit
Number
4.44
4.45
4.46
4.47*
4.48*
4.49*
4.50
4.51*
4.52
4.53*
4.54*
4.55
4.56
4.57
4.58
4.59
4.60
4.61*
4.62*
4.63*
4.64*
4.65*
4.66*
Description of Document
English translation of Spousal Consent granted by the spouse of Mr. Jianming Dong dated July 26, 2018 (incorporated herein by reference
to Exhibit 10.42 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Mr. Zhongwei Qiu dated March 26, 2018 (incorporated herein by reference
to Exhibit 10.43 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Ms. Huan Hu dated July 26, 2018 (incorporated herein by reference to
Exhibit 10.44 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Ms. Yaping Gao dated November 29, 2018
English translation of Equity Interests Pledge Agreement among Yeelion Online, Beijing Kuwo and the shareholders of Beijing Kuwo dated
October 1, 2019
English translation of Exclusive Option Agreement among Yeelion Online, Beijing Kuwo and the shareholders of Beijing Kuwo dated
October 1, 2019
English translation of Exclusive Technical Service Agreement between Yeelion Online and Beijing Kuwo dated July 12, 2016 (incorporated
herein by reference to Exhibit 10.47 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the
SEC on October 2, 2018)
English translation of Voting Trust Agreement granted by the shareholders of Beijing Kuwo dated October 1, 2019
English translation of Loan Agreement among Yeelion Online, Mr. Guomin Xie and Mr. Lixue Shi dated July 12, 2016 (incorporated herein
by reference to Exhibit 10.49 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on
October 2, 2018)
English translation of Debt Assignment and Offset Agreement among Mr. Guomin Xie, Ms. Meiqi Wang and Yeelion Online dated October
1, 2019
English translation of Spousal Consent granted by the spouse of Ms. Meiqi Wang dated October 1, 2019
English translation of Equity Interests Pledge Agreement among Shenzhen Ultimate Xiangyue, Shenzhen Ultimate Music and the
shareholders of Shenzhen Ultimate Music dated January 11, 2018 (incorporated herein by reference to Exhibit 10.51 to the registration
statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
English translation of Exclusive Option Agreement among Shenzhen Ultimate Xiangyue, Shenzhen Ultimate Music and the shareholders of
Shenzhen Ultimate Music dated January 11, 2018 (incorporated herein by reference to Exhibit 10.52 to the registration statement on Form
F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
English translation of Exclusive Technical Service Agreement between Shenzhen Ultimate Xiangyue and Shenzhen Ultimate Music dated
January 11, 2018 (incorporated herein by reference to Exhibit 10.53 to the registration statement on Form F-1 (File No. 333-227656), as
amended, initially filed with the SEC on October 2, 2018)
English translation of Voting Trust Agreement granted by the shareholders of Shenzhen Ultimate Music dated January 11, 2018
(incorporated herein by reference to Exhibit 10.54 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially
filed with the SEC on October 2, 2018)
English translation of Spousal Consent granted by the spouse of Mr. Xiudong Ma dated January 11, 2018 (incorporated herein by reference
to Exhibit 10.55 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Spousal Consent granted by the spouse of Mr. Gang Ding dated January 11, 2018 (incorporated herein by reference to
Exhibit 10.56 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
English translation of Equity Interests Pledge Agreement among Beijing Tencent Music, Niannian Youyu and the shareholders of Niannian
Youyu dated August 28, 2019
English translation of Exclusive Option Agreement among Beijing Tencent Music, Niannian Youyu and the shareholders of Niannian
Youyu dated August 28, 2019
English translation of Exclusive Business Cooperation Agreement between Beijing Tencent Music and Niannian Youyu dated August 28,
2019
English translation of respective Loan Agreement between Mr. Mingzhong Ji and Mr. Wenjiang Zhou and Tencent Music (Beijing) Co., Ltd
dated August 28, 2019
English translation of Power of Attorney granted by the shareholders of Niannian Youyu dated August 28, 2019
English translation of Spousal Consent granted by the spouse of Mr. Mingzhong Ji dated August 28, 2019
130
Exhibit
Number
4.67*
4.68*
4.69*
4.70*
4.71*
4.72*
4.73*
4.74*
4.75*
4.76*
4.77*
4.78*
4.79*
4.80*
4.81*
4.82*
4.83
4.84
4.85
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
Description of Document
English translation of Equity Interests Pledge Agreement among Simo Music, United Culture Entertainment and the shareholders of United
Culture Entertainment dated July 26, 2019
English translation of Exclusive Option Agreement among Simo Music, United Culture Entertainment and the shareholders of United
Culture Entertainment dated July 26, 2019
English translation of Exclusive Business Cooperation Agreement between Simo Music and United Culture Entertainment dated July 26,
2019
English translation of Loan Agreement among Mr. Dejun Gu, Mr. Qihu Yang and Simo Music dated July 26, 2019
English translation of Voting Trust Agreement granted by the shareholders of United Culture Entertainment dated July 26, 2019
English translation of Commitment Letters signed by Mr. Qihu Yang and Mr. Dejun Gu dated July 26, 2019
English translation of Spousal Consents granted by the spouse of Mr. Qihu Yang and the spouse of Mr. Dejun Gu dated July 26, 2019
English translation of Equity Interests Pledge Agreement among Huateng Xiangfeng, Shengxiang Hudong and Mr. Qihu Yang, shareholder
of Shengxiang Hudong dated May 15, 2019
English translation of Equity Interests Pledge Agreement among Huateng Xiangfeng, Shengxiang Hudong and Mr. Dejun Gu, shareholder
of Shengxiang Hudong dated May 15, 2019
English translation of Exclusive Option Agreement among Huateng Xiangfeng, Shengxiang Hudong and Mr. Qihu Yang, shareholder of
Shengxiang Hudong dated May 15, 2019
English translation of Exclusive Option Agreement among Huateng Xiangfeng, Shengxiang Hudong and Mr. Dejun Gu, shareholder of
Shengxiang Hudong dated May 15, 2019
English translation of Business Cooperation Agreement between Huateng Xiangfeng and Shengxiang Hudong dated May 15, 2019
English translation of Power of Attorney granted by Mr. Qihu Yang, shareholder of Shengxiang Hudong dated May 15, 2019
English translation of Power of Attorney granted by Mr. Dejun Gu, shareholder of Shengxiang Hudong dated May 15, 2019
English translation of Spousal Consent granted by the spouse of Mr. Qihu Yang dated May 15, 2019
English translation of Spousal Consent granted by the spouse of Mr. Dejun Gu dated May 15, 2019
English translation of Master Business Cooperation Agreement between certain affiliates of Tencent and the Registrant dated July 12, 2018
(incorporated herein by reference to Exhibit 10.57 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially
filed with the SEC on October 2, 2018)
Share Subscription Agreement between the Registrant and Min River Investment Limited with respect to the subscription of Class A
ordinary shares in connection with the Assured Entitlement Distribution dated December 3, 2018 (incorporated herein by reference to
Exhibit 10.58 to the registration statement on Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2,
2018)
Registration Rights Agreement among the Registrant, the shareholders of the Registrant and certain other parties named therein dated
November 16, 2018 (incorporated herein by reference to Exhibit 10.59 to the registration statement on Form F-1 (File No. 333-227656), as
amended, initially filed with the SEC on October 2, 2018)
Principal Subsidiaries and VIEs of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on
Form F-1 (File No. 333-227656), as amended, initially filed with the SEC on October 2, 2018)
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Han Kun Law Offices
Consent of Maples and Calder (Hong Kong) LLP
Consent of PricewaterhouseCoopers Zhong Tian LLP, Independent Registered Public Accounting Firm
131
Exhibit
Number
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Description of Document
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
Filed herewith
Furnished herewith
132
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.
SIGNATURES
Date: March 25, 2020
Tencent Music Entertainment Group
By:
/s/ Cussion Kar Shun Pang
Name: Cussion Kar Shun Pang
Chief Executive Officer
Title:
133
TENCENT MUSIC ENTERTAINMENT GROUP
(Incorporated in the Cayman Islands with limited liability)
2019 CONSOLIDATED FINANCIAL STATEMENTS
134
TENCENT MUSIC ENTERTAINMENT GROUP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2018 and 2019
Consolidated Balance Sheets as at December 31, 2018 and 2019
Consolidated Statement of Changes in Equity for the years ended December 31, 2017, 2018 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2018 and 2019
Notes to the Consolidated Financial Statements
Page
F-2
F-5
F-6
F-7
F-8
F-11
F-12
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Tencent Music Entertainment Group
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tencent Music Entertainment Group and its subsidiaries (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each
of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”).
We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in
conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over
Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-2
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition from social entertainment services in relation to sale of durable virtual gifts
As described in Notes 2.22(b) and 4(b) to the consolidated financial statements, revenue from social entertainment services and others in the amount of
RMB18,282 million for the year ended December 31, 2019 includes revenue from the sale of durable virtual gifts on the Company’s online karaoke and
live streaming platforms. Management recognizes the revenue for sale of durable virtual gifts over their estimated lifespans of no longer than six months,
which are determined by the management based on the expected service periods derived from past experiences, given there is an implicit obligation of the
Company to maintain the virtual gifts operated on its platforms. The expected service periods of the virtual gifts is determined by management based on
historical data of the Company’s customers’ user relationship period. Significant judgments were required in determining the expected user relationship
periods including, but not limited to users' historical activities patterns and churn rates. Management assesses the estimated lifespans of virtual gifts
whenever there is any indication of change in the expected user relationship periods.
The principal considerations for our determination that performing procedures relating to revenue recognition from social entertainment services and others
in relation to sale of durable virtual gifts is a critical audit matter are there was a significant amount of judgment by management in determining the
expected service periods. This in turn led to a high degree of auditor judgment and effort in evaluating the assumptions used by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the operating effectiveness of controls over determining the expected user relationship periods for
revenue recognition from social entertainment services in relation to sale of durable virtual gifts including information systems’ general and automated
controls over the Company’s online platforms. These procedures also included, among others, (i) evaluating management’s judgment of key assumptions in
determining the estimated lifespans of the durable virtual gifts by comparing assumptions to actual historical results; (ii) testing the data integrity of
historical users’ activities patterns and calculation of the churn rates; and (iii) evaluating the consideration made by management with reference to the
continuing relevance of historical data of the Company’s customers’ user relationship periods.
F-3
Impairment assessments of goodwill
As described in Notes 2.10 and 14 to the consolidated financial statements, the Company’s consolidated goodwill balance was RMB17,140 million as of
December 31, 2019. Management conducts an annual goodwill impairment test or when there are indications the carrying value may be impaired. For
purposes of impairment testing, management allocates its goodwill to the relevant cash-generating units (“CGUs”) or group of CGUs, and compares the
recoverable amounts of these CGUs or group of CGUs to their respective carrying amounts. Management determined the recoverable amounts of these
CGU or group of CGUs based on the higher of (i) their value in use (“VIU”) and (ii) their fair value less costs of disposal, of which VIU is calculated based
on discounted cash flows expected to be derived from the respective CGU or group of CGUs. Management’s cash flows projections included significant
judgments and assumptions relating to revenue growth, margin, terminal growth rate and pre-tax discount rates.
The principal considerations for our determination that performing procedures relating to impairment assessments of goodwill is a critical audit matter are
there were significant judgments by management when determining the recoverable amount of the related CGU. This in turn led to a high degree of auditor
judgment and effort in performing procedures and in evaluating management’s significant assumptions, including revenue growth, margin, terminal growth
rate and pre-tax discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing
these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the operating effectiveness of controls relating to management’s goodwill impairment assessment,
including controls over the determination of the recoverable amounts of the Company’s CGUs. These procedures also included, among others, (i)
evaluating the appropriateness of the discounted cash flow model; (ii) testing the completeness, accuracy, and relevance of underlying data used in the
model; and (iii) evaluating the reasonableness of the significant assumptions used in management’s cash flow forecast related to revenue growth, margin
and terminal growth rate by considering the current and past performance of the CGU, or group of CGUs and consistency with relevant industry forecasts
and market developments. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the cash flow model
and certain significant assumptions, including pre-tax discount rates.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
March 25, 2020
We have served as the Company’s auditor since 2018.
F-4
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED INCOME STATEMENTS
Revenue from online music services
Revenue from social entertainment services and others
Total revenues
Cost of revenues
Gross profit
Selling and marketing expenses
General and administrative expenses
Total operating expenses
Interest income
Other gains/(losses), net
Share-based payments arising from issuance of ordinary
shares to music label partners
Operating profit
Share of net profit/(loss) of investments accounted for
using equity method
Finance cost
Profit before income tax
Income tax expense
Profit for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share for Class A and
Class B ordinary shares
Basic
Diluted
Earnings per ADS (2 Class A shares equal to 1 ADS)
Basic
Diluted
2017
RMB’million
Year ended December 31,
2018
RMB’million
Note
5
6
7
21(iv)
15
9(a)
3,149
7,832
10,981
(7,171)
3,810
(913)
(1,521)
(2,434)
93
124
-
1,593
4
-
1,597
(278)
1,319
1,326
(7)
1,319
2019
RMB’million
7,152
18,282
25,434
(16,761)
8,673
(2,041)
(2,703)
(4,744)
615
78
5,536
13,449
18,985
(11,708)
7,277
(1,714)
(2,258)
(3,972)
282
(29)
(1,519)
2,039
(1)
(35)
2,003
(171)
1,832
1,833
(1)
1,832
-
4,622
(18)
(64)
4,540
(563)
3,977
3,982
(5)
3,977
RMB
RMB
RMB
10
0.51
0.50
0.60
0.58
1.19
1.16
1.22
1.19
2.43
2.38
The accompanying notes are an integral part of these consolidated financial statements.
F-5
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Profit for the year
Other comprehensive income, net of tax:
Item that will not be reclassified subsequently to
profit or loss
Fair value changes on financial assets at fair
value through other comprehensive income
Items that may be subsequently reclassified to
profit or loss
Currency translation differences
Share of other comprehensive loss of an associate
Total comprehensive income for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
F-6
2017
RMB’million
Year ended December 31,
2018
RMB’million
1,319
1,832
2019
RMB’million
3,977
-
(675)
1,031
(143)
-
1,176
1,183
(7)
1,176
552
-
1,709
1,710
(1)
1,709
261
(1)
5,268
5,273
(5)
5,268
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED BALANCE SHEETS
ASSETS
Non-current assets
Property, plant and equipment
Right-of-use assets
Intangible assets
Goodwill
Investments accounted for using equity method
Financial assets at fair value through other comprehensive income
Other investments
Prepayments, deposits and other assets
Deferred tax assets
Term deposits
Current assets
Inventories
Accounts receivable
Prepayments, deposits and other assets
Other investments
Short-term investments
Term deposits
Cash and cash equivalents
Total assets
EQUITY
Equity attributable to equity holders of the Company
Share capital
Additional paid-in capital
Shares held for share award schemes
Other reserves
Retained earnings
Non-controlling interests
Total equity
LIABILITIES
Non-current liabilities
Other payables and other liabilities
Deferred tax liabilities
Lease liabilities
Deferred revenue
Current liabilities
Accounts payable
Other payables and other liabilities
Current tax liabilities
Lease liabilities
Deferred revenue
Total liabilities
Total equity and liabilities
The accompanying notes are an integral part of these consolidated financial statements.
F-7
As at December 31,
Note
2018
RMB’million
2019
RMB’million
11
12
13
14
15
16(a)
16(b)
17
9(b)
19
18
17
16(b)
19
20
21
21
21
22
24
9(b)
25
24
25
168
-
1,763
17,088
236
3,331
217
901
123
-
23,827
35
1,483
1,823
39
42
-
17,356
20,778
44,605
2
33,776
-
903
3,040
37,721
51
37,772
214
354
-
27
595
1,830
2,742
235
-
1,431
6,238
6,833
179
148
1,622
17,140
489
4,461
217
816
192
500
25,764
26
2,198
2,220
38
6
7,000
15,426
26,914
52,678
2
34,425
(31)
2,187
7,007
43,590
88
43,678
68
297
78
67
510
2,559
3,782
386
69
1,694
8,490
9,000
44,605
52,678
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company
Additional
paid-in
capital
Shares held
for share
award
schemes
(Accumulated
deficits)/
retained
earnings
Other
reserves
Share capital
Non-
controlling
interests
Total
equity
Total
Note RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million
2
20,063
-
617
(57)
20,625
9
20,634
-
-
-
-
-
-
1,326
1,326
(7)
1,319
-
(143)
-
(143)
-
(143)
-
-
-
(143)
1,326
1,183
(7)
1,176
22
-
-
-
20
-
20
-
20
21
21
23
21
-
-
-
-
-
-
-
7,547
(3,774)
-
79
-
-
-
-
-
-
-
-
-
-
-
-
362
-
-
99
-
-
-
-
-
-
7,547
(3,774)
362
79
-
99
42
(42)
-
-
-
-
-
5
-
-
7,547
(3,774)
362
79
5
99
-
-
3,852
-
523
(42)
4,333
5
4,338
2
23,915
-
997
1,227
26,141
7
26,148
F-8
the
for
at
1,
equity
Balance
January
2017
Comprehensive
Income
Profit
year
Currency
translation
differences
Total
comprehensive
income for the
year
Transactions
with
holders:
Deemed
contribution
arising from
carve out of
Tencent
PRC
Music
Business
Issuance
of
ordinary shares
in
exchange for
equity
investments
Distribution
Tencent
Share-based
compensation
-
value
employee
services
- proceeds from
shares issued
Capital
contribution
from non-
of
to
controlling
statutory
interests
Business
combination
Appropriations
to
reserves
Total
transactions
with equity
holders at
their capacity
as
equity
holders for the
year
Balance
at
December 31,
2017
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
Attributable to equity holders of the Company
Additional
paid-in
capital
Shares held
for share
award
schemes
Share capital
Other
reserves
Retained
earnings
Total
Non-
controlling
interests
Total
equity
Note RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million
2
23,915
-
-
-
-
997
1,227
26,141
7
26,148
-
1,833
1,833
(1)
1,832
the
at
1,
Balance
January
2018
Profit for
year
value
Fair
changes
on
financial assets
at fair value
through other
equity
comprehensive
income
Currency
translation
differences
Total
comprehensive
income for the
year
Transactions
with
holders:
Issuance
ordinary shares 21
Issuance
of
ordinary shares
for
acquisition of
the remaining
interests in
associates
of
Issuance
ordinary shares
to Musical
21
of
-
-
-
-
-
(675)
-
(675)
-
(675)
-
552
-
552
-
552
-
-
-
(123)
1,833
1,710
(1)
1,709
-
2,433
-
-
-
2,433
-
2,433
-
1,027
-
(827)
-
200
41
241
21
-
2,905
-
-
-
2,905
-
2,905
21
-
3,496
-
-
-
3,496
-
3,496
22,23
-
-
-
840
-
840
-
840
-
-
-
-
-
9,861
-
-
-
(4)
-
(4)
4
-
20
29
(20)
(20)
-
9,870
-
45
-
9,915
Label
Partners
Issuance
of
ordinary shares
upon initial
public
offering
Share-based
compensation -
value of
employee
and
services
business
cooperation
arrangements
Additional
investment in a
non-wholly
owned
subsidiary
Appropriations
to
statutory
reserves
Total
transactions
with equity
holders at
their capacity
as
equity
holders for the
year
Balance
at
December 31,
2018
2
33,776
-
903
3,040
37,721
51
37,772
F-9
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
Attributable to equity holders of the Company
Additional
paid-in
capital
Shares held
for share
award
schemes
Share capital
Other
reserves
Retained
earnings
Total
Non-
controlling
interests
Total
equity
Note RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million
2
-
33,776
-
-
-
903
3,040
37,721
51
37,772
-
3,982
3,982
(5)
3,977
the
at
1,
Balance
January
2019
Profit for
year
value
Fair
changes
on
financial assets
at fair value
through other
comprehensive
income
Share of other
comprehensive
losses of
an associate
Currency
translation
differences
Total
comprehensive
income for the
year
Transactions
with
holders:
Issuance
ordinary shares 21
Exercise
share options/
equity
of
of
-
-
-
1,031
-
1,031
-
1,031
-
-
-
-
-
(1)
-
(1)
-
(1)
-
261
-
261
-
261
-
-
-
1,291
3,982
5,273
(5)
5,268
-
12
-
-
-
12
-
12
Restricted
share
units("RSUs")
Non-
controlling
interests arising
from
business
combination
Share-based
compensation -
value of
employee
services
Shares held for
award
share
schemes
Capital
contribution by
non-
controlling
interests
Additional
investments in
non-wholly
owned
subsidiaries
Appropriations
statutory
to
reserves
Total
transactions
with equity
21,22
-
637
-
(465)
-
172
-
172
-
-
-
-
-
-
48
48
22,23
21
-
-
-
-
519
-
519
-
519
-
(31)
-
-
(31)
-
(31)
-
-
-
-
-
-
2
2
-
-
-
-
-
(76)
-
(76)
(8)
(84)
-
649
-
(31)
15
(7)
(15)
(15)
-
596
-
42
-
638
holders at
their capacity
as
equity
holders for the
year
at
Balance
December 31,
2019
2
34,425
(31)
2,187
7,007
43,590
88
43,678
The accompanying notes are an integral part of these consolidated financial statements.
F-10
TENCENT MUSIC ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Cash generated from operations
Interest received
Income taxes paid
Net cash inflow from operating activities
Cash flows from investing activities
Payments for business combinations, net of cash acquired
Payments for settlement of pre-acquisition dividends
payables of CMC
Cash acquired from business combinations under common
control
Purchase of property, plant and equipment
Purchase of intangible assets
Net proceeds from short term investments
Placement of term deposits with initial terms
of over three months
Receipt from maturity of term deposits with initial terms
of over three months
Proceeds from disposal of investments accounted
for using equity method
Payments for acquisition of investments accounted
for using equity method
Payments for acquisition of investments accounted for as
financial assets at fair value through profit or loss
Payments for loans to third parties
Dividend received
Other investing activities
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from issues of ordinary shares
Proceeds from issues of puttable shares
Proceeds from issues of ordinary shares to Music Label
Partners
Proceeds from exercise of share options
Net proceeds from issues of ordinary shares upon initial
public offering
Deemed contributions arising from carve out
of Tencent Music Business
Payments for acquisition of non-controlling interests
in non-wholly owned subsidiaries
Shares withheld for share award schemes
Proceeds from issuance of additional equity
of non-wholly owned subsidiaries
Payments of principal elements and related interest of lease
Net cash inflow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Exchange differences on cash and cash equivalents
Cash and cash equivalents at end of the year
Note
28(a)
26
21
21
21
21
21
21
12
2017
RMB’million
Year ended December 31,
2018
RMB’million
2019
RMB’million
2,614
93
(207)
2,500
(72)
(591)
-
(75)
(2)
261
-
-
57
(61)
-
-
-
-
(483)
-
-
-
79
-
20
-
-
-
-
99
2,116
3,071
(13)
5,174
5,604
249
(221)
5,632
(1,090)
(19)
397
(132)
(12)
11
-
-
-
(140)
(199)
(5)
-
(1)
(1,190)
2,433
422
1,386
-
3,500
-
-
-
-
-
7,741
12,183
5,174
(1)
17,356
6,188
576
(564)
6,200
(45)
-
-
(95)
(191)
36
(12,050)
4,550
1
(294)
-
(46)
32
-
(8,102)
12
-
-
127
-
-
(79)
(31)
3
(63)
(31)
(1,933)
17,356
3
15,426
The accompanying notes are an integral part of these consolidated financial statements.
F-11
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
General information, organization and basis of preparation
General information
1
1.1
Tencent Music Entertainment Group (the “Company” or “TME”), formerly known as China Music Corporation (“CMC”), was incorporated
under the laws of the Cayman Islands on June 6, 2012 as an exempted company with limited liability under the Companies Law (2010
Revision) of the Cayman Islands. The address of its registered office is Cricket Square, P.O. Box 2582, Grand Cayman KY1-1112, Cayman
Islands. The Company is controlled by Tencent Holdings Limited (“Tencent”), a company incorporated in the Cayman Islands with limited
liability and the shares of Tencent are listed on the Main Board of The Stock Exchange of Hong Kong Limited. The Company completed its
initial public offering (“IPO”) on December 12, 2018 and the Company’s American Depositary Shares (“ADSs”) have been listed on the New
York Stock Exchange since then. Each ADS of the Company represents two ordinary shares.
The Company, its subsidiaries, its controlled structured entities (“Variable interest entities”, or “VIE”) and their subsidiaries (“Subsidiaries of
VIEs”) are collectively referred to as the “Group”. The Group is principally engaged in operating online music entertainment platforms to
provide music streaming, online karaoke and live streaming services in the People’s Republic of China (“PRC”). The Company does not
conduct any substantive operations of its own but conducts its primary business operations through its wholly-owned subsidiaries, VIEs and
subsidiaries of VIEs in the PRC.
In July 2016, Tencent acquired control of the Company through a series of transactions, pursuant to which Tencent injected substantially all of
its online music business in the mainland China (“Tencent Music Business”) into the Company in exchange for certain number of shares issued
by the Company (“Merger”). Upon the completion of such transactions, the Company became a subsidiary of Tencent and the Company was
renamed to its current name in December 2016. The Merger was accounted for as a reverse acquisition under which Tencent Music Business is
regarded as the acquirer, and these consolidated financial statements have been presented as a continuation of the financial statements of
Tencent Music Business.
1.2
Organization and principal activities
The PRC laws and regulations prohibit or restrict foreign ownership of companies that provide Internet-based business, which include activities
and services provided by the Group. The Group operates its business operations in the PRC through a series of contractual arrangements
(“Structure Contracts”) entered into among the Company, its wholly-owned subsidiaries of the Company(“WOFEs”), domestic entities
(“Operating Entities”) that legally owned by individuals (“Nominee Shareholders”) authorized by the Group (collectively, “Contractual
Arrangements”). The Structure Contracts including Exclusive Technology Services Agreement, Exclusive Business Cooperation Agreement,
Loan Agreement, Exclusive Purchase Option Agreement, Equity Interest Pledge Agreement, and Powers of Attorney Agreement.
Under the Contractual Arrangements, the Company has the power to control the management, and financial and operating policies of the
Operating Entities, has exposure or rights to variable returns from its involvement with the Operating Entities, and has the ability to use its
power over the Operating Entities to affect the amount of the returns. As a result, all these Operating Entities are regarded as VIEs that
accounted for as consolidated structured entities of the Company and their financial statements have been consolidated by the Company.
F-12
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
1.2
General information, organization and basis of preparation (Continued)
Organization and principal activities (Continued)
The Structured Contracts were throughout the years presented, and, there was no change to the principal terms of the Structured Contracts. The
principal terms of the Structured Contracts are further described below:
(i)
Voting Trust Agreement
Pursuant to the Voting Trust Agreement, the shareholders of the Operating entities each irrevocably granted the WOFEs or any
individual designated by the WOFEs in writing as their attorney-in-fact to vote, the rights to vote on their behalf on all matters of the
Operating Entities requiring shareholder approval under PRC laws and regulations and the Operating Entities’ articles of
association. The term of this agreement will remain effective as long as the shareholders continue to hold equity interests in the
Operating Entities.
(ii)
Exclusive Technical Service Agreement
Pursuant to the exclusive technical service agreement between the WOFEs and the Operating Entities, the WOFEs or their
designated party has the exclusive right to provide business support, technical services and consulting services in return for a service
fee, which represents 90% of net operating income of the Operating Entities together with other service fees charged for other ad
hoc services provided. The WOFEs have the discretion to change the charge rate. During the term of the agreement, without the
WOFEs’ prior written consent, the Operating Entities shall not engage any third party for any of such services provided under this
agreement.
(iii)
Loan agreement
Under the loan agreement between the WOFEs and the shareholders of the Operating Entities, the WOFEs provided interest-free
loans to the shareholders of the Operating Entities solely for the subscription of newly registered capital of the Operating Entities.
The WOFEs have the sole discretion to determine the way of repayment, including requiring the shareholders to transfer their equity
shares in the Operating Entities to the WOFEs according to the terms indicated in the Exclusive Share Purchase Option as after
mentioned.
(iv)
Exclusive option agreement
Pursuant to the exclusive purchase option agreement amongst the WOFEs, the Operating Entities and their shareholders, the
shareholders of the Operating Entities granted the WOFEs or their designated party, an exclusive irrevocable option to purchase, all
or part of the equity interests held by its shareholders, when and to the extent permitted under PRC law, at a price equal to the
proportional amount of registered capital of the Operating Entities. Without the consent of the WOFEs or their designated party, the
shareholders of the Operating Entities may not transfer, donate, pledge, or otherwise dispose of their equity shareholdings in any
way. The exclusive purchase option agreement remains effective until the options are exercised.
(v)
Equity interest pledge agreement
Pursuant to the equity interest pledge agreement amongst the WOFEs, the Operating Entities and their shareholders, the
shareholders of the Operating Entities pledge all of their equity interests in the Operating Entities to the WOFEs, to guarantee the
Operating Entities and their shareholders' performance of their obligations under exclusive purchase option agreement, exclusive
business cooperation agreement, loan agreement, and powers of attorney. If the Operating Entities and/or any of their shareholders
breach their contractual obligations under this agreement, the WOFEs, as pledgee, will be entitled to certain rights, including the
right to sell the pledged equity interests. Without the WOFEs' prior written consent, shareholders of the Operating Entities shall not
transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice the WOFEs’ interests.
F-13
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
1.2
General information, organization and basis of preparation (Continued)
Organization and principal activities (Continued)
During the term of this agreement, the WOFEs are entitled to receive all of the dividends and profits paid on the pledged equity interests. The
equity interest pledge will be effective upon the completion of the registration of the pledge with the competent local branch of the State
Administration for Industry and Commerce ("SAIC"), and will remain effective until the Operating Entities and its shareholders discharge all
their obligations under the Contractual Arrangements.
As at December 31, 2019, the Company’s significant subsidiaries, VIEs, and subsidiaries of VIEs were as follows:
Subsidiaries
Tencent Music Entertainment Hong
Kong Limited (“TME Hong
Kong”) (formerly known as
“Ocean Music Hong Kong
Limited”)
Tencent Music Entertainment
(Beijing) Co., Ltd. (“TME
Beijing”) (formerly known as
“Ocean Interactive (Beijing)
Information Technology Co.,
Ltd.”)
Yeelion Online Network
Technology (Beijing) Co., Ltd.
(‘‘Yeelion Online”)
Tencent Music Entertainment
Technology (Shenzhen) Co., Ltd.
(''TME Tech Shenzhen")
Variable Interest Entities
Guangzhou Kugou Computer
Technology Co., Ltd.
(“Guangzhou Kugou”)
Beijing Kuwo Technology Co.,
Ltd.(“Beijing Kuwo”)
Xizang Qiming Music Co.,
Ltd.(“Xizang Qiming”)
Subsidiaries of Variable Interest
Entities
Tencent Music Entertainment
(Shenzhen) Co., Ltd. (“TME
Shenzhen”)
Place of
incorporation
Date of
Incorporation
or acquisition
Equity
Interest
Held
(direct or
indirect)
Hong Kong
July 2016*
100%
PRC
July 2016*
100%
Principal activities
Investment holding
and music content
distribution
Technical support and
consulting services
PRC
July 2016*
100%
Technical support and
consulting services
PRC
February 2017
100%
Online music and
PRC
July 2016*
100%
PRC
July 2016*
100%
PRC
February 2018
100%
entertainment related
services
Online music and
entertainment related
services
Online music and
entertainment related
services
Music content
investments
PRC
July 2016*
100%
Online music and
entertainment related
services
* Representing the entities acquired by the Group on July 12, 2016.
F-14
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
1.2
General information, organization and basis of preparation (Continued)
Organization and principal activities (Continued)
Apart from the significant subsidiaries, VIEs and subsidiaries of VIEs listed above, there are certain non-wholly owned subsidiaries of the
Group, of which management of the Group considered that these non-wholly owned subsidiaries are not significant to the Group, accordingly,
no summarized financial information of these non-wholly owned subsidiaries is presented separately.
Risks in relation to the VIEs
In the opinion of the Company's management, the contractual arrangements discussed above have resulted in the Company, and the WOFE
having the power to direct activities that most significantly impact the VIEs, including appointing key management, setting up operating
policies, exerting financial controls and transferring profit or assets out of the VIEs at its discretion. The Company has the power to direct
activities of the VIEs and can have assets transferred out of the VIEs under its control. Therefore, the Company considers that there is no asset
in any of the VIEs that can be used only to settle obligations of the VIEs, except for registered capital, capital reserve and PRC statutory
reserves of the VIEs totaling RMB4,432 million and RMB4,206 million as at December 31, 2018 and 2019, respectively. Currently there is no
contractual arrangement that could require the Company to provide additional financial support to the VIEs. As the Company is conducting its
Internet-related business mainly through the VIEs, the Company may provide such support on a discretional basis in the future, which could
expose the Company to a loss. As the VIEs organized in the PRC were established as limited liability companies under PRC law, their creditors
do not have recourse to the general credit of the WOFE for the liabilities of the VIEs, and the WOFE does not have the obligation to assume
the liabilities of these VIEs.
The Company determines that the Contractual Arrangements are in compliance with PRC law and are legally enforceable. However,
uncertainties in the PRC legal system could limit the Group's ability to enforce the Contractual Arrangements.
On January 19, 2015, the Ministry of Commerce of the PRC ("MOFCOM"), released for public comment a proposed PRC law, the Draft FIE
Law, that appears to include Consolidated VIEs within the scope of entities that could be considered as foreign invested enterprises, or FIEs,
that would be subject to restrictions under existing PRC law on foreign investment in certain categories of industry. Specifically, the Draft FIE
Law introduces the concept of "actual control" for determining whether an entity is considered to be an FIE. In addition to control through
direct or indirect ownership or equity, the Draft FIE Law includes control through contractual arrangements within the definition of "actual
control." The Draft FIE Law includes provisions that would exempt from the definition of foreign invested enterprises entities where the
ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law is silent
as to what type of enforcement action might be taken against existing entities that operate in restricted or prohibited industries and are not
controlled by entities organized under PRC law or individuals who are PRC citizens. If the restrictions and prohibitions on foreign invested
enterprises included in the Draft FIE Law are enacted and enforced in their current form, the Company's ability to use the Contractual
Arrangements and the Company's ability to conduct business through them could be severely limited.
The Company's ability to control VIEs also depends on rights provided to the WOFE, under the powers of attorney agreement, to vote on all
matters requiring shareholder approval. As noted above, the Company believes these powers of attorney agreements are legally enforceable, but
they may not be as effective as direct equity ownership. In addition, if the corporate structure of the Group or the contractual arrangements
between the or the WOFE, the VIEs and their respective shareholders were found to be in violation of any existing PRC laws and regulations,
the relevant PRC regulatory authorities could:
•
•
•
•
revoke the Group’s business and operating licenses;
require the Group to discontinue or restrict its operations;
restrict the Group’s right to collect revenues;
block the Group’s websites;
F-15
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
1.2
General information, organization and basis of preparation (Continued)
Organization and principal activities (Continued)
•
•
•
require the Group to restructure the operations, re-apply for the necessary licenses or relocate its businesses, staff and assets;
impose additional conditions or requirements with which the Group may not be able to comply; or
take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business.
The following are major financial statements amounts and balances of the Group’s VIEs and subsidiaries of VIEs as at December 31, 2018 and
2019 and for the years ended December 31, 2017, 2018 and 2019 on a combined basis.
Total current assets
Total non-current assets
Total assets
Total current liabilities
Total non-current liabilities
Total liabilities
Total revenues
Net profit
Net cash inflow/(outflow) from operating activities
Net cash inflow/(outflow) from investing activities
Net cash outflow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
As at December 31,
2018
RMB’million
2019
RMB’million
7,199
5,902
13,101
(5,664)
(562)
(6,226)
9,303
5,824
15,127
(6,446)
(425)
(6,871)
2017
2019
Year ended December 31,
2018
RMB’million RMB’million RMB’million
25,379
1,323
(101)
(185)
(115)
(401)
1,728
1,327
10,948
340
1,763
131
-
1,894
1,412
3,306
18,966
1,333
(334)
(1,244)
-
(1,578)
3,306
1,728
The above combined financial statements amounts and balances have included intercompany transactions which have been eliminated in the
Company's consolidated financial statements.
As at December 31, 2018 and 2019, the total assets of Group's VIEs mainly consisted of cash and cash equivalents, accounts receivable,
prepayments, deposits and other current assets and intangible assets.
As at December 31, 2018 and 2019, the total liabilities of VIEs mainly consisted of accounts payable, accrued expenses and other current
liabilities.
The recognized revenue-producing assets held by the Group's VIEs include intangible assets acquired through business combination, prepaid
content royalties and domain names, servers and leasehold improvements relating to office facilities. The balances of these assets as at
December 31, 2018 and 2019 were included in the line of "Total non-current assets" in the table above.
The unrecognized revenue-producing assets held by the Group's VIEs mainly consist of internally generated intellectual property, licenses, and
trademarks that the Group relies on to operate its businesses.
F-16
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have
been consistently applied to all the years presented, unless otherwise stated.
2.1
Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards
(“IFRSs”) as issued by International Accounting Standards Board (“IASB”). The consolidated financial statements have been prepared under
the historical cost convention, as modified by the revaluation of other investments, financial assets at fair value through other comprehensive
income and short-term investments, which are carried at fair value.
The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in
Note 4.
2.2 New and amendments to the accounting standards adopted and recent accounting pronouncements
(a) New and amendments to the accounting standards adopted
All the new standards and amendments that are effective for annual reporting period commencing January 1, 2019 have been
applied by the Group for the year ended December 31, 2019. Except IFRS 16 Leases, the adoption of these new and amended
standards does not have material impact on the consolidated financial statements of the Group.
Adoption of IFRS 16
The Group has adopted IFRS 16 Leases from January 1, 2019, and has not restated comparatives for the 2018 reporting period, as
permitted under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new
leasing rules are therefore recognized in the opening balance sheet on January 1, 2019. The new accounting policies are disclosed in
Note 2.28.
On adoption of IFRS 16, the Group recognized right-of-use assets and lease liabilities of RMB100 million and RMB97 million,
respectively, in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases.
These lease liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental
borrowing rate as at January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on
January 1, 2019 was 5.18%.
Operating commitments disclosed as at December 31, 2018
(Less): Other commitments
Discounted using the lessee’s incremental borrowing rate of at the date of initial
application
(Less): short-term leases not recognized as a liability
Lease liabilities recognized as at January 1,2019
Of which are:
Current lease liabilities
Non-current lease liabilities
F-17
RMB'million
305
(28)
277
222
(125)
97
29
68
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies (Continued)
New and amendments to the accounting standards adopted and recent accounting pronouncements (Continued)
2
2.2
(a) New and amendments to the accounting standards adopted (Continued)
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
•
•
•
•
•
applying a single discount rate to a portfolio of leases with reasonably similar characteristics
relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review –
there were no onerous contracts as at January 1, 2019
accounting for operating leases with a remaining lease term of less than 12 months as at January 1, 2019 as short-term
leases
excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and
using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for
contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and Interpretation 4
Determining whether an Arrangement contains a Lease.
(b)
Recent accounting pronouncements
A number of new standards and amendments to standards have not come into effect for the financial year beginning January 1,
2019, and have not been early adopted by the Group in preparing these consolidated financial statements. None of these new
standards and amendments to standards is expected to have a significant effect on the consolidated financial statements of the
Group.
2.3
Principles of consolidation and equity accounting
(a)
Subsidiaries
Subsidiaries are all entities (including VIEs as stated in Note 1.2 above) over which the Group has control. The Group controls an
entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to
affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. They are deconsolidated from the date that control ceases.
Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealised
losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of
subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement,
statement of comprehensive income, statement of changes in equity and balance sheet, respectively.
F-18
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
2.3
Summary of significant accounting policies (Continued)
Principles of consolidation and equity accounting (Continued)
(b)
Associates
Associates are all entities over which the Group has significant influence but not control or joint control, generally but not
necessarily accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for
using the equity method of accounting (see (d) below), after initially being recognized at cost. Interests in associates are accounted
for using the equity method of accounting (see (d) below), after initially being recognized at cost in the consolidated balance sheet.
(c)
Joint ventures
Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and
obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures.
Interests in joint ventures are accounted for using the equity method (see (d) below), after initially being recognized at cost in the
consolidated balance sheet.
(d)
Equity accounting
Under the equity method of accounting, the investments are initially recognized at cost and adjusted thereafter to recognize the
Group's share of the post-acquisition profits or losses of the investee in profit or loss, and the Group's share of movements in other
comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint
ventures are recognized as a reduction in the carrying amount of the investment.
When the Group's share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other
unsecured long-term receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments
on behalf of the other entity.
Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's
interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset
transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the
policies adopted by the Group.
The carrying amount of equity-accounted investments is tested for impairment in accordance with the policy described in Note 2.10
whenever there is an indication that the carrying amount may be impaired in accordance with Note 2.11 (b).
2.4
Business combinations
The acquisition method of accounting is used to account for all business combinations except for the business combinations under common
control as stated below, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition
of a subsidiary comprises the:
•
•
•
•
•
fair values of the assets transferred
liabilities incurred to the former owners of the acquired business
equity interests issued by the Group
fair value of any asset or liability resulting from a contingent consideration arrangement, and
fair value of any pre-existing equity interest in the subsidiary.
F-19
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
2.4
Summary of significant accounting policies (Continued)
Business combinations (Continued)
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured
initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-
by-acquisition basis either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets.
Acquisition-related costs are expensed as incurred.
The excess of the:
•
•
•
consideration transferred,
amount of any non-controlling interest in the acquired entity, and
acquisition-date fair value of any previous equity interest in the acquired entity
over the fair value of the net identifiable assets acquired is recorded as goodwill.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the
acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognized in profit or
loss.
Business combination under common control
The Group accounts for the business combination between entities under common control using the predecessor accounting. For predecessor
accounting:
•
•
•
Assets and liabilities of the acquired entity are stated at predecessor carrying values. Fair value measurement is not required.
No new goodwill arises in predecessor accounting.
Any difference between the consideration given and the aggregate carrying value of the assets and liabilities of the acquired entity at
the date of the transaction is included in equity in retained earnings or in a separate reserve.
The Group does not restate any assets and liabilities of the acquired entity. The assets and liabilities of the acquired entity are consolidated using
the predecessor’s amounts from the controlling party’s perspective. No new goodwill is recorded. Any difference between the cost of
investment and the carrying value of the net assets is recorded in equity as merger reserve.
The Group elects to incorporate the acquired entity’s results only from the date on which the business combination between entities under
common control occurred. Consequently, the consolidated financial statements do not reflect the results of the acquired entity for the period
before the transaction occurred. The corresponding amount for the previous year are also not restated.
2.5
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision makers, who are
responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The Group's chief
operating decision makers have been identified as executive directors of the Company, who review the consolidated results of operations when
making decisions about allocating resources and assessing performance of the Group as a whole.
F-20
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
2.5
Summary of significant accounting policies (Continued)
Segment reporting (Continued)
For the purpose of internal reporting and management's operation review, the chief operating decision-makers and management personnel do
not segregate the Group's business by product or service lines. Hence, the Group has only one operating segment. In addition, the Group does
not distinguish between markets or segments for the purpose of internal reporting. As the Group's assets and liabilities are substantially located
in the PRC, substantially all revenues are earned and substantially all expenses are incurred in the PRC, no geographical segments are
presented.
2.6
Foreign currency translation
(a)
Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic
environment in which the entity operates (the “functional currency”). The functional currency of the Company is United States
Dollars (“US$”). As the major operations of the Group are within the PRC, the Group presents its consolidated financial statements
in Renminbi (“RMB”), unless otherwise stated.
(b)
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and
liabilities denominated in foreign currencies at year end exchange rates are generally recognized in the income statement.
Foreign exchange gains and losses that relate to borrowings are presented in the income statement, within finance cost. All other
foreign exchange gains and losses are presented in the income statement on a net basis within finance cost.
(c)
Group companies
The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a
functional currency different from the presentation currency are translated into the presentation currency as follows:
•
•
•
assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet
income and expenses for each income statement and statement of comprehensive income are translated at average
exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the dates of the transactions), and
all resulting exchange differences are recognized in other comprehensive income.
On consolidation, exchange differences arising from the translation of any net investment in foreign entities are recognized in other
comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the
associated exchange differences are reclassified to profit or loss, as part of the gains or losses on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the
foreign operation and translated at the closing rate. Currency translation differences arising are recognized in other comprehensive
income.
F-21
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
2.7
Summary of significant accounting policies (Continued)
Property, plant and equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount
of any component accounted for as a separate asset is derecognized when replaced. All other repairs and maintenance are charged to profit or
loss during the reporting period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their
estimated useful lives or, in the case of leasehold improvements and certain leased plant and equipment, the shorter lease term as follows:
Servers and network equipment
Office furniture, equipment and others
Leasehold improvements
3 - 5 years
3 - 5 years
Shorter of expected lives of leasehold
improvements and lease term
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated
recoverable amount (Note 2.10).
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in the income statement.
2.8
Goodwill
Goodwill is not amortized but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it
might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. The allocation is made to those CGUs or groups
of CGUs that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at
the lowest level at which goodwill is monitored for internal management purposes, below the operating segment.
2.9
Other intangible assets
(a)
Domain name, trademark and Internet audio/video program transmission license
Separately acquired domain name, trademark and Internet audio/video program transmission license are shown at historical cost.
These assets acquired in a business combination are recognized at fair value at the acquisition date. Domain name, trademark and
Internet audio/video program transmission license have a finite useful life and are carried at cost less accumulated amortization.
Amortization is calculated using the straight-line method to allocate the cost of these assets and over their respective useful live of
no more than 12 years. The useful lives of these assets are the periods over which they are expected to be available for use by the
Group, and the management of the Group also take into account of past experience when estimating the useful lives.
F-22
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
2.9
Summary of significant accounting policies (Continued)
Other intangible assets (Continued)
(b)
Separately acquired and internal developed contents and copyrights
Separately acquired contents and copyrights are shown at historical cost. The Group also produces or/and contracts external parties
to produce contents to exhibit on its platforms. Produced contents includes direct production costs, production overhead and
acquisition costs. The Group recognizes internal developed contents as intangible assets only when the following criteria are met:
the technical feasibility of completing the intangible asset exists, there is an intent to complete and an ability to use or sell the
intangible asset, the intangible asset will generate probable future economic benefits, there are adequate resources available to
complete the development and to use or sell the intangible asset, and there is the ability to reliably measure the expenditure
attributable to the intangible asset during its development. Capitalized in house produced contents are amortized on a straight-line
basis over the estimated useful lives of 1 to 5 years.
(c)
Other intangible assets acquired in a business combination
Other intangible assets acquired in a business combination are recognized initially at fair value at the acquisition date and
subsequently carried at the amount initially recognized less accumulated amortization and impairment loss, if any. Amortization is
calculated using the straight-line method to allocate the costs of acquired intangible assets over the following estimated useful lives:
Online users
Corporate customer relationship
Supplier resources
Non-compete agreements
Copyrights
2.10
Impairment of non-financial assets
1 year
3 - 4 years
3 - 6 years
4 - 5 years
3 - 7 years
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more
frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Impairment review on the goodwill of the Group is
conducted by the management as at December 31 according to IAS 36 "Impairment of assets". An impairment loss is recognized for the amount
by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of
disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-
financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each
reporting period.
2.11
Investments and other financial assets
(a)
Classification and measurement
From January 1, 2018, the Group classifies its financial assets in the following measurement categories:
•
•
those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss),
and
those to be measured at amortized cost.
The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash
flows.
F-23
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.11
Investments and other financial assets (Continued)
(a)
Classification and measurement (Continued)
For assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For
investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable
election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income.
The Group reclassifies debt investments only when its business model for managing those assets changes.
Purchases and sales of financial assets are recognized on trade-date, the date on which the Group commits to purchase or sell the
asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been
transferred and the Group has transferred substantially all the risks and rewards of ownership.
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of
financial assets carried at fair value through profit or loss are expensed in profit or loss.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely
payments of principal and interest.
Debt instruments
Initial recognition and subsequent measurement of debt instruments depend on the Group’s business model for managing the asset
and the contractual cash flow characteristics of the asset. There are three categories into which the Group classifies its debt
instruments:
•
•
•
Amortized cost: Financial assets that are held for collection of contractual cash flows where those cash flows represent
solely payments of principal and interest are classified as and measured at amortized cost. A gain or loss on a debt
investment measured at amortized cost which is not part of a hedging relationship is recognized in profit or loss when the
asset is derecognized or impaired. Interest income from these financial assets is recognized using the effective interest
rate method.
Fair value through other comprehensive income: Financial assets that are held for collection of contractual cash flows
and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are
classified as and measured at fair value through other comprehensive income. Movements in the carrying amount of
these financial assets are taken through other comprehensive income, except for the recognition of impairment losses or
reversals, interest income and foreign exchange gains and losses which are recognized in profit or loss. When the
financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is
reclassified from equity to profit or loss and recognized in “other gains/(losses), net” in the consolidated income
statement. Interest income from these financial assets is recognized using the effective interest rate method. Foreign
exchange gains and losses and impairment losses or reversals are presented in “other gains/(losses), net”.
Fair value through profit or loss: Financial assets that do not meet the criteria for amortized cost or fair value through
other comprehensive income are classified as and measured at fair value through profit or loss. A gain or loss on a debt
investment measured at fair value through profit or loss which is not part of a hedging relationship is recognized in profit
or loss and presented in “other gains/(losses), net” for the period in which it arises.
F-24
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.11
Investments and other financial assets (Continued)
(a)
Classification and measurement (Continued)
Equity instruments
The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair
value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value
gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be
recognized in profit or loss as other income when the Group’s right to receive payments is established.
Changes in the fair value of financial assets at fair value through profit or loss are recognized in “other gains/(losses), net” in the
statement of profit or loss as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at
fair value through other comprehensive income are not reported separately from other changes in fair value.
(b)
Impairment
From January 1, 2018, the Group assesses on a forward looking basis the expected credit losses associated with its debt instruments
carried at amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on
whether there has been a significant increase in credit risk.
For accounts receivable and contract assets, the Group applies the simplified approach permitted by IFRS 9, which requires
expected lifetime losses to be recognized since initial recognition.
Impairment on deposits and other receivables is measured as either 12-month expected credit losses or lifetime expected credit
losses, depending on whether there has been a significant increase in credit risk since initial recognition. If a significant increase in
credit risk of a deposit or receivable has occurred since initial recognition, the impairment is measured as lifetime expected credit
losses.
The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized
cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a
significant increase in credit risk.
(c)
Offsetting
Financial assets and liabilities are offset and the net amount reported in the balance sheet where the Company currently has a legally
enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis or realize the asset and settle the
liability simultaneously. The Company has also entered into arrangements that do not meet the criteria for offsetting but still allow
for the related amounts to be set off in certain circumstances, such as bankruptcy or the termination of a contract.
2.12
Inventories
Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average method and are stated at the
lower of cost and net realizable value.
2.13
Accounts receivable
Accounts receivable are amounts due from customers for goods sold or services performed in the ordinary course of business. Accounts
receivable are generally due for settlement within 30 to 90 days and therefore are all classified as current.
F-25
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.14
Short-term investments
Short-term investments are investments issued by commercial banks in the PRC with a variable return and accounted for as financial assets at
fair value through profit and loss (see Note 2.11 above). Since these investments’ maturity dates are within one year, they are classified as
current assets.
2.15
Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with
financial institutions, and other short-term deposits with original maturities of three months or less.
2.16
Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
2.17
Accounts and other payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The
amounts are unsecured and are usually paid within 1 year of recognition. Accounts and other payables are presented as current liabilities unless
payment is not due within 12 months after the reporting period.
2.18
Current and deferred income tax
The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the applicable income tax
rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.
(a)
Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting
period in the countries where the company’s subsidiaries and associates operate and generate taxable income. Management
periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to
interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b)
Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not
recognized if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial
recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or
substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is
realized or the deferred income tax liability is settled.
Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary
differences and losses.
Deferred tax liabilities and assets are not recognized for temporary differences between the carrying amount and tax bases of
investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it
is probable that the differences will not reverse in the foreseeable future.
F-26
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.18
Current and deferred income tax (Continued)
(c)
Offsetting
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and
when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity
has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability
simultaneously.
(d)
Uncertain tax positions
In determining the amount of current and deferred income tax, the Group takes into account the impact of uncertain tax positions
and whether additional taxes, interest or penalties may be due. This assessment relies on estimates and assumptions and may involve
a series of judgments about future events. New information may become available that causes the Group to change its judgment
regarding the adequacy of existing tax liabilities. Such changes to tax liabilities will impact tax expense in the period that such a
determination is made.
2.19
Employee benefits
(a)
Employee leave entitlements
Employee entitlements to annual leave are recognized when they accrue to employees. A provision is made for the estimated
liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements
to sick and maternity leave are not recognized until the time of leave.
(b)
Pension obligations
The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These
plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined
contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a
separate fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient
assets to pay all employees the benefits relating to employee services in the current and prior periods. The Group's contributions to
the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the
plan prior to vesting fully in the contributions.
2.20
Share-based payments
The Group operates a number of equity-settled share-based compensation plan (including share option schemes and share award schemes),
under which the Group receives services from employees as consideration for equity instruments (including stock options and restricted shares
units (“RSUs”)) of the Group. In addition, the controlling shareholder, Tencent, also operates certain share-based compensation plans (mainly
share option schemes and share award schemes) which may cover the employees of the Group. Share awards granted to the employees of the
Group are measured at the grant date based on the fair value of equity instruments and are recognized as an expense over the vesting period,
which is the period over which all of the specified vesting conditions are to be satisfied, and credited to equity as “share-based compensation
reserve” if it is related to equity instruments of the Company or as “contribution from ultimate holding company” if it is related to equity
instruments of Tencent.
For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using Binomial
model (the “Binomial Model”). The determination of the fair value is affected by the share price as well as assumptions regarding a number of
complex and subjective variables, including the expected share price volatility, expected forfeiture rate, risk-free interest rates, contract life and
expected dividends. For grant of award shares, the total amount to be expensed is determined by reference to the fair value of the Company or
market price of Tencent’s shares at the grant date.
Forfeitures are estimated at the time of grant and revised in the subsequent periods if actual forfeitures differ from those estimates.
F-27
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.20
Share-based payments (Continued)
If a share-based arrangement involving a compound financial instrument issued by the Group, which includes a debt component (i.e. the
counterparty’s right to demand payment in cash) and an equity component (i.e. the counterparty’s right to demand settlement in equity
instruments rather than in cash), to any party other than employees, the Group measure the equity component of the compound financial
instrument as the difference between the fair value of the goods or services received and the fair value of the debt component, at the date when
the goods or services are received. If a compound financial instrument issued by the Group to the employees, the Group first measure the fair
value of the debt component, and then measure the fair value of the equity component—taking into account that the counterparty must forfeit
the right to receive cash in order to receive the equity instrument. The fair value of the compound financial instrument is the sum of the fair
values of the two components. The debt component will be accounted for as a cash-settled share-based payment transaction; and the equity
component will be accounted for as an equity-settled share-based payment.
2.21
Provisions
Provisions for legal claims and service warranties are recognized when the Group has a present legal or constructive obligation as a result of
past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
Provisions are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same
class of obligations may be small.
Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the end
of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as interest
expense.
2.22
Revenue recognition
The Group generates revenues primarily from provision of music entertainment services, such as paid music, virtual gifts sales and content
sublicensing, and online advertising. Revenue is recognized when or as the control of the services or goods is transferred to the customer.
Depending on the terms of the contract and the laws that are applied to the contract, control of the services and goods may be transferred over
time or at a point in time.
(a)
Revenue from online music services
Online music services revenues primarily include revenues from subscriptions, sale of digital music singles and albums, content
sublicensing and online advertising on the Group’s online music platforms.
The Group provides to users certain subscription packages which entitle paying subscribers a fixed amount of non-accumulating
downloads per month and unlimited "ad-free" streaming of the Group's full music content offerings with certain privilege features
on its music platforms. The subscription fee for these packages is time-based and is collected upfront from subscribers. The terms of
time-based subscriptions range from one month to twelve months. The receipt of subscription fee is initially recorded as deferred
revenue. The Group satisfies its various performance obligations by providing services throughout the subscription period and
revenue is recognized over time accordingly.
The Group also provides its users to purchase early release access to certain new digital music singles and albums. These singles and
albums can be downloaded and streamed only through the Group's platform. Such music singles and albums will be made available
to all users to access after the initial launch period which is generally 3 months. The Group considers that it provides the early
access to the newly launched singles and albums within its platform as opposed to providing functional intellectual property to the
users. As a result, the performance obligation of providing early access is satisfied over time.
The above services can be paid directly by users by way of online payment channels or through various third party platforms. The
Group records revenue on gross basis according to the criteria stated in (c) below and recognizes service fees levied by online
payment channels or third party platforms ("Channel Fees") as the cost of revenues in the same period as the related revenue is
recognized.
F-28
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.22
Revenue recognition (Continued)
(a)
Revenue from online music services (Continued)
The Group sublicenses certain of the Group's music content to other music platforms for a fixed period of time, typically one year, that
falls within the original license period. The Group is obliged to replicate the licensed content library for any subsequent changes in the
contents, including any new contents or removal of existing contents, updated by the contents partners any time during the sublicense
period. As a result, the Group determines sublicense of contents as a single performance obligation. Revenues from sublicensing the
contents is recognized over the sublicense period. The Group only recognizes revenue when it is highly probable that this will not result
in a significant reversal of revenue when any uncertainty is resolved. The Group does not adjust the promised amount of consideration
for the effects of any significant financing component as the sublicense period is typically one year.
Advertising revenue is primarily generated through display ads on the Group's platforms. Advertising contracts are signed to
establish the fixed prices and advertising services to be provided based on cost per display ("CPD") or cost per mille ("CPM")
arrangements. When the collectability is reasonably assured, advertising revenues from the CPD arrangements that are display ads
for an agreed period of time, are recognized ratably over the contract period of display based on a time-based measure of progress as
the performance obligation is expended evenly over the period, while revenue from the CPM arrangements are recognized based on
the number of times that the advertisement has been displayed. The Group allocates revenue to each performance obligation on a
relative stand-alone selling price basis which is determined with reference to the prices charged to customers.
The Group also entered into contracts with advertising agencies third-party or entities controlled by Tencent, which represent the
Group in negotiation and contracting with advertisers. The Group shares with these advertising agencies a portion of the revenues
the Group derives from the advertisers. Revenues are recognized on a gross or net basis based on assessment according to the
criteria stated in (c) below. If revenue for advertising through these advertising agencies are recorded at the gross amount, the
portion remitted to advertising agencies, including any cash incentive in the form of commissions, is recorded as cost of revenues. If
revenue for advertising through these advertising agencies are recorded at the net amount, cash incentives, in the form of
commissions to any advertising agencies based on volume and performance, are accounted for as a reduction of revenue, based on
expected performance.
(b)
Revenue from social entertainment services and others
The Group offers virtual gifts to users for free or sell virtual gifts to users on the Group's online karaoke and live streaming
platforms. The virtual gifts are sold to users at different specified prices as pre-determined by the Group. The utilization of each
virtual gift sold to users is considered as the performance obligation and the Group allocates revenue to each performance obligation
on a relative stand-alone selling price basis, which are determined based on the prices charged to customers.
Virtual gifts are categorized as consumable, time-based and durable. Consumable items are consumed upon purchase and use while
time-based items could be used for a fixed period. The Group does not have further obligations to the user after the virtual gifts are
consumed immediately or after the stated period for time-based items. The revenue for the sale of consumable virtual gifts on the
online karaoke and online broadcasting platforms is recognized immediately when a virtual item is consumed or, in the case of a time-
based virtual item, recognized ratably over the useful life of the items, which generally does not exceed one year. The Group
recognizes the revenue for sale of durable virtual gifts over their estimated lifespans of no longer than six months, which are
determined by the management based on the expected service period derived from past experiences, given there is an implicit
obligation of the Group to maintain the virtual gifts operated on its platforms.
The Group may share with performers a portion of the revenues derived from the sale of the virtual gifts on the online karaoke and
live streaming platforms. Revenues for the sale of virtual gifts are recorded at the gross amount with the portion remitted to
performers recorded as cost of revenues as the Group considers itself the primary obligor in the sale of virtual gifts with the latitude
in establishing prices, and the rights to determine the specifications or change the virtual gifts.
F-29
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.22
Revenue recognition (Continued)
(b)
Revenue from social entertainment services and others (Continued)
The Group also generates revenue from online karaoke and live streaming services by selling premium memberships that provide
paying users with certain privileges. The fees for these packages are time-based ranging from one month to twelve months and are
collected up-front from subscribers. The receipt of subscription fee is initially recorded as deferred revenue. The Group satisfies its
performance obligation by providing services over the subscription period and revenue is recognized ratably over the subscription
period.
The Group also generated advertising revenue from its social entertainment platforms and the policies for recognized advertising
revenue is described in Note 2.22(a) above.
(c)
Principal agent consideration
The Group reports the revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in a
transaction. The determination of whether to report the revenues of the Group on a gross or net basis is based on an evaluation of
whether various factors, including but not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has latitude
in establishing the selling price; (iii) changes the product or performs part of the service; (iv) has involvement in the determination
of product and service specifications.
The Group does not disclose the information about the remaining performance obligations as the performance obligations of the
Group have an expected duration of one year or less.
(d)
Contract liabilities and contract costs
A contract liability is the Group’s obligation to transfer goods or services to a customer for which the Group has received
consideration (or an amount of consideration is due) from the customer.
Contract costs includes incremental costs of obtaining a contract and costs to fulfil a contract.
2.23
Interest income
Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for financial assets
that subsequently become credit-impaired. For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of
the financial asset (after deduction of the loss allowance).
2.24
Cost of revenues
Cost of revenues mainly consists of service costs, advertising agency fees, channel fees, amortization of intangible assets, salaries and benefits
for operation personnel (including related share-based compensation) and others.
Service costs include royalty payments to music content providers and revenue sharing with performers on the online karaoke and live
streaming platforms. Payment arrangements with music content providers are mainly calculated under pre-determined revenue sharing based on
actual usage of content. Certain arrangements require the Group to pay certain non-recoupable royalty in advance. The Group expenses the non-
recoupable royalty on a straight-line basis over the relevant contractual periods and accrues additional royalty costs when revenue sharing
during a contractual period is expected to exceed the non-recoupable royalty amounts.
2.25
Selling and marketing expenses
Selling and marketing expenses mainly consist of advertising expenses to acquire user traffic for our online music show platforms, salaries and
commissions for our sales and marketing personnel (including related share-based compensation) and intangible assets amortization.
Advertising costs are included in "Selling and marketing" and are expensed when the service is received.
F-30
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.26
General and administrative expenses
General and administrative expenses mainly consist of salaries and benefits for management and administrative personnel and research and
development personnel (including related share-based compensation), rental and depreciation expenses related to facilities and equipment used
by our research and development team, professional service expense, amortization of intangible assets, allowance for doubtful debts and other
general corporate expenses. The Group recognizes research and development related costs as expense when incurred as the amount of costs
qualifying for capitalization has been immaterial.
2.27
Government grants
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the
Group will comply with all attached conditions.
2.28
Leases
Until December 31, 2018, leases in which a significant portion of the risks and rewards of ownership were not transferred to the group as lessee
were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to
profit or loss on a straight-line basis over the period of the lease.
From January 1, 2019, leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available
for use by the Group.
Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease
components based on their relative stand-alone prices. Assets and liabilities arising from a lease are initially measured on a present value basis.
Lease liabilities include the net present value of the following lease payments:
•
•
•
•
•
fixed payments (including in-substance fixed payments), less any lease incentives receivable
variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date
amounts expected to be payable by the Group under residual value guarantees
the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and
payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the
case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to
borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms,
security and conditions.
To determine the incremental borrowing rate, the group:
•
•
•
where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in
financing conditions since third party financing was received
uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, which does not
have recent third party financing, and
makes adjustments specific to the lease, e.g. term, country, currency and security.
F-31
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary of significant accounting policies (Continued)
2.28
Leases (Continued)
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease
liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and
adjusted against the right-of-use asset.
Lease payments are allocated between principal and finance cost. The finance cost is charged to income statement over the lease period so as to
produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following:
the amount of the initial measurement of lease liability
any lease payments made at or before the commencement date less any lease incentives received
any initial direct costs, and
restoration costs.
•
•
•
•
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is
reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. The lease terms of
building and others are generally less than six years and less than two years, respectively.
Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognized on a straight-line basis
as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and
small items of office furniture.
2.29
Dividends distribution
Dividend distribution to the Company's shareholders is recognized as a liability in the consolidated financial statements in the period in which
the dividends are approved by the Company's shareholders or directors, where appropriate.
Distribution of non-cash assets to the Company's shareholders is recognized and measured at the fair value of the non-cash assets to be
distributed. Any difference between the fair value and the carrying amount of the non-cash assets to be distributed is recognized in the income
statement.
3
3.1
Financial risk management
Financial risk factors
The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk),
credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimize the potential adverse effects on the financial
performance of the Group. Risk management is carried out by the senior management of the Group.
(a)
Market risk
(i) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to RMB and US$.
Foreign exchange risk arises when future commercial transactions or recognized assets and liabilities are denominated in a currency
that is not the respective functional currency of the Group’s subsidiaries. The functional currency of the Company and majority of its
overseas subsidiaries is USD whereas the functional currency of the subsidiaries which operate in the PRC is RMB. The Group
currently does not hedge transactions undertaken in foreign currencies but manages its foreign exchange risk by performing regular
reviews of the Group’s net foreign exchange exposures.
F-32
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
3.1
(a)
Financial risk management (Continued)
Financial risk factors (Continued)
Market risk (Continued)
(i) Foreign exchange risk (Continued)
If RMB had strengthened/weakened by 5% against US$ with all other variables held constant, the post-tax profit would have been
RMB7 million higher/lower and RMB28 million higher/lower, for the years ended December 31, 2018 and 2019, respectively, as a
result of net foreign exchange gains/losses on translation of net monetary assets denominated in RMB/US$ which is not the
functional currencies of the respective Group’s entities.
(ii) Price risk
The Group is exposed to price risk because of investments held by the Group, which were classified as financial assets at fair value
through other comprehensive income and other investments for 2018 and 2019. The Group is not exposed to commodity price risk.
The sensitivity analysis is determined based on the exposure to equity price risk of financial assets at fair value through other
comprehensive income and other investments at the end of each reporting period. If equity prices of the respective instruments held
by the Group had been 5% higher/lower, the other comprehensive income would have been approximately RMB167 million and
RMB223 million higher/lower, for the years ended December 31, 2018 and 2019, respectively, and profit for the year would have
been approximately RMB11 million and RMB11 million higher/lower, for the year ended December 31, 2018 and 2019,
respectively.
(iii)
Interest rate risk
Other than term deposits with initial terms of over three months and cash and cash equivalents, the Group has no other significant
interest-bearing assets. In addition, the Group has no any significant interest-bearing liabilities. Accordingly, the directors of the
Company do not anticipate there is any significant impact to interest-bearing assets resulted from the changes in interest rates,
because the interest rates of these assets are not expected to change significantly.
(b)
Credit risk
The Group is exposed to credit risk in relation to its cash and cash deposits (including term deposits) placed with banks and financial
institutions, short-term investments, as well as accounts and other receivables. The carrying amount of each class of these financial assets
represents the Group’s maximum exposure to credit risk in relation to the corresponding class of financial assets.
The Group has policies in place to ensure that credit terms are granted to counterparties, including customers for contents sublicenses,
advertising agencies, third parties platforms as well as entities under Tencent, with an appropriate credit history and the Group performs
periodic credit evaluations of these counterparties. Management does not expect any loss arising from non-performance by these counterparties.
Customers for contents sublicenses and the third parties platforms are reputable corporations with sound financial position.
The credit quality of the advertising agencies are assessed on a regular basis based on historical settlement records and past experience.
In addition, deposits are only placed with reputable domestic or international financial institutions. There has been no recent history of default
in relation to these financial institutions.
Top five customers accounted for 9% of gross accounts receivable comprise of 2%, 2%, 2%, 2% and 1% from these top five customers as at
December 31, 2019. Nevertheless no single external customer amount to more than 10% of the revenue of the Group for the year ended
December 31, 2019.
F-33
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
3.1
(b)
Financial risk management (Continued)
Financial risk factors (Continued)
Credit risk (Continued)
The Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial
recognition of the assets. The provision matrix is determined based on historical observed default rates over the expected life of the receivables
with similar credit risk characteristics and is adjusted for forward-looking estimates. The historical observed default rates are updated based on
the payment profiles of receivable over a period of 12 months, and changes in the forward-looking estimates are analyzed at year end. For the
year ended December 31, 2018 and 2019, loss allowance made against the gross amounts of accounts receivable were not significant, and
provision matrix is not presented.
As at December 31, 2019, the carrying amounts of accounts receivable approximated their fair values.
(c)
Liquidity risk
The Group aims to maintain sufficient cash and cash equivalents and short-term investments to meet financial obligations when due.
Management monitors rolling forecasts of the Group’s liquidity requirements on the basis of expected cash flows and considering the maturities
of financial assets and financial liabilities.
As at December 31, 2018 and 2019, the Group did not have any external borrowings and majority of its financial liabilities except for the lease
liabilities, mainly comprise of accounts payable and other payables and accruals, are due for settlement contractually within 12 months. The
contractual undiscounted cash flows of the Group’s lease liabilities payable in the next twelve months and more than 1 year but within 5 years
as at December 31, 2019 are RMB78 million, RMB82 million, respectively. The contractual undiscounted cash outflow of the Group’s financial
liabilities approximates their carrying amounts included in the consolidated balance sheet.
3.2
Capital risk management
The Group’s objectives on managing capital are to safeguard the Group’s ability to continue as a going concern and support the sustainable
growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure
to enhance shareholders’ value in the long term.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to
shareholders, issue new shares or sell assets to reduce debt.
As at December 31, 2018 and 2019, the directors of the Company consider the risk of the Group’s capital structure is remote as the Group has a
net cash position and without any material external interest-bearing debts.
3.3
Fair value estimation
The table below analyzes the Group’s financial instruments carried at fair value as at December 31, 2018 and 2019 by level of the inputs to
valuation techniques used to measure fair value. Such inputs are categorized into three levels within a fair value hierarchy as follows:
•
•
•
Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices) (level 2); and
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
As at December 31, 2018 and 2019, the Group’s financial instruments carried at fair values comprised financial assets at fair value through
other comprehensive income (Note 16(a)), short-term investments and other investments (Note 16(b)) stated in the consolidated balance sheets
were measured at level 1, level 2 and level 3 fair value hierarchy, respectively. The Group’s contingent consideration of RMB63 million and
RMB112 million included in other payables and other liabilities (Note 24) as at December 31, 2018 and 2019, respectively were measured at
level 3 fair value hierarchy.
F-34
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
3.3
Financial risk management (Continued)
Fair value estimation (Continued)
The fair value of financial instruments traded in active markets is determined with reference to quoted market prices at the end of the reporting
period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group,
pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
These instruments are included in level 1.
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation
techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all
significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. If one or
more of the significant inputs are not based on observable market data, the instrument is included in level 3.
The Group has a team of personnel who performs valuation on these level 3 instruments for financial reporting purposes. The team adopts
various valuation techniques to determine the fair value of the Group’s level 3 instruments. External valuation experts may also be involved and
consulted when it is necessary.
The components of the level 3 instruments mainly include investments in unlisted companies classified as other investment, short-term
investments and contingent consideration payables. As these instruments are not traded in an active market, their fair values have been
determined using various applicable valuation techniques, including discounted cash flows approach and comparable transactions approach, etc.
Major assumptions used in the valuation include historical financial results, assumptions about future growth rates, estimates of weighted
average cost of capital (WACC), recent market transactions, discount for lack of marketability and other exposure etc. The fair value of these
instruments determined by the Group requires significant judgement, including: (i) investments in unlisted companies and projects and short-
term investments: financial performance of the investee companies, market value of comparable companies, projected cash flows as well as
discount rate, etc.; and (ii) contingent consideration payables: estimated performance matrix based on historical performance and discount rate.
During the years ended December 31, 2018 and 2019, there was no transfer between level 1 and 2 for recurring fair value measurements.
Movement of the financial assets at fair value that using level 3 measurements, solely represented other investments, have been presented in
Note 16(b). Movement of the financial liabilities at fair value using level 3 measurements, solely represented contingent consideration,
comprised inception of RMB63 million as a result of business combination and fair value loss of RMB49 million recognized during the years
ended December 31, 2018 and 2019, respectively.
4
Critical accounting estimates and judgments
The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results.
Management also needs to exercise judgement in applying the Group’s accounting policies.
Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future
events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.
(a)
Consolidation of VIEs
As disclosed in Note 1.2, the Group exercises control over the VIEs and has the right to recognize and receive substantially all the
economic benefits through the Contractual Arrangements. The Group considers that it controls the VIEs notwithstanding the fact
that it does not hold direct equity interests in the VIEs, as it has power over the financial and operating policies of the VIEs and
receive substantially all the economic benefits from the business activities of the VIEs through the Contractual Arrangements.
Accordingly, all these VIEs are accounted for as controlled structured entities and their financial statements have also been
consolidated by the Company.
F-35
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Critical accounting estimates and judgments (Continued)
(b)
The estimates of the lifespans of durable virtual gifts
Users purchase certain durable virtual gifts on the Group's online karaoke and live streaming platforms and the relevant revenue is
recognized based on the estimated lifespans of the virtual gifts. The estimated lifespans are determined by the management based on
the expected service period derived from historical data of user relationship period.
Significant judgements are required in determining the expected user relationship periods, including but not limited to historical
users' activities patterns and churn out rate. The Group has adopted a policy of assessing the estimated lifespans of virtual gifts on a
regular basis whenever there is any indication of change in the expected user relationship periods.
Any change in the estimates may result in the revenue being recognized on a different basis from that in prior periods.
(c)
Recoverability of non-financial assets
The Group tests annually whether goodwill has suffered any impairment. Goodwill and other non-financial assets, mainly including
property, plant and equipment, right-of-use assets, intangible assets, as well as investments accounted for using equity method are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The recoverable amounts have been determined based on value-in-use calculations or fair value less costs to sell. These calculations
require the use of judgments and estimates.
Management judgment is required in the area of asset impairment particularly in assessing: (i) whether an event has occurred that
may indicate that the related asset values may not be recoverable; (ii) whether the carrying value of an asset can be supported by the
recoverable amount, being the higher of fair value less costs to sell and net present value of future cash flows which are estimated
based upon the continued use of the asset in the business; (iii) the selection of the most appropriate valuation technique, e.g. the
market approach, the income approach, as well as a combination of approaches, including the adjusted net asset method; and (iv) the
appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are
discounted using an appropriate rate. Changing the assumptions selected by management in assessing impairment, including the
discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the
impairment test and as a result affect the Group’s financial condition and results of operations. If there is a significant adverse
change in the projected performance and resulting future cash flow projections, it may be necessary to take an impairment charge to
income statement.
(d)
Share-based compensation arrangements
The Group measures the cost of equity-settled transactions with employees and non- employees by reference to the fair value of the
equity instruments at the date at which they are granted. The fair value is estimated using a model which requires the determination
of the appropriate inputs. The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the
end of vesting periods of the options and awarded shares (the “Expected Retention Rate”) in order to determine the amount of share-
based compensation expenses charged to the consolidated income statement. The assumptions and models used for estimating the
fair value of share-based payment transactions are disclosed in Note 23.
(e)
Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide
provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded,
such differences will impact current income tax and deferred income tax in the period in which such determination is made.
5
Revenue
During the years ended December 31, 2017, 2018 and 2019, revenue contributed from subscription packages amounted to RMB1,841 million,
RMB2,499 million and RMB3,563 million, respectively.
As at December 2018 and 2019, incremental contracts costs related to contracts with customers are not material to the Group. Details of
contract liabilities were disclosed in Note 25.
F-36
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
7
Interest Income
Interest income mainly represents interest income from bank deposits, including bank balance and term deposits.
Other gains/(losses), net
Government grants and tax rebates (note)
Impairment provision for investments in associates (Note 15)
Net foreign exchange gains/(losses)
Gain on step-up acquisition arising from business combination
Fair value change of investment
Others
2019
2017
Year ended December 31,
2018
RMB’million RMB’million RMB’million
132
(43)
-
-
(37)
26
78
30
(2)
18
72
-
6
124
52
(2)
(31)
-
(30)
(18)
(29)
Note: There are no unfulfilled conditions or contingencies related to these subsidies.
8
Expense by nature
2017
Year ended December 31,
2018
Service costs (note i)
Advertising agency fees
Employee benefits expenses (note ii and note iii)
Promotion and advertising expenses
RMB’million
6,142
188
1,373
660
RMB’million
10,323
204
2,077
1,511
2019
RMB’million
14,967
233
2,527
1,823
Notes:
(i)
(ii)
Service costs mainly comprise of licensing costs, revenue sharing fees paid to content creators and content delivery costs relating
primarily to server, cloud services and bandwidth costs.
During the years ended December 31, 2017, 2018 and 2019, the Group incurred expenses for the purpose of research and
development of approximately RMB797 million, RMB937 million and RMB1,159 million, which comprised employee benefits
expenses of RMB724 million, RMB825 million and RMB1,012 million, respectively. No significant development expenses had
been capitalized for the years ended December 31, 2017, 2018 and 2019.
(iii)
Employee benefits expenses
Wages, salaries and bonuses
Welfare, medical and other expenses
Share-based compensation expenses
Contribution to pension plans
2019
2017
Year ended December 31,
2018
RMB’million RMB’million RMB’million
1,616
295
519
97
2,527
723
204
384
62
1,373
1,228
293
487
69
2,077
Majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in
the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The
plans are organized and administered by the governmental authorities. Other than the contributions made to these social security plans, the
Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare
benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally
determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the
respective labor and social welfare authorities and are expensed as incurred.
F-37
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
Taxation
(a)
Income tax expense
Income tax expense is recognized based on management’s best knowledge of the income tax rates expected for the financial year.
(i)
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. Additionally, upon
payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
(ii)
Hong Kong
Under the current tax laws of Hong Kong, TME HK is subject to Hong Kong profits tax at 16.5% on its taxable income generated
from the operations in Hong Kong. Dividends from TME HK is exempted from withholding tax.
(iii)
PRC
Under the Corporate Income Tax (“CIT”) Law, foreign invested enterprises and domestic enterprises are subject to a unified CIT
rate of 25%. except for available preferential tax treatment, including tax concession for enterprise approved as “High and New
Technology Enterprise” (“HNTE”) and “Software Enterprise” (“SE”), and enterprise established in certain special economic
development zones. In accordance with the implementation rules of the CIT Law, a qualified HNTE is eligible for a preferential tax
rate of 15% and a SE is entitled to an exemption from income taxation for the first two years, commencing from the year the
enterprise makes profit, and a reduction of half tax rate for the next three years.
Guangzhou Kugou, Beijing Kuwo and Guangzhou Fanxing Entertainment Information Technology Co., Ltd. have been recognized
as HNTE by relevant government authorities and were entitled to preferential tax rate of 15% for the years ended December 31,
2017, 2018 and 2019. Yeelion Online was qualified as SE and has entitled to tax holiday starting from the year ended December 31,
2017 (i.e. its first profitable year in 2017). Yeelion Online was entitled to a reduced tax rate of 12.5% for the year ended December
31, 2019.
TME Tech Shenzhen was established in Qianhai, Bonded Zone of Shenzhen in 2017 and was entitled to an preferential tax rate of
15% as it met the requirements set out by local tax authorities, therefore, income tax for TME Tech Shenzhen was provided and paid
at the preferential tax rate of 15%, as it met the requirements set out by local tax authorities, and accordingly income tax for TME
Tech Shenzhen was provided and paid at the preferential tax rate of 15% for the year ended December 31, 2017. However, TME
Tech Shenzhen was further assessed and approved by the relevant government authorities as a SE in 2018 and entitled to the
relevant tax holiday which became applicable since year ended December 31, 2017. Refund for the income tax paid for 2017 was
received and recognized in 2018. After the tax holiday, TME Tech Shenzhen was entitled to a reduced tax rate of 12.5% for the year
ended December 31, 2019.
In addition, for the years ended. December 31, 2018 and 2019, certain subsidiaries of the Group were established in a special
economic development zone and entitled to a tax concession of exemption from CIT for five years, commencing from the first
profitable year. Furthermore, the Group also has certain subsidiaries subject to other preferential tax treatment for certain reduced
tax rates of 5% to 10%.
F-38
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
Taxation (Continued)
(a)
Income tax expense (Continued)
The income tax expense of the Group are analyzed as follows:
2017
Current income tax
Deferred income tax (note b)
Total income tax expense
RMB’million
353
(75)
278
RMB’million
255
(84)
171
Year ended December 31,
2018
2019
RMB’million
703
(140)
563
The taxation on the Group’s profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% for the years
ended December 31, 2017, 2018 and 2019, being the tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments,
as follows:
Profit before income tax expense
Tax calculated at a tax rate of 25%
Effects of different tax rates applicable to different
subsidiaries of the Group
Effects of tax holiday on assessable profit of certain
subsidiaries
Effects of tax holiday of a subsidiary recognized for prior year
Effects of preferential tax rate on assessable profit of certain
subsidiaries
Expense not deductible for tax purposes
Income not subject to tax
Unrecognized deferred income tax assets
Utilization of previously unrecognized tax assets
Others
Year ended December 31,
2018
2017
RMB’million
1,597
399
RMB’million
2,003
501
2019
RMB’million
4,540
1,135
(56)
(39)
-
(161)
107
(10)
81
(45)
2
278
396
(530)
(116)
(230)
156
(2)
37
(40)
(1)
171
(36)
(88)
-
(556)
133
-
16
(50)
9
563
The aggregate amount and per share effect of the tax holiday are as follows:
2017
Year ended December 31,
2018
RMB’million
RMB’million
2019
RMB’million
Effects of tax holiday on assessable profit of
certain subsidiaries
Per ordinary share effect—basic
Per ordinary share effect—diluted
The Group’s profit before tax consists of:
Non-PRC
PRC
39
0.01
0.01
646
0.21
0.20
88
0.03
0.03
Year ended December 31,
2018
2017
RMB’million
266
1,331
1,597
RMB’million
(1,579)
3,582
2,003
F-39
2019
RMB’million
470
4,070
4,540
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
(b)
Taxation (Continued)
Deferred income tax
The deferred tax assets comprise temporary differences
attributable to:
Prepayment and other investments
Deferred revenue
Accruals
Deemed distribution arising from carve out of Tencent Music Business
Others
Total deferred tax assets
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax assets
The deferred tax liabilities comprise temporary
differences attributable to:
Intangible assets acquired in business combinations
Total deferred tax liabilities
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred liabilities
The recovery of deferred income tax:
Deferred tax assets:
to be recovered after more than 12 months
to be recovered within 12 months
Deferred tax liabilities:
to be recovered after more than 12 months
to be recovered within 12 months
F-40
As at December 31,
2018
RMB’million
2019
RMB’million
39
30
40
19
3
131
(8)
123
362
362
(8)
354
61
46
74
13
6
200
(8)
192
305
305
(8)
297
As at December 31,
2018
RMB’million
2019
RMB’million
44
79
123
284
70
354
43
149
192
229
68
297
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
(b)
Taxation (Continued)
Deferred income tax (Continued)
The movements of deferred income tax assets were as follows:
Prepayment
and other
investments
Deferred
revenue
Accruals
Deemed
distribution
Others
Total
At January 1, 2018
Credited/(charged) to
income statement
At December 31, 2018
Credited/(charged) to
income statement
At December 31, 2019
RMB’million RMB’million RMB’million RMB’million RMB’million RMB’million
106
45
25
24
6
6
33
39
22
61
6
30
16
46
(5)
40
34
74
(6)
19
(6)
13
(3)
3
3
6
25
131
69
200
The Group only recognizes deferred income tax assets for cumulative tax losses if it is probable that future taxable amounts will be available to
utilize those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at
December 31, 2018 and 2019, the Group did not recognize deferred income tax assets of RMB116 and RMB42 million respectively in respect
of cumulative tax losses amounting to, RMB511 million and RMB436 million respectively. These tax losses will expire from 2020 to 2024.
The movements of deferred income tax liabilities were as follows:
At January 1, 2018
Credited to income statement
Business combination
At December 31, 2018
Credited to income statement
Business combination
At December 31, 2019
Intangible
assets
RMB’million
300
(54)
116
362
(71)
14
305
Others
RMB’million
5
(5)
-
-
-
-
-
Total
RMB’million
305
(59)
116
362
(71)
14
305
F-41
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
Earning per share
(a)
Basic earnings per share
Basic earnings per share (“EPS”) is calculated by dividing the profit attributable to equity holders of the Company by the weighted
average number of ordinary shares outstanding during the year.
(b)
Diluted earnings per share
For the calculation of diluted earnings per share, weighted average number of ordinary shares outstanding is adjusted by the effect of
dilutive securities, including share-based awards in respect of share options and restricted share units (“RSU”) as well as puttable
shares, under the treasury stock method (collectively forming the denominator for computing the diluted earnings per share).
Potentially dilutive securities, including share options, RSU and puttable shares, have been excluded from the computation of
weighted average number of ordinary shares for the purpose of diluted earnings per share if their inclusion is anti-dilutive. No
adjustments is made to earnings (numerator).
For the years ended December 31, 2017, 2018 and 2019, certain share options, certain RSU and puttable shares that were anti-
diluted and excluded from the calculation of diluted earnings per share were immaterial on a weighted average basis.
The following table sets forth the computation of basic and diluted earnings per share:
Basic earnings per share calculation
Numerator:
Profit for the year attributable to the Company
(in millions of RMB)
Denominator:
Weighted average number of Class A and Class B ordinary
shares outstanding
Basic earnings per share (in RMB)
Basic earnings per ADS (in RMB) (note)
Diluted earnings per share calculation
Numerator:
Profit for the year attributable to the Company
(in millions of RMB)
Denominator:
Weighted average number of Class A and Class B ordinary
shares outstanding
Adjustments for share options and RSU
Number of shares used in computing diluted earnings per
share attributable to the Company
Diluted earnings per share (in RMB)
Diluted earnings per ADS (in RMB) (note)
Note: One ADS represented two Class A ordinary shares of the Company.
F-42
Year ended December 31,
2018
2017
2019
1,326
1,833
3,982
2,593,157,207
0.51
N/A
3,076,314,670
0.60
1.19
3,272,754,403
1.22
2.43
1,326
1,833
3,982
2,593,157,207
46,309,205
3,076,314,670
82,906,218
3,272,754,403
74,817,935
2,639,466,412
3,159,220,888
3,347,572,338
0.50
N/A
0.58
1.16
1.19
2.38
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11
Property, plant and equipment
At January 1, 2018
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2018
Opening net book amount
Additions
Business combination
Disposals
Depreciation charge
Closing net book amount
At December 31, 2018
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2019
Opening net book amount
Additions
Business combination
Disposals
Depreciation charge
Closing net book amount
At December 31, 2019
Cost
Accumulated depreciation
Net book amount
Servers
and
network
equipment
RMB
’million
Leasehold
improve
-ments
RMB
’million
Office
furniture,
equipment
and others
RMB
’million
Total
RMB
’million
123
(51)
72
72
95
-
(1)
(45)
121
217
(96)
121
121
63
-
-
(60)
124
264
(140)
124
75
(32)
43
43
10
3
-
(25)
31
88
(57)
31
31
13
-
(1)
(17)
26
59
(33)
26
22
(10)
12
12
11
1
-
(8)
16
30
(14)
16
16
24
1
(1)
(11)
29
41
(12)
29
220
(93)
127
127
116
4
(1)
(78)
168
335
(167)
168
168
100
1
(2)
(88)
179
364
(185)
179
During the years ended December 31, 2017, 2018 and 2019, depreciation was charged to the consolidated income statements as follows:
Cost of revenues
Selling and marketing expenses
General and administrative expenses
F-43
2017
Year ended December 31,
2018
RMB’million RMB’million RMB’million
64
1
23
88
33
2
27
62
47
1
30
78
2019
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
Right-of-use assets
The carrying amounts of right-of-use assets are as below:
Upon adoption of IFRS 16 as at January 1, 2019 (Note 2.2)
Inception of new leases
Depreciation charge
Net book amount at December 31, 2019
Total
Buildings
Others
RMB’million RMB’million RMB’million
100
109
(61)
148
100
89
(53)
136
-
20
(8)
12
During the year ended December 31, 2019, Interest expense of RMB7 million arising from lease liabilities was included in finance costs.
Expense related to short-term leases of RMB201 million and RMB26 million were included in cost of revenues and expenses, respectively.
The total cash outflow in financing activities for leases in 2019 was RMB63 million, including principal elements of lease payments of
approximately RMB56 million and related interest paid of approximately RMB7 million, respectively.
The Group considered the lease as a single transaction in which the asset and liability are integrally linked and no net temporary difference at
inception. As at December 31, 2019, net temporary difference arose on settlement of the liability and the amortization of the leased asset on
which deferred tax was immaterial.
During the year ended December 31, 2019, the lease of low value were immaterial and there were no lease with variable lease payment.
13
Intangible assets
At January 1, 2018
Cost
Accumulated amortization
Net book amount
Year ended December 31,
2018
Opening net book amount
Additions
Business combination
(Note 27)
Disposals
Amortization charge
Closing net book amount
At December 31, 2018
Cost
Accumulated amortization
Net book amount
Year ended December 31,
2019
Opening net book amount
Additions
Business combination
Amortization charge
Closing net book amount
At December 31, 2019
Cost
Accumulated amortization
Net book amount
Domain
name,
trademark
and
Internet
audio/video
program
transmission
license
RMB’million
Copyrights
RMB’million
Supplier
resources
RMB’million
Corporate
customer
relationships
RMB’million
Non-compete
agreement
RMB’million
Others
RMB’million
Total
RMB’million
1,340
(171)
1,169
1,169
-
-
-
(116)
1,053
1,340
(287)
1,053
1,053
-
-
(116)
937
1,340
(403)
937
-
-
-
-
4
281
-
(13)
272
285
(13)
272
272
225
34
(157)
374
544
(170)
374
F-44
331
(72)
259
259
-
4
-
(51)
212
335
(123)
212
212
-
-
(52)
160
335
(175)
160
238
(90)
148
148
-
-
-
(62)
86
238
(152)
86
86
-
-
(42)
44
185
(141)
44
131
(42)
89
89
-
3
-
(29)
63
134
(71)
63
63
-
22
(33)
52
156
(104)
52
81
(29)
52
52
11
35
(1)
(20)
77
125
(48)
77
77
12
-
(34)
55
136
(81)
55
2,121
(404)
1,717
1,717
15
323
(1)
(291)
1,763
2,457
(694)
1,763
1,763
237
56
(434)
1,622
2,696
(1,074)
1,622
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13
Intangible assets (Continued)
During the years ended December 31, 2017, 2018 and 2019, amortization was charged to the consolidated income statements as follows:
Cost of revenues
Selling and marketing expenses
General and administrative expenses
14
Goodwill
At January 1
Business combination
At December 31
2017
Year ended December 31,
2018
RMB’million RMB’million RMB’million
239
42
153
434
60
109
148
317
78
62
151
291
2019
Year ended December 31,
2019
2018
RMB’million
RMB’million
16,262
826
17,088
17,088
52
17,140
Goodwill is tested for impairment on an annual basis or when there are indications the carrying amount may be impaired. For the purpose of
impairment testing, the Group allocates its goodwill to the relevant CGUs or group of CGUs, and compares the recoverable amounts of these
CGUs/groups of CGUs to their respective carrying amounts. Majority of the Goodwill to the extent of approximately RMB16 billion is mainly
related to the reverse acquisition in 2016 (Note 1.1). The recoverable amount of a CGU (or group of CGUs) is the higher of its value in use and
fair value less costs of disposal.
Value-in-use is calculated based on discounted cash flows. The discounted cash flows calculations of each group of CGUs use cash flow
projections developed based on financial budgets approved by management of the Group covering a five-year period. Cash flows beyond the
five-year period are extrapolated using a terminal growth rate of not more than 3%. Other key parameters applied in the financial budgets for
impairment review purpose including revenue growth and margin, which do not exceed the industry growth forecast. Pre-tax discount rates
ranging from 13.5% to 18% are adopted, which reflects market assessment of time value and the specific risks relating to the industry that the
Group operates. The financial projections were determined by the management based on past performance and its expectation for market
development.
When determining the recoverable amounts, management has not identified reasonably possible change in key assumptions that could cause the
CGU’s (group of CGU’s) carrying amount to exceed the recoverable amount. No impairment is recognized for the years ended December 31,
2018 and 2019.
15
Investments accounted for using equity method
Investments in associates
Investments in joint ventures
F-45
As at December 31,
2018
RMB’million
2019
RMB’million
190
46
236
422
67
489
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15
Investments accounted for using equity method(Continued)
2017
Year ended December 31,
2018
RMB’million
RMB’million
2019
RMB’million
Share of profit/(loss) of investments accounted for using
equity method:
Associates
Joint ventures
Movement of investments in associates and joint ventures is analyzed as follows:
At January 1
Additions (note i)
Business combination
Share of losses
Share of other comprehensive losses
Disposal
Step acquisition accounted for as business combination under common
control (Note 26)
Other step acquisition
Impairment provision (note ii)
Currency translation differences
Dividend received
At December 31
13
(9)
4
12
(13)
(1)
(9)
(9)
(18)
Year ended December 31,
2019
2018
RMB’million
RMB’million
378
99
3
(1)
-
(50)
(184)
(14)
(2)
7
-
236
236
333
-
(18)
(1)
(1)
-
-
(43)
3
(20)
489
Notes:
(i)
(ii)
During the year ended December 31, 2019, the Group invested in several companies in various sectors in music industry for a
minority stake.
Both external and internal sources of information of associates are considered in assessing whether there is any indication that the
investments maybe impaired, including but not limited to financial position, business performance and market capitalization. During
the year ended December 31, 2019, the impairment losses mainly resulted from revisions of financial business outlook of the
associates and changes in the market environment of the underlying business.
There are no material contingent liabilities relating to the Group’s interests in the investments accounted for using equity method.
.
F-46
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16
(a)
Financial assets at fair value
Financial assets at fair value through other comprehensive income
As at December 31, 2018 and 2019, the Group’s financial assets at fair value through other comprehensive income solely represented its equity
investment in Spotify Technology S.A. (“Spotify”). Spotify has been listed on the New York Stock Exchange since April 2018.
Movement of financial assets at fair value through other comprehensive income is analyzed as follows:
Listed equity investments
At January 1
Fair value change
Currency translation differences
At December 31
(b)
Other investments
Year ended December 31,
2019
2018
RMB’million
RMB’million
3,730
(675)
276
3,331
3,331
1,031
99
4,461
Other investments represent financial assets at fair value through profit or loss. Movement of other investments is analyzed as follows:
At January 1
Addition (note)
Fair value change
Disposal
At December 31
Of which are:
Current
Non-current
Year ended December 31,
2019
2018
RMB’million
RMB’million
10
276
(30)
-
256
39
217
256
256
3
-
(4)
255
38
217
255
Note: During the year ended December 31, 2018, the Group acquired a minority stake in an entertainment and media company at a
consideration of RMB160 million and invested in minority interest in certain music related media projects of Tencent in aggregate amount of
RMB116 million.
F-47
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17
Prepayments, deposits and other assets
Included in non-current assets
Prepaid contents royalties
Included in current assets
Prepaid contents royalties
Value-added tax recoverable
Prepaid vendors deposits and other receivables
Prepaid promotion and other expenses
Receivable from Tencent (Note 31(b))
Others
18
Accounts receivable
Accounts receivable
Less: loss allowance for expected credit losses
Accounts receivable, net
Ageing analysis of the accounts receivables based on invoice date:
Up to 3 months
3 to 6 months
Over 6 months
As at December 31,
2018
RMB’million
2019
RMB’million
901
901
1,450
85
75
130
28
55
1,823
816
816
1,600
153
199
133
50
85
2,220
As at December 31,
2018
RMB’million
2019
RMB’million
1,490
(7)
1,483
1,304
144
42
1,490
2,209
(11)
2,198
1,913
116
180
2,209
The loss allowances for accounts receivables as at December 31, 2018 and 2019 reconcile to the opening loss allowances as follows:
At January 1
Provision for loss allowance recognized in income statement
Receivables written off during the year as uncollectible
At December 31
19
Term deposits
Year ended December 31,
2019
2018
RMB’million
RMB’million
9
3
(5)
7
7
18
(14)
11
As at December 31, 2019, the Group's term deposits included in current and non-current portion of RMB7,000 million and RMB500 million
were denominated in RMB (December 31, 2018: Nil).
The effective interest rate for the term deposits of the Group with initial terms of over three months during the year ended December 31, 2019
was 3.97% (December 31, 2018: Nil).
As at December 31, 2019, the carrying amounts of the term deposits with initial terms of over three months approximated their fair values.
F-48
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20
Cash and cash equivalents
Cash at bank
Term deposits with initial terms within three months
As at December 31,
2018
RMB’million
2019
RMB’million
7,557
9,799
17,356
8,892
6,534
15,426
The effective interest rate of term deposits of the Group with initial terms within three months during the years ended December 31, 2018 and
2019 was 3.24% and 3.35%, respectively.
21
Share capital
Balance January 1, 2017
(US$0.000083 par value; 4,800,000,000 shares authorized)
Issuance of ordinary shares (note i)
Issuance of stock dividend (note x)
Exercise of share options (note i)
Issuance of ordinary shares in exchange for ordinary
shares in an investee (note x)
Distribution to Tencent (note x)
Balance December 31, 2017
(US$0.000083 par value; 4,800,000,000 shares authorized)
Issuance of ordinary shares (note ii)
Issuance of ordinary shares for acquiring
the remaining interest in UEC (Note 26)
Issuance of puttable ordinary shares (note iii)
Issuance of ordinary shares to Music Label Partners (note iv)
Issuance of ordinary shares upon initial public offering (note v)
Balance December 31, 2018
(US$0.000083 par value; 4,800,000,000 shares authorized)
Issuance of ordinary shares (note vi)
Employee share award schemes
-value of employee service
-Shares held for share award schemes (note vii)
-Shares allotted and issued for share award schemes(note viii)
Balance December 31, 2019
(US$0.000083 par value; 4,800,000,000 shares authorized)
Number of
issued
shares*
2,543,814,662
15,939,000
88,726,036
39,262,654
282,830,698
-
2,970,573,050
97,381,238
23,084,008
24,757,517
68,131,015
82,059,658
3,265,986,486
280,512
-
-
88,798,940
3,355,065,938
Share
capital
Additional
paid-in
capital
Shares
held for
share award
schemes
RMB’million
RMB’million
RMB’million
2
-
-
-
-
-
2
-
-
-
-
-
2
-
-
-
-
2
20,063
-
-
79
7,547
(3,774)
23,915
2,433
1,027
-
2,905
3,496
33,776
12
637
-
-
34,425
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(31)
-
(31)
As at December 31, 2018 and 2019, analysis of the Company’s issued shares is as follows:
Class A ordinary shares
Class B ordinary shares
As at December 31, 2018
Share
capital
Number of
issued
shares
609,770,009
RMB’million
As at December 31, 2019
Share
capital
RMB’million
-
2
2
Number of
issued
shares
- 1,325,454,335
2 2,029,611,603
2 3,355,065,938
2,656,216,477
3,265,986,486
* All issued shares are fully paid as at December 31, 2017, 2018 and 2019.
F-49
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21
Share capital (Continued)
Notes:
(i)
(ii)
These shares rank pari passu in all respects with the shares in issue.
From January to March 2018, 97,318,238 ordinary shares of the Company were allotted and issued to certain existing shareholders
and new financial investors for an aggregated consideration of US$382 million (equivalents to approximately RMB2,659 million).
These shares rank pari passu in all respects with the shares in issue. The excess over the par value was credited to the additional
paid-in capital.
(iii)
Issuance of puttable ordinary shares
From January to March 2018, the Company allotted and issued 24,757,517 ordinary shares of the Company to certain investors for
an aggregate consideration of US$123 million (equivalents to approximately RMB856 million). The consideration comprised cash
proceeds of US$67 million (equivalents to approximately RMB466 million) and business cooperation arrangements, in form of
contents cooperation, valued at approximately US$56 million (equivalents to approximately RMB390 million).
These shares rank pari passu in all respects with the shares in issue except that there is lock up period of 3 years on these shares and
the holders have the right to sell their shares to the Company during the lock up period at a pre-determined price (“Put Right”). This
arrangement is accounted for as compound instrument under share-based compensation arrangement with debt component,
representing the holders’ right to demand payment by exercise the Put Right, which is accounted for as cash-settled share-based
compensation and the residual is equity component accounted for as equity-settled shared-based compensation.
The present value of the outflows of cash in relation to the Put Right of approximately US$67 million (equivalents to approximately
RMB466 million) is recognized as a liability (Note 24) and subsequently measured at fair value. The residual balance of
approximately US$56 million (equivalents to approximately RMB390 million) is accounted for as an equity-settled share-based
compensation and recognized in equity.
(iv)
Share Issuances to Music Label Partners
On October 3, 2018, the Company issued a total of 68,131,015 ordinary shares to WMG China LLC (“Warner”), an affiliate of
Warner Music Group, and Sony Music Entertainment (“Sony”) for an aggregate cash consideration of approximately US$200
million. Under the share subscription agreements, shares held by Warner and certain shares held by Sony are subject to a lock-up
until the earlier of the third anniversary of the completion of the IPO of the Company or October 1, 2021, subject to limited
exceptions. The remaining shares held by Sony are subject to a lock-up until the earlier of the end of 180 days after the Company’s
prospectus issued on December 12, 2018 or April 1, 2019, subject to limited exceptions. Warner and Sony can request the Company
to repurchase the shares held by them at their subscription price if there is no qualified IPO by the end of 2019.
The Company expects this share issuance will help deepen its strategic cooperation with its major music label partners and better
align the interests with them to create long-term value. The excess fair value of the shares issued, taking into account the related
terms and conditions, over the consideration received of approximately US$221 million (equivalents to approximately RMB1,519
million) was accounted for as share-based accounting charge expensed immediately upon the share issuances under IFRS 2 “Share-
based Payment”.
F-50
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21
Share capital (Continued)
Notes: (Continued)
(v)
Dual-class ordinary share structure
The Company adopted a dual-class ordinary share structure effective immediately prior to the completion of the IPO.
Ordinary shares of the Company are divided into Class A ordinary shares and Class B ordinary shares. Holders of the Class A
ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A
ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 15 votes and is convertible into one Class A
ordinary share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while
Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer,
assignment or disposition of any Class B ordinary shares by a holder thereof to any non-affiliate to such holder, each of such Class B
ordinary share will be immediately converted into one Class A ordinary share.
All the Company’s issued ordinary shares held by the Company’s shareholders other than the then existing shareholders as at
December 8, 2017 and its respective affiliates that holding any ordinary shares in the Company immediately prior to the completion
of the IPO (“Pre-2018 Shareholders”) have been re-designated as Class A ordinary shares, and all issued ordinary shares held by the
Pre-2018 Shareholders have been re-designated as Class B ordinary shares immediately prior to the completion of the IPO.
On December 12, 2018, 41,029,829 ADSs were offered by the Company upon the listing of the ADSs on the New York Stock
Exchange (the “Offering”), which represented 82,059,658 Class A ordinary shares of the Company.
(vi)
(vii)
(viii)
On February 20, 2019, the Company completed a private placement, where the Company sold to Tencent 280,512 Class A ordinary
shares with an aggregate value of US$1.8 million at the offering price per share in our initial public offering for distribution to its
eligible shareholders as required by the relevant listing rules of the Hong Kong Stock Exchange
During the year ended 31 December 2019, the Share Scheme Trust withheld 617,634 Class A ordinary shares (December 31, 2018:
Nil) of the Company for an amount of approximately RMB31 million which had been deducted from the equity
As at December 31, 2019, 31,310,524 Class A ordinary shares are held in the Share Scheme Trust for the purpose of granting
awarded shares to the participants under the Share Award Schemes.
(ix)
Repurchase of shares
As at December 2019, the Company announced that its board of directors has authorized a share repurchase program under which
the Company may repurchase up to US$400 million of its Class A ordinary shares in the form of ADSs during a twelve-month
period commencing on December 15, 2019. During the year ended December 31 2019, no ADS of the Company was repurchased
under the share repurchase program.
(x)
In December 2017, the Group entered into a share subscription agreement (“Spotify Subscription Agreement”) with Spotify
Technology S.A. (“Spotify”) to subscribe for 8,552,440 ordinary shares of Spotify, at valuation of RMB7,547 million (US$1,142
million), by issuance of 282,830,698 ordinary shares of the Company as consideration. After the completion of the subscription, the
Company transferred 50% of its ordinary shares in Spotify amounting to approximately RMB3,774 million to Tencent at US$1 and
issued 88,726,036 ordinary shares as fully paid stock dividend to the Company’s then shareholders other than Spotify and Tencent.
The stock dividend paid was credited to share capital at the par value of the stock dividend paid with corresponding debited to
additional paid-in capital of the same amount.
The distribution of ordinary shares of Spotify to Tencent was accounted for as distribution in equity.
F-51
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22
Other reserves
Contribution
from/
(distribution
to) ultimate
holding
company
Share-based
compensa-tion
reserve
PRC
statutory
reserve
Foreign
currency
translation
reserve
Fair value
reserve
Others
Total other
reserves
RMB’million
142
-
99
335
RMB’million
416
-
20
27
RMB’million
17
-
-
-
RMB’million
42
(143)
-
-
RMB’million
-
-
-
-
RMB’million
-
-
-
-
RMB’million
617
(143)
119
362
-
576
-
-
-
840
-
1,416
-
-
519
(465)
-
-
1,470
-
463
-
-
-
-
463
-
-
-
-
-
42
59
-
-
-
20
79
-
-
-
-
-
-
(101)
552
-
-
-
451
261
-
-
-
-
-
-
463
15
94
-
712
-
-
-
(675)
-
-
-
-
-
(831)
-
(675)
1,031
-
-
-
-
356
-
(831)
-
(1)
-
-
(76)
-
(908)
42
997
552
(675)
(831)
840
20
903
261
1,031
(1)
519
(465)
(76)
15
2,187
At January 1, 2017
Currency translation differences
Deemed contribution
Share based compensation
Profit appropriations to PRC
statutory reserves
At December 31, 2017
Currency translation differences
Fair value changes on financial
assets at fair value through
other comprehensive income
Acquisition of remaining
interests in associates
Share based compensation
Profit appropriations to PRC
statutory reserves
At December 31, 2018
Currency translation differences
Fair value changes on financial
assets at fair value through
other comprehensive income
Share of other comprehensive
losses of an associate
Share based compensation
Exercise of share options/RSU
Additional investments in non-
wholly owned subsidiaries
Profit appropriations to PRC
statutory reserves
At December 31, 2019
23
(a)
Share based compensation
Share-based compensation plans of the Company
The Group has adopted three share-based compensation plans, namely, the 2014 Share Incentive Plan, the 2017 Restricted Share Scheme and
the 2017 Option Plan.
(i)
2014 Share Incentive Plan
2014 Share Incentive Plan was approved by the then board of directors of the Company in October 2014 prior to the Reverse
Acquisition. According to the 2014 Share Incentive Plan, 96,704,847 ordinary shares have been reserved to be issued to any
qualified employees, directors, non-employee directors, and consultants as determined by the board of directors of the Company.
The options will be exercisable only if option holder continues employment or provide services through each vesting date. The
maximum term of any issued stock option is ten years from the grant date.
Some granted options follow the first category vesting schedule, one-fourth (1/4) of which shall vest and become exercisable upon
the first anniversary of the date of grant and one-eighth (1/8) of which shall vest and become exercisable on each half of a year
anniversary thereafter. Some granted options follow the second category vesting schedule, one-fourth (1/4) of which shall vest upon
the first anniversary of the grant date and one-sixteenth (1/16) of which shall vest on each three months thereafter. Under the second
category vesting schedule, in the event of the Company’s completion of an IPO or termination of the option holder’s employment
agreement by the Company without cause, the vesting schedule shall be accelerated by a one year period (which means that the
whole vesting schedule shall be shortened from four years to three years). For the third category vesting schedule, all options shall
vest upon the first anniversary of the grant date, and in the event of the Company’s completion of an IPO.
F-52
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
(a)
Share based compensation (Continued)
Share-based compensation plans of the Company (Continued)
(i)
2014 Share Incentive Plan (Continued)
The option holders may elect at any time to exercise any part or all of the vested options before the expiry date.
Outstanding as at January 1, 2017
Exercised
Forfeited
Outstanding as at December 31, 2017
Vested and expected to vest as at December 31, 2017
Exercisable as at December 31, 2017
Non vested as at December 31, 2017
Outstanding as at January 1, 2018
Anti-dilution adjustments
Forfeited
Outstanding as at December 31, 2018
Vested and expected to vest as at December 31, 2018
Exercisable as at December 31, 2018
Non vested as at December 31, 2018
Outstanding as at January 1, 2019
Exercised
Forfeited
Outstanding as at December 31, 2019
Vested and expected to vest as at December 31, 2019
Exercisable as at December 31, 2019
Non vested as at December 31, 2019
Weighted-
average
exercise
price
(US$)
Weighted-
average
grant
date fair
value
(US$)
0.25
0.30
0.24
0.21
0.21
0.18
0.26
0.21
-
0.24
0.19
0.19
0.18
0.25
0.19
0.18
0.20
0.23
0.23
0.23
0.24
2.05
1.98
2.08
2.09
2.09
2.11
2.06
2.09
-
2.05
1.94
1.94
1.94
1.91
1.94
1.97
2.04
1.92
1.92
1.91
1.92
Number of
options
96,704,847
(39,262,654)
(3,943,920)
53,498,273
49,573,551
33,196,944
20,301,329
53,498,273
4,731,938
(1,494,002)
56,736,209
55,921,341
50,155,161
6,581,048
56,736,209
(42,091,694)
(747,211)
13,897,304
13,670,469
12,007,012
1,890,292
The weighted average price of the shares at the time these options were exercised was US$3.66 (equivalent to approximately
RMB25.48) and US$7.46 per share (equivalent to approximately RMB51.94), during the year ended December 31, 2017 and 2019
(December 31, 2018: Nil).
F-53
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
(a)
Share based compensation (Continued)
Share-based compensation plans of the Company (Continued)
(i)
2014 Share Incentive Plan (Continued)
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Grant Date
March 1, 2015
March 1, 2015
March 1, 2015
March 1, 2015
March 30, 2015
July 1, 2015
October 1, 2015
December 31, 2015
December 31, 2015
March 1, 2016
March 31, 2016
June 1, 2016
June 30, 2016
June 30, 2016
Total
Expiry date
February 28, 2025
February 28, 2025
February 28, 2025
February 28, 2025
March 29, 2025
June 30, 2025
September 30, 2025
December 30, 2025
December 30, 2025
February 28, 2026
March 30, 2026
May 30, 2026
June 29, 2026
June 29, 2026
Exercise
price
US$0.000076
US$0.27
US$0.000076
US$0.27
US$0.27
US$0.27
US$0.27
US$0.27
US$0.000076
US$0.27
US$0.27
US$0.27
US$0.000076
US$0.27
Weighted average remaining contractual life of options
outstanding at end of period:
(ii)
2017 Restricted Share Scheme and 2017 Option Plan
Share
options
December 31, 2018
2,348,099
2,714,940
12,945,345
10,776,631
3,748,650
75,100
791,880
3,036,686
230,750
746,643
370,040
7,098,340
653,070
11,200,035
56,736,209
Share
options
December 31, 2019
339,001
394,470
1,407,820
1,409,162
1,953,472
-
245,826
1,529,224
90,302
255,377
156,498
-
163,272
5,952,880
13,897,304
6.23
5.87
Followed the completion of the Reverse Acquisition, the Company has reserved certain ordinary shares to be issued to any qualified
employees of Tencent Music Business transferred to the Group.
Pursuant to the restricted shares agreements under 2017 Restricted Share Scheme, subject to grantee's continued services to the
Group through the applicable vesting date, some restricted shares follow the first category of vesting schedule, one-fourth (l/4) of
which shall vest eighteen months after grant date, and one-fourth (1/4) every year after. Other granted restricted shares shall follow
the second vesting schedule, half (1/2) shall vest six months after grant date, and the other half shall vest six months thereafter.
Share options granted are generally subject to a four batches vesting schedule as determined by the board of directors of the grant.
One-fourth (1/4) of which shall vest nine months or eighteen months after grant date, respectively, as provided in the grant
agreement, and one-fourth (1/4) of which vest upon every year thereafter. The vested options shall become exercisable in the event
of the Company’s completion of an IPO.
F-54
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
(a)
Share based compensation (Continued)
Share-based compensation plans of the Company (Continued)
(ii)
2017 Restricted Share Scheme and 2017 Option Plan (Continued)
Movements in the number of RSUs for the years ended December 31, 2017, 2018 and 2019 are as follows:
Outstanding as at January 1
Anti-dilution adjustments
Granted
Vested
Forfeited
Outstanding as at December 31
Expected to vest as at December 31
Number of awarded shares
Year ended December 31,
2018
2017
7,172,472
-
1,234,514
-
(265,322)
8,141,664
5,797,563
8,141,664
719,968
5,335,010
-
(472,542)
13,724,100
10,318,030
2019
13,724,100
-
19,567,514
(5,700,520)
(931,578)
26,659,516
24,377,060
The fair value of the restricted shares was calculated based on the fair value of ordinary shares of the Company. The weighted
average fair value of restricted shares granted during the years ended December 31, 2017, 2018 and 2019 was US$3.26 per share
(equivalent to approximately RMB22.70 per share), US$6.12 per share (equivalent to approximately RMB42.61 per share) and
US$7.07 per share (equivalent to approximately RMB49.22 per share), respectively.
Weighted-
average
exercise
price
(US$)
Weighted-
average
grant
date fair
value
(US$)
Number of
options
12,034,480
15,315,256
(388,350)
26,961,386
18,362,420
-
26,961,386
26,961,386
2,384,714
7,777,224
(1,037,021)
36,086,303
28,604,121
7,252,971
28,833,332
36,086,303
1,993,780
(9,696,202)
(1,743,373)
26,640,508
25,329,481
6,065,968
20,574,540
2.53
1.35
0.29
1.89
1.87
-
1.89
1.89
-
6.76
1.35
2.75
2.58
1.76
3.00
2.75
7.05
1.78
2.67
3.43
3.44
2.45
3.71
1.03
3.10
3.39
2.17
2.18
-
2.17
2.17
-
3.27
1.85
2.24
2.38
1.75
2.47
2.24
3.00
1.95
2.33
2.39
2.38
2.04
2.50
Outstanding as at January 1, 2017
Granted
Forfeited
Outstanding as at December 31, 2017
Vested and expected to vest as at December 31,
2017
Exercisable as at December 31, 2017
Non vested as at December 31, 2017
Outstanding as at January 1, 2018
Anti-dilution adjustments
Granted
Forfeited
Outstanding as at December 31, 2018
Vested and expected to vest as at December 31,
2018
Exercisable as at December 31, 2018
Non vested as at December 31, 2018
Outstanding as at January 1, 2019
Granted
Exercised
Forfeited
Outstanding as at December 31, 2019
Vested and expected to vest as at December 31,
2019
Exercisable as at December 31, 2019
Non vested as at December 31, 2019
F-55
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
(a)
Share based compensation (Continued)
Share-based compensation plans of the Company (Continued)
(ii)
2017 Restricted Share Scheme and 2017 Option Plan (Continued)
The weighted average price of the shares at the time these options were exercised was US$6.79 per share (equivalent to
approximately RMB47.27) during the year ended December 31, 2019 (December 31, 2017 and 2018: Nil).
The fair value of share options were valued using the Binomial option-pricing model.
Assumptions used in the Binomial option-pricing model are presented below:
Risk free interest rate
Expected dividend yield
Expected volatility
Exercise multiples
Contractual life
2017
2.1-2.5%
0%
55%-60%
2.2-2.8
10 years
Granted in
2018
2.97%-3.21%
0%
50%-60%
2.8
10 years
2019
2.08%
0%
40%
2.2-2.8
10 years
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Grant Date
Expiry date
Exercise price
June 16, 2017
August 31, 2017
December 20, 2017
April 16, 2018
October 17, 2018
June 14, 2019
Total
June 15, 2027
August 30,2027
December 19, 2027
April 15, 2028
October 16, 2028
June 13, 2029
US$2.32
US$0.27
US$2.32
US$4.04
US$7.14
US$7.05
Weighted average remaining contractual life of options
outstanding at end of year:
(b)
Share-based compensation plans of Tencent
Share options
as at December 31,
2018
13,098,930
7,768,593
7,902,280
1,300,000
6,016,500
-
36,086,303
2019
7,889,968
4,513,508
5,551,752
975,000
5,716,500
1,993,780
26,640,508
8.62
8.07
Tencent operates a number of share-based compensation plans (including share option scheme and share award scheme) covering certain
employees of the Group.
Share options granted are generally subject to a four-year or five-year vesting schedule as determined by the board of directors of Tencent.
Under the four-year vesting schedule, share options in general vest one-fourth (1/4) upon the first anniversary of the grant date, and one-fourth
(1/4) every year after. Under the five-year vesting schedule, depending on the nature and purpose of the grant, share options in general vest one-
fifth (1/5) upon the first or second anniversary of the grant date, respectively, as provided in the grant agreement, and one-fifth (1/5) every year
after.
F-56
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
(b)
Share based compensation (Continued)
Share-based compensation plans of Tencent (Continued)
RSUs are subject to a three-year or four-year vesting schedule, and each year after the grant date, one-third (1/3) or one-fourth (1/4) shall vest
accordingly. No outstanding share options or RSUs will be exercisable or subject to vesting after the expiry of a maximum of seven years from
the date of grant. Movements in the number of share options of Tencent relevant to the Group outstanding is as follows:
Outstanding as at January 1, 2017
Granted
Exercised
Outstanding as at December 31, 2017
Vested and expected to vest as at December 31, 2017
Exercisable as at December 31, 2017
Non vested as at December 31, 2017
Outstanding as at January 1, 2018
Exercised
Outstanding as at December 31, 2018
Vested and expected to vest as at December 31, 2018
Exercisable as at December 31, 2018
Non vested as at December 31, 2018
Outstanding as at January 1, 2019
Exercised
Outstanding as at December 31, 2019
Vested and expected to vest as at December 31, 2019
Exercisable as at December 31, 2019
Non vested as at December 31, 2019
Weighted-
average grant
exercise price date fair value
Average
(HK$)
(HK$)
Number of
shares
85,660
32,410
(32,735)
85,335
57,795
8,055
77,280
85,335
(10,235)
75,100
63,462
24,212
50,888
75,100
(10,000)
65,100
63,626
35,605
29,495
129.88
272.36
64.88
208.93
208.52
174.86
212.48
208.93
150.16
216.94
214.53
207.49
221.43
216.94
174.86
223.40
223.28
219.24
228.43
53.63
81.70
53.28
64.43
64.25
55.42
65.37
64.43
47.30
66.76
66.11
64.21
67.97
66.76
55.42
68.50
68.47
67.38
69.86
The weighted average price of the shares at the time these options were exercised was HK$289.79 per share (equivalent to approximately
RMB259.00), HK$322.79 (equivalent to approximately RMB288.49) and HK$330.2 (equivalent to approximately RMB295.12) during the year
ended December 31, 2017, 2018 and 2019.
The fair values of employee stock options were valued using the Binomial option-pricing model. Assumptions used in the Binomial option-
pricing model are presented below:
Risk free interest rate
Expected dividend yield
Expected volatility range
Exercise multiples
Contractual life
F-57
Granted in
2017
1.39%
0.33%
30%
7
7 years
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
(b)
Share based compensation (Continued)
Share-based compensation plans of Tencent (Continued)
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Grant Date
Expiry date
Exercise price
2018
2019
July 10, 2014
July 6, 2016
July 10, 2017
Total
July 9, 2021
July 5, 2023
July 9, 2024
HK$124.30
HK$174.86
HK$272.36
-
42,690
32,410
75,100
-
32,690
32,410
65,100
Movements in the number of awarded shares for the years ended December 31, 2017, 2018 and 2019 are as follows:
Share options
as at December 31,
Outstanding as at January 1
Granted
Forfeited
Vested and transferred
Outstanding as at December 31
Expected to vest as at December 31
Number of awarded shares
Year ended December 31,
2018
2019
2017
731,814
24,503
(9,013)
(316,886)
430,418
361,943
430,418
-
(4,718)
(237,752)
187,948
166,321
187,948
-
(9,037)
(124,336)
54,575
48,977
The fair value of the awarded shares was calculated based on the market price of the Tencent’s shares at the respective grant date. The expected
dividends during the vesting period have been taken into account when assessing the fair value of these awarded shares.
The outstanding awarded shares as at December 31, 2019 were divided into two to five tranches on an equal basis as at their grant dates. The
first tranche can be exercised immediately or after a specified period ranging from four months to four years from the grant date, and the
remaining tranches will become exercisable in each subsequent year. The optionee may elect at any time while remains an employee, to
exercise any part or all of the vested options before the expiry date.
(c)
Expected retention rate of grantees
The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options
and awarded shares (the “Expected Retention Rate”) in order to determine the amount of share-based compensation expenses charged to the
consolidated income statement. As at December 31, 2018 and 2019, the Expected Retention Rate of the Group was assessed to be 88%-95%.
F-58
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24
Other payables and other liabilities
Included in non-current liabilities
Investment payables
Government grants
Deferred income
Contingent consideration, measured at fair value (note i)
Included in current liabilities
Dividend payable
Accrued expenses (note ii)
Advances from customers
Investment payables
Other tax liabilities
Present value of liability of puttable shares
Deferred income
Other deposits
Others
Contingent consideration, measured at fair value (note i)
As at December 31,
2018
RMB’million
2019
RMB’million
169
13
-
32
214
12
1,467
106
389
103
494
-
71
69
31
2,742
-
2
66
-
68
12
2,105
83
611
140
539
23
77
80
112
3,782
Notes:
(i)
In October 2018, the Company acquired the entire equity interest of a music contents production company at a cash consideration
comprising of a fixed amount and a variable amount, settlement in certain tranches. The variable amount is determined based on
certain operating performance indicators of the acquiree and up to RMB400 million. As at December 31, 2018 and 2019, contingent
consideration in relation to the arrangement was recognized at fair value as determined by management taking into account the
estimation of the performance indicators.
(ii)
Accrued expenses mainly comprise of payroll and welfare, advertising and marketing, short-term lease rental and other operating
expenses.
25
Deferred revenue
Non-current
Current
As at December 31,
2018
RMB’million
2019
RMB’million
27
1,431
1,458
67
1,694
1,761
Deferred revenue mainly represents contract liabilities in relation to the service fees prepaid by customers for time-based virtual gifts,
membership subscriptions, and digital music albums or single songs, for which the related services had not been rendered as at December 31,
2018 and 2019.
Revenue recognized for the years ended December 31, 2017, 2018 and 2019 related to carried-forward contract liabilities amounted to RMB372
million, RMB978 million and RMB1,431 million, respectively.
The transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, has not been disclosed, as
substantially all of the Group’s contracts have a duration of one year or less.
F-59
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26
Acquisition of subsidiaries accounted for as business combination under common control
On September 1, 2018, the Company acquired all the remaining interest of an associate, UEC, from Tencent and other shareholders, which
included a director of the Company, for an aggregated consideration comprising of 12,781,204 and 10,302,804 ordinary shares of the Company,
respectively amounting to approximately US$151 million (equivalents to approximately RMB1,027 million). 460,724 share options of the
Company were also granted to employee of UEC to replace their outstanding share options. Upon completion of the acquisition, UEC became a
wholly-owned subsidiary of the Company.
As the Company and UEC are under common control of Tencent, the acquisition to the extent of the acquired interest from Tencent was
accounted for as a business combination under common control. Accordingly, the Group incorporate the book value of the assets and liabilities
of UEC in its financial statements which mainly comprise of cash and cash equivalents of RMB397 million, accounts receivable of RMB39
million, accounts payable of RMB16 million, other payables and accruals of RMB34 million, other net assets of RMB20 million and non-
controlling interests of RMB22 million. Any difference between the purchase price paid to Tencent and the attributable portion of net book
value of net assets acquired was recognized in equity as merger reserve. The acquisition of the remaining interest from other shareholders was
accounted for as a transaction with non-controlling interests. Any difference between the purchase price paid to other shareholders and the
attributable portion of net book value of net assets acquired was recognized in equity as capital reserve.
The Group accounts for the business combination between entities under common control using the predecessor accounting. The Group elects
to incorporate the acquired entity’s results only from the date on which the business combination between entities under common control
occurred. Consequently, the consolidated financial statements do not reflect the results of the acquired entity for the period before the
transaction occurred. The corresponding amount for the previous year are also not restated.
27
Business Combination
Acquisition of a music content company in 2018
In October 2018, the Company acquired the entire equity interest of a music content production company at a cash consideration comprising of
a fixed amount and a variable amount, settlement in certain tranches, to enhance its music contents library. The variable amount is determined
based on certain operation and financial performance of the acquiree and up to RMB400 million. As at the acquisition date, the fixed
consideration was recognized at its present value and the variable consideration was recognized at fair value of approximately RMB63 million
determined by management.
As a result of the acquisition, the Group is expected to increase its presence in online music industry in China. Goodwill arising from the
acquisition was attributable to an increase in coverage of the online music market of China. The goodwill recognized was not expected to be
deductible for income tax purpose.
The following table summarizes the amount of identified assets acquired and liabilities assumed at the acquisition date.
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents
Accounts and other receivables
Intangible assets
Prepayments, deposits and other assets
Deferred revenue
Other payables and accruals
Deferred tax liabilities
Goodwill
F-60
RMB’million
68
101
297
162
(18)
(57)
(105)
798
1,246
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27
Business Combination (Continued)
The revenue and the results contributed by the acquiree to the Group for the period since the completion date were insignificant. The Group’s
revenue and results for the year would not be materially different should the acquisition otherwise occur on January 1, 2018.
Transaction costs were not significant and were charged to general and administrative expenses in the consolidated income statement during the
year ended December 31, 2018.
28
(a)
Cash flow information
Cash generated from operations
Profit before income tax
Adjustments for:
Depreciation and amortization
Impairment provision for investments in associates
(Note 15)
Loss allowance for expected credit losses (Note 18)
Non-cash employee benefits expense – share based
payments (Note 8)
Non-cash share-based payments arising from issues of
ordinary shares to music label partners(Note 21(iv))
Fair value losses on investments
Net (gains)/losses in relation to equity investments
Share of (profit)/loss of associates and joint ventures
(Note 15)
Interest income (Note 6)
Fair value change on puttable shares
Interest expense
Net exchange differences
Increase in accounts receivable
Increase in inventories
Decrease in other operating assets
Increase in accounts payables
Increase in other operating liabilities
Cash generated from operations
(b)
Non-cash investing and financing activities
Issuance of ordinary shares to music label partners
Issuance of ordinary shares for equity investments
Distribution to Tencent
Other payables for business combinations
Issuing restricted shares for business combinations
Settlement of dividend by issuance of shares
Other payables for acquisition of investments in joint ventures
F-61
2017
2018
RMB’million RMB’million RMB’million
4,540
1,597
2,003
2019
379
369
2
6
362
-
-
(72)
(4)
(93)
-
-
(18)
(447)
(16)
(137)
4
1,051
2,614
2
3
487
1,519
30
20
1
(282)
35
-
31
(182)
(4)
(789)
780
1,581
5,604
583
43
18
519
-
37
(1)
18
(615)
37
31
(4)
(733)
9
(175)
717
1,164
6,188
2017
RMB’million
2018
RMB’million
2019
RMB’million
-
7,547
(3,774)
277
149
58
46
1,519
1,027
-
-
-
-
-
-
-
-
-
-
-
-
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29
Financial instruments by category
The Group holds the following financial instruments:
Financial assets
As at December 31, 2018
Accounts receivable (Note 18)
Other receivables (Note 17)
Short-term investments
Cash and cash equivalents
(Note 20)
Other investments (Note 16(b))
Financial assets at fair value
through other comprehensive
income (Note 16(a))
As at December 31, 2019
Accounts receivable (Note 18)
Other receivables (Note 17)
Term deposits (Note 19)
Short-term investments
Cash and cash equivalents
(Note 20)
Other investments (Note 16(b))
Financial assets at fair value
through other comprehensive
income (Note 16(a))
Financial liabilities
As at December 31, 2018
Accounts payable
Other payables and other liabilities (note)
As at December 31, 2019
Accounts payable
Other payables and other liabilities (note)
Lease liabilities
Financial assets
at amortized cost
RMB’million
Financial
assets
at fair value
through
profit and loss
RMB’million
Financial
assets
at fair value
through other
comprehensive
income
RMB’million
Total
RMB’million
1,483
80
-
17,356
-
-
18,919
2,198
213
7,500
-
15,426
-
-
25,337
-
-
42
-
256
-
298
-
-
-
6
-
255
-
261
-
-
-
-
-
3,331
3,331
-
-
-
-
-
-
4,461
4,461
1,483
80
42
17,356
256
3,331
22,548
2,198
213
7,500
6
15,426
255
4,461
30,059
Liabilities at
amortized cost
RMB’million
1,830
1,839
3,669
2,559
2,261
147
4,967
As at December 31, 2018 and 2019, financial liabilities measured at fair value comprised contingent consideration of RMB63 million and
RMB112 million, were included in other payables and other liabilities.
Note: Other payables and other liabilities exclude prepayment received from customers and others, staff costs, welfare accruals, other tax
liabilities, government grant and deferred revenue.
F-62
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
30
(a)
Commitments
Operating commitments
The following table summarizes future minimum commitments of the Group under non-cancelable operating arrangements, which are mainly
related to rental of bandwidth:
Within one year
Later than one year but not later than five years
(b)
Contents royalty
2018
RMB’million
2019
RMB’million
212
93
305
233
2
235
The Group is subject to the following minimum royalty payments associated with its license agreements:
Within one year
Later than one year but not later than five years
More than 5 years
(c)
Investment commitments
2018
RMB’million
2019
RMB’million
3,599
2,284
2
5,885
4,513
2,704
-
7,217
As at December 31, 2018 and 2019, the Group had commitments of approximately RMB94 million and RMB 198 million to invest in certain
entities to hold the equity interest in such entities.
In addition, on December 31, 2019, the Group proposed to join a consortium (the “Consortium”) led by Tencent to acquire a 10% equity stake
in Universal Music Group (“UMG”), at an enterprise value of EUR30 billion, up to a 10% equity interest in the Consortium. The Consortium
will also have the option to purchase an additional 10% equity stake in UMG at the same enterprise value pursuant to the terms of the
transaction documents. The Transaction is subject to regulatory approvals and other customary closing conditions, and is expected to close by
the first half of 2020.
Prior to the closing of the Transaction, the Group and UMG also intend to enter into a second agreement that grants the Group an option to
acquire a minority equity stake in UMG's Greater China business.
F-63
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31
Related party transactions
The table below sets forth the major related parties and their relationships with the Group as at December 31, 2019:
Name of related parties
Tencent and its subsidiaries other than the entities
controlled by the Group (“Tencent Group”)
Relationship with the Group
The Company’s principal owner
(a)
Transactions
For the years ended December 31, 2017, 2018 and 2019, significant related party transactions were as follows:
Revenue
Online music services to Tencent Group (note)
Online music services to the Company's associates and
associates of Tencent Group
Social entertainment services and others to Tencent Group, the
Company’s associates and associates of Tencent Group
Expenses
Operation expenses recharged by Tencent Group
Advertising agency cost to Tencent Group
Content royalties to Tencent Group, the Company’s associates
and associates of Tencent Group
Other costs to the Company's associates and associates of
Tencent Group
2017
2018
RMB’million
RMB’million
2019
RMB’million
33
-
20
493
187
45
-
51
18
63
589
207
88
14
355
40
21
752
231
132
25
Note: Including revenue from content sublicensing, online advertising and subscriptions provided to Tencent Group pursuant to the Business
Cooperation Agreement.
These related party transactions were conducted at prices and terms as agreed by parties involved.
(b)
Balances with related parties
Included in accounts receivable from related parties:
Tencent Group (note)
The Company's associates and associates of Tencent Group
Included in prepayments, deposits and other assets from related
parties:
Tencent Group
The Company's associates and associates of Tencent Group
Included in accounts payable to related parties:
Tencent Group
The Company's associates and associates of Tencent Group
Included in other payables and accruals to related parties:
Tencent Group
The Company’s associates and associates of Tencent Group
Outstanding balances are unsecured and are repayable on demand.
2018
RMB’million
2019
RMB’million
971
39
28
16
529
1
135
-
1,653
49
50
23
215
15
382
19
Note: The balance is mainly arising from user payments collected through various payment channels of Tencent Group pursuant to the Business
Cooperation Agreement signed upon the Merger.
F-64
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31
(c)
Related party transactions (Continued)
Key management personnel compensation
Short-term employee benefits
Share-based compensation
32
Contingent liabilities
2017
2018
RMB’million RMB’million RMB’million
65
233
298
46
107
153
64
223
287
2019
The Group is involved in a number of claims pending in various courts, in arbitration, or otherwise unresolved as at December 31, 2019. These
claims are mainly related to alleged copyright infringement with an aggregate amount of damages sought of approximately RMB21 million.
Adverse results in these claims may include awards of damages and may also result in, or even compel, a change in the Company’s business
practices, which could impact the Company’s future financial results.
In addition, in September 2019 and October 2019, respectively, the Company, certain of its current and former directors and officers, and
Tencent, based on its status as the Company’s controlling shareholder, were named as defendants in two putative securities class actions filed in
the U.S. District Court for the Eastern District of New York. Both actions, purportedly brought on behalf of a class of persons who allegedly
suffered damages as a result of their trading in the ADSs, allege that the Company’s public filings contained material misstatements and
omissions in violation of the U.S. federal securities laws. These actions remain in their preliminary stages. Additional complaints related to
these claims may be filed in the coming months. The Company are currently unable to estimate the potential loss, if any, associated with the
resolution of such lawsuits, if they proceed. Nevertheless, with the legal advice, the Company believes these cases are without merit and intend
to defend actions vigorously.
The Company is unable to estimate the reasonably possible loss or a range of reasonably possible losses for proceedings in the early stages or
where there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions.
Although the results of unsettled litigations and claims cannot be predicted with certainty, the Company does not believe that, as at December
31, 2019, there was at least a reasonable possibility that the Company may have incurred a material loss, or a material loss in excess of the
accrued expenses, with respect to such loss contingencies. Accordingly, the Group has made certain accruals in “Account payable” in the
consolidated balance sheet as at December 31, 2019 and recognized related cost expenses for the year ended December 31, 2019.The losses
accrued include judgments handed down by the court and out-of-court settlements after December 31, 2019, but related to cases arising on or
before December 31, 2019. The Company is in the process of appealing certain judgments for which losses have been accrued. However, the
ultimate timing and outcome of pending litigation is inherently uncertain. Therefore, although management considers the likelihood of a
material loss for all pending claims, both asserted and unasserted, to be remote, if one or more of these legal matters were resolved against the
Company in the same reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements
of a particular reporting period could be materially adversely affected.
F-65
TENCENT MUSIC ENTERTAINMENT GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
33
Events occurring after the reporting period
Apart from the below, there were no other material subsequent events during the period from December 31, 2019 to the approval date of these
financial statements by the Board of Directors on March 25, 2020.
(a)
Coronavirus pandemic (“Pandemic”)
With respect to the outbreak of the Pandemic, the Group has assessed and preliminarily concluded that there was no significant impact on the
financial position of the Group subsequent to the year ended 31 December 2019 and up to the date of this report. The outbreak has caused
temporary decrease in levels of activities of our users and performers and negatively affected our financial operations to certain extent. The
Group will keep continuous attention on the situation of the Pandemic and react actively to its impacts on the operation and financial position of
the Group.
(b)
Co-operation agreement with China Literature Limited (“China Literature”)
In the first quarter of 2020, the Group signed a five-year strategic partnership with China Literature, a subsidiary of Tencent listed in Hong
Kong, which enable the Group to access to China Literature’s broad online library and license to produce certain long-form audio content that
available on both the Group and China Literature’s platforms.
(c)
Repurchase of shares
In March 2020 and up to the date of this report, the Company repurchased ADSs from the open market for an aggregate consideration of
approximately US$16 million in cash pursuant to the share repurchase program approved on December 17, 2019.
34
Approval of these consolidated financial statements
These consolidated financial statements were approved for issue by the board of directors of the Company on March 25, 2020.
F-66
Exhibit 2.4
Description of rights of each class of securities
registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”)
American Depositary Shares (“ADSs”) each representing two Class A ordinary shares of Tencent Music Entertainment Group (
“we,” “our,” “our company,” or “us”) are listed and traded on the New York Stock Exchange (“NYSE”) and, in connection
therewith, the Class A ordinary shares are registered under Section 12(b) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). This exhibit contains a description of the rights of (i) the holders of Class A ordinary shares and (ii) the
holders of the ADSs. Class A ordinary shares underlying the ADSs are held by Bank of New York Mellon, as depositary, and
holders of ADSs will not be treated as holders of Class A ordinary shares.
Description of Class A Ordinary Shares
The following is a summary of material provisions of our currently effective sixth amended and restated memorandum and
articles of association (the “Memorandum and Articles of Association”), as well as the Companies Law (as amended) of the
Cayman Islands (the “Companies Law”) insofar as they relate to the material terms of the Class A ordinary shares.
Notwithstanding this, because it is a summary, it may not contain all the information that you may otherwise deem important. For
more complete information, you should read the entire Memorandum and Articles of Association, which has been filed with the
Securities And Exchange Commission (the “SEC”) as an exhibit to our Registration Statement on Form F-1 (File No. 333-
227656) filed with the SEC on October 2, 2018.
Type and Class of Securities (Item 9.A.5 of Form 20-F)
Each Class A ordinary share has US$0.000083 par value. The number of Class A ordinary shares that have been issued as of the
last day of the financial year ended December 31, 2019 is provided on the cover of our annual report on Form 20-F filed on
March 25, 2020 (the “2019 Form 20-F”). Our Class A ordinary shares may be held in either certificated or uncertificated form.
Preemptive Rights (Item 9.A.3 of Form 20-F)
Our shareholders do not have preemptive rights.
Limitations or Qualifications (Item 9.A.6 of Form 20-F)
We have a dual-class voting structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary
shares. Each Class A ordinary share shall be entitled to one vote on all matters subject to a vote at general meetings of the
shareholders, and each Class B ordinary share shall be entitled to 15 votes on all matters subject to a vote at general meetings of
the shareholders. Holders of Class A ordinary
shares and Class B ordinary shares shall, at all times, vote together as one class on all matters submitted to a vote by the members
at any such general meeting. Due to the super voting power of Class B ordinary shareholder, the voting power of the Class A
ordinary shares may be materially limited. See also “ - Requirements to Change the Rights of Holders of Class A Ordinary Shares
(Item 10.B.4 of Form 20-F) - Variations of Rights of Shares.”
Rights of Other Types of Securities (Item 9.A.7 of Form 20-F)
Not applicable.
Rights of Class A Ordinary Shares (Item 10.B.3 of Form 20-F)
General
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares
and Class B ordinary shares will have the same rights except for voting and conversion rights. All of our issued and outstanding
ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in registered form and are issued when
registered in our register of members. We may not issue share to bearer. Our shareholders who are non-residents of the Cayman
Islands may freely hold and transfer their ordinary shares.
Conversion
Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time,
while Class A ordinary shares cannot be converted into Class B ordinary shares under any circumstances. Upon (i) any sale,
transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to person or entity which is not an affiliate
of such holder, or (ii) a change of beneficial ownership of any Class B ordinary shares as a result of which any person who is not
an affiliate of registered holders of such Class B ordinary shares becomes a beneficial owner of such Class B ordinary shares,
each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. There is
no limit on the circumstances where holders of Class B ordinary shares may transfer or otherwise dispose of their Class B
ordinary shares.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the
Memorandum and Articles of Association and the Companies Law. In addition, our shareholders may by ordinary resolution
declare a dividend, but no dividend may exceed the amount recommended by our board of directors. The Memorandum and
Articles of Association provides that dividends may be declared and paid out of our profits, realized or unrealized, or from any
reserve set aside from profits which our board of directors determine is no longer needed. Dividends may also be declared and
paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the
Companies Law. No
2
dividend may be declared and paid unless our board of directors determine that, immediately after the payment, we will be able
to pay our debts as they become due in the ordinary course of business and we have funds lawfully available for such purpose.
Voting Rights
Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together as one class on all matters
submitted to a vote by the members at any such general meeting. Each Class A ordinary share shall be entitled to one vote on all
matters subject to a vote at general meetings of the shareholders, and each Class B ordinary share shall be entitled to 15 votes on
all matters subject to a vote at general meetings of the shareholders.
A quorum required for a meeting of shareholders consists of one or more shareholders holding a majority of all votes attaching to
the issued and outstanding shares entitled to vote at general meetings present in person or by proxy or, if a corporation or other
non-natural person, by its duly authorized representative. As a Cayman Islands exempted company, we are not obliged by the
Companies Law to call shareholders’ annual general meetings. The Memorandum and Articles of Association provides that we
may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we will specify the
meeting as such in the notices calling it, and the annual general meeting will be held at such time and place as may be determined
by our board of directors. We, however, will hold an annual shareholders’ meeting for each fiscal year as required by the Listing
Rules of the NYSE. Each general meeting, other than an annual general meeting, shall be an extraordinary general meeting.
Shareholders’ annual general meetings and any other general meetings of our shareholders may be called by a majority of our
board of directors or our chairman of the board or upon a requisition of shareholders holding at the date of deposit of the
requisition not less than one-third of the votes attaching to the issued and outstanding shares entitled to vote at general meetings,
in which case our board of directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such
meeting; however, the Memorandum and Articles of Association does not provide our shareholders with any right to put any
proposals before annual general meetings or extraordinary general meetings not called by such shareholders. Advance notice of at
least seven days is required for the convening of our annual general meeting and other general meetings unless such notice is
waived in accordance with our articles of association.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the
votes attaching to the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a
general meeting, while a special resolution also requires the affirmative vote of no less than two-thirds of the votes attaching to
the ordinary shares cast by those shareholders entitled to vote who are present in person or by proxy at a general meeting. A
special resolution will be required for important matters such as a change of name or making changes to our sixth amended and
restated memorandum and articles of association.
Transfer of Ordinary Shares
3
Subject to the restrictions in the Memorandum and Articles of Association as set out below, any of our shareholders may transfer
all or any of its, his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved
by our board of directors.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid
up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
•
•
•
•
•
•
the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it
relates and such other evidence as our board of directors may reasonably require to show the right of the
transferor to make the transfer;
the instrument of transfer is in respect of only one class of shares;
the instrument of transfer is properly stamped, if required;
in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be
transferred does not exceed four;
the shares are free from any lien in favor of our company; and
a fee of such maximum sum as the NYSE may determine to be payable or such lesser sum as our board of
directors may from time to time require is paid to us in respect thereof.
If our board of directors refuses to register a transfer it shall, within two months after the date on which the instrument of transfer
was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the NYSE, be suspended and the register closed at
such times and for such periods as our board of directors may from time to time determine, provided, however, that the
registration of transfers shall not be suspended nor the register closed for more than 30 calendar days in any year.
Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), if the
assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at
the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of
the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which
there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution
are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in
4
proportion to the par value of the shares held by them. Any distribution of assets or capital to a holder of ordinary share will be
the same in any liquidation event.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a
notice served to such shareholders at least 14 calendar days prior to the specified time of payment. The ordinary shares that have
been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Ordinary Shares
We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders thereof, on
such terms and in such manner as may be determined, before the issuance of such shares, by our board of directors. We may also
repurchase any of our shares provided that the manner and terms of such purchase have been approved by our board of directors,
or are otherwise authorized by the Memorandum and Articles of Association. Under the Companies Law, the redemption or
repurchase of any share may be paid out of our profits or out of the proceeds of a fresh issuance of shares made for the purpose of
such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if we can,
immediately following such payment, pay our debts as they fall due in the ordinary course of business. In addition, under the
Companies Law no such share may be redeemed or repurchased (i) unless it is fully paid up, (ii) if such redemption or repurchase
would result in there being no shares outstanding, or (iii) if we have commenced liquidation. In addition, we may accept the
surrender of any fully paid share for no consideration.
Requirements to Change the Rights of Holders of Class A Ordinary Shares (Item 10.B.4 of Form 20-F)
Variations of Rights of Shares
If at any time our share capital is divided into different classes or series of shares, the rights attached to any class or series of
shares (unless otherwise provided by the terms of issuance of the shares of that class or series), whether or not our company is
being wound-up, may be varied with the consent in writing of the holders of not less than two-thirds of the issued shares of that
class or series or with the sanction of a resolution passed at a separate meeting of the holders of the shares of the class or series by
two-thirds of the votes cast at such a meeting. The rights conferred upon the holders of the shares of any class issued shall not,
unless otherwise expressly provided by the terms of issuance of the shares of that class, be deemed to be varied by the creation or
issuance of further shares ranking pari passu with such existing class of shares.
Limitations on the Rights to Own Class A Ordinary Shares (Item 10.B.6 of Form 20-F)
There are no limitations under the laws of the Cayman Islands or under the Memorandum and Articles of Association that limit
the right of non-resident or foreign owners to hold
5
or vote Class A ordinary shares, other than anti-takeover provisions contained in the Memorandum and Articles of Association to
limit the ability of others to acquire control of our company or cause our company to engage in change-of-control transactions.
Provisions Affecting Any Change of Control (Item 10.B.7 of Form 20-F)
Anti-Takeover Provisions. Some provisions of the Memorandum and Articles of Association may discourage, delay or prevent a
change of control of our company or management that shareholders may consider favorable, including provisions that authorize
our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and
restrictions of such preferred shares without any further vote or action by our shareholders. Under Cayman Islands law, our
directors may only exercise the rights and powers granted to them under the Memorandum and Articles of Association for a
proper purpose and for what they believe in good faith to be in the best interests of our company.
Ownership Threshold (Item 10.B.8 of Form 20-F)
There are no provisions under Cayman Islands law applicable to the Company, or under the Memorandum and Articles of
Association, that require the Company to disclose shareholder ownership above any particular ownership threshold.
Differences Between the Law of Different Jurisdictions (Item 10.B.9 of Form 20-F)
The Companies Law is derived, to a large extent, from the older Companies Acts of England, but does not follow many recent
English law statutory enactments. In addition, the Companies Law differs from laws applicable to United States corporations and
their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law
applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements. The Companies Law permits mergers and consolidations between Cayman Islands
companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (i) “merger” means
the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such
companies as the surviving company, and (ii) a “consolidation” means the combination of two or more constituent companies
into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated
company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan
of merger or consolidation, which must then be authorized by (i) a special resolution of the shareholders of each constituent
company, and (ii) such other authorization, if any, as may be specified in such constituent company’s articles of association. The
written plan of merger or consolidation must be filed with the Registrar of Companies of the Cayman Islands together with a
declaration as to the solvency of the consolidated or surviving company, a declaration as to the assets and liabilities of each
constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the
6
members and creditors of each constituent company and that notification of the merger or consolidation will be published in the
Cayman Islands Gazette. Court approval is not required for a merger or consolidation which is effected in compliance with these
statutory procedures.
A merger between a Cayman Islands parent company and its Cayman Islands subsidiary or subsidiaries does not require
authorization by a resolution of shareholders of that Cayman Islands subsidiary if a copy of the plan of merger is given to every
member of that Cayman Islands subsidiary to be merged unless that member agrees otherwise. For this purpose a company is a
“parent” of a subsidiary if it holds issued shares that together represent at least ninety percent (90%) of the votes at a general
meeting of the subsidiary.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement
is waived by a court in the Cayman Islands.
Save in certain limited circumstances, a shareholder of a Cayman Islands constituent company who dissents from the merger or
consolidation is entitled to payment of the fair value of its, his or her shares (which, if not agreed between the parties, will be
determined by a Cayman Islands court) upon dissenting to the merger or consolidation, provided that the dissenting shareholder
complies strictly with the procedures set out in the Companies Law. The exercise of dissenter rights will preclude the exercise by
the dissenting shareholder of any other rights to which it, he or she might otherwise be entitled by virtue of holding shares, save
for the right to seek relief on the ground that the merger or consolidation is void or unlawful.
Separate from the statutory provisions relating to mergers and consolidations, the Companies Law also contains statutory
provisions that facilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the
arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be
made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may
be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening
of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a
dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be
expected to approve the arrangement if it determines that:
•
•
•
the statutory provisions as to the required majority vote have been met;
the shareholders have been fairly represented at the meeting in question and
the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those
of the class; the arrangement is such that may be reasonably approved by an intelligent and honest man of that
class acting in respect of his interest; and
7
•
the arrangement is not one that would more properly be sanctioned under some other provision of the Companies
Law.
The Companies Law also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of a
dissenting minority shareholder upon a tender offer. When a tender offer is made and accepted by holders of 90% of the shares
affected within four months, the offeror may, within a two-month period commencing on the expiration of such four-month
period, require the holders of the remaining shares to transfer such shares to the offeror on the terms of the offer. An objection
can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so
approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction by way of scheme of arrangement is thus approved and sanctioned, or if a tender offer is
made and accepted, in accordance with the foregoing statutory procedures, a dissenting shareholder would have no rights
comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware
corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a
general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which
would in all likelihood be of persuasive authority in the Cayman Islands, a Cayman Islands court can be expected to follow and
apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit a minority
shareholder to commence a class action against or derivative actions in the name of a company to challenge actions where:
•
•
•
the company acts or proposes to act illegally or ultra vires;
the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple
majority vote that has not been obtained; and
those who control the company are perpetrating a “fraud on the minority.”
Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to
which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. The Memorandum and Articles of Association
provides that that we shall indemnify our officers and directors against all actions, proceedings, costs, charges, expenses, losses,
damages or liabilities incurred or sustained by such directors or officers, other than by reason of such person’s dishonesty, willful
default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or
in the execution or discharge of his or her duties, powers, authorities or
8
discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by
such directors or officers in defending (whether successfully or otherwise) any civil proceedings concerning our company or our
affairs in any court whether in the Cayman Islands or elsewhere. This standard of conduct is generally the same as permitted
under the Delaware General Corporation Law for a Delaware corporation.
In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons
with additional indemnification beyond that provided in the Memorandum and Articles of Association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons
controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the
corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care
requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar
circumstances. Under this duty, a director must inform himself or herself of, and disclose to shareholders, all material information
reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he
reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal
gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its
shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the
shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and
in the honest belief that the action taken was in the best interests of the corporation and its shareholders. However, this
presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented
concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction
is fair to the corporation and its shareholders.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the
company and therefore it is considered that he or she owes the following duties to the company: (i) a duty to act bona fide in the
best interests of the company; (ii) a duty not to make a profit based on his or her position as director (unless the company permits
him or her to do so); (iii) a duty not to put himself or herself in a position where the interests of the company conflict with his or
her personal interest or his or her duty to a third party; and (iv) a duty to exercise powers for the purpose for which such powers
were intended. A director of a Cayman Islands company also owes to the company a duty to act with skill and care. It was
previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may
reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have
moved
9
towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the
Cayman Islands.
Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the
annual meeting of shareholders, provided that it complies with the notice provisions in the governing documents. A special
meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but
shareholders may be precluded from calling special meetings.
The Companies Law provides shareholders with only limited rights to requisition a general meeting, and does not provide
shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s
articles of association. The Memorandum and Articles of Association allows any one or more of our shareholders who together
hold shares which carry in aggregate not less than one-third of the total number of votes attaching to all issued and outstanding
shares of our company entitled to vote at general meetings to requisition an extraordinary general meeting of our shareholders, in
which case our board of directors is obliged to convene an extraordinary general meeting and to put the proposals so
requisitioned to a vote at such meeting. Other than this right to requisition a shareholders’ meeting, the Memorandum and
Articles of Association does not provide our shareholders with any other right to put proposals before annual general meetings or
extraordinary general meetings not called by such shareholders. As an exempted Cayman Islands company, we are not obliged by
law to call shareholders’ annual general meetings.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted
unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to
which the shareholder is entitled on a single director nominee, which increases the shareholder’s voting power with respect to
electing such director nominee. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands
but the Memorandum and Articles of Association does not provide for cumulative voting. As a result, our shareholders are not
afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be
removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of
incorporation provides otherwise. Under the Memorandum and Articles of Association, directors may be removed with or
without cause, by an ordinary resolution of our shareholders. A director shall hold office until the expiration of his or her term or
his or her successor shall have been elected and qualified, or until his or her office is otherwise vacated. In addition, a director’s
office shall be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his or her creditors;
(ii) is found to be or becomes of unsound mind or dies; (iii) resigns his or her office by notice in writing to our company; (iv) is
prohibited by law from being a director; or (v) is removed from office pursuant to any other provisions of the Memorandum and
Articles of Association.
10
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute
applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute
by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an
“interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested
shareholder generally is a person or a group who or which owns or owned 15% or more of the corporation’s outstanding voting
shares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for a
Delaware corporation in which all shareholders would not be treated equally. The statute does not apply if, among other things,
prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business
combination or the transaction which resulted in the shareholder becoming an interested shareholder. This encourages any
potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the corporation’s board of
directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the
Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a
company and its significant shareholders, the directors of the company are required to comply with fiduciary duties which they
owe to the company under Cayman Islands laws, including the duty to ensure that, in their opinion, any such transactions must be
entered into bona fide in the best interests of the company, and are entered into for a proper corporate purpose and not with the
effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to
dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the
dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares.
Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in
connection with dissolutions initiated by the board of directors.
Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special
resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members.
A court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the
court, just and equitable to do so. Under the Companies Law and the Memorandum and Articles of Association, our company
may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of
shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides
otherwise. Under Cayman Islands law and the Memorandum and Articles of Association, if our share capital is divided into more
than one class of shares, we may vary the rights attached to any class with the written consent of the holders of not less than two-
thirds of
11
the issued shares of that class or with the sanction of a resolution passed at a general meeting of the holders of the shares of that
class by two-thirds of the votes cast at such a meeting.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may
be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation
provides otherwise. Under the Companies Law and the Memorandum and Articles of Association, the Memorandum and Articles
of Association may only be amended by a special resolution of our shareholders.
Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by our Memorandum and Articles of
Association on the rights of nonresident or foreign shareholders to hold or exercise voting rights of our shares. In addition, there
are no provisions in our Memorandum and Articles of Association governing the ownership threshold above which shareholder
ownership must be disclosed.
Directors’ Power to Issue Shares. Under the Memorandum and Articles of Association, our board of directors is empowered to
issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or
restrictions.
Exempted Company. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any
company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be
registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary
resident company except that an exempted company:
•
•
•
•
•
•
•
•
does not have to file an annual return of its shareholders with the Registrar of Companies;
is not required to open its register of members for inspection;
does not have to hold an annual general meeting;
may issue negotiable or bearer shares or shares with no par value;
may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for
20 years in the first instance);
may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
may register as a limited duration company; and
may register as a segregated portfolio company.
12
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that
shareholder’s shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an
agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the
corporate veil).
Debt Securities (Item 12.A of Form 20-F)
Not applicable.
Warrants and Rights (Item 12.B of Form 20-F)
Not applicable.
Other Securities (Item 12.C of Form 20-F)
Not applicable.
Description of American Depositary Shares (Items 12.D.1 and 12.D.2 of Form 20-F)
The Bank of New York Mellon, as depositary, issues and delivers American Depositary Shares, also referred to as ADSs. Each
ADS represents two Class A ordinary shares (or a right to receive two Class A ordinary shares) deposited with The Hongkong
and Shanghai Banking Corporation Limited, as custodian for the depositary in Hong Kong. Each ADS also represents any other
securities, cash or other property which maybe held by the depositary. The deposited shares together with any other securities,
cash or other property held by the depositary are referred to as the deposited securities.
The depositary’s office at which the ADSs will be administered and its principal executive office are located at 240 Greenwich
Street, New York, New York 10286.
You may hold ADSs either (A) directly (i) by having an American Depositary Receipt, also referred to as an ADR, which is a
certificate evidencing a specific number of ADSs, registered in your name, or (ii) by having uncertificated ADSs registered in
your name, or (B) indirectly by holding a security entitlement in ADSs through your broker or other securities intermediary that
is a direct or indirect participant in The Depository Trust Company, also called DTC. If you hold ADSs directly, you are a
registered ADS holder, also referred to as an ADS holder. This description assumes you are an ADS holder. If you hold the ADSs
indirectly, you must rely on the procedures of your broker or other securities intermediary to assert the rights of ADS holders
described in this section. You should consult with your securities intermediary to find out what those procedures are.
Registered holders of uncertificated ADSs will receive statements from the depositary confirming their holdings.
As an ADS holder, we will not treat you as one of our shareholders and you will not have shareholder rights. Cayman Islands law
governs shareholder rights. The depositary will be the holder of the shares underlying the ADSs. As a registered holder of ADSs,
you
13
will have ADS holder rights. A deposit agreement among us, the depositary, ADS holders and all other persons indirectly or
beneficially holding ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. New York law
governs the deposit agreement and the ADSs.
The following is a summary of what we believe to be the material terms of the deposit agreement. Notwithstanding this, because
it is a summary, it may not contain all the information that you may otherwise deem important. For more complete information,
you should read the entire deposit agreement and the form of ADR which contains the terms of your ADSs. The deposit
agreement has been filed with the SEC as an exhibit to a Registration Statement on Form F-6 (File No. 333-228610) for the
Company. The form of ADR is on file with the SEC (as a prospectus) and was filed on December 12, 2018.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares underlying my ADSs?
The depositary has agreed to pay or distribute to ADS holders the cash dividends or other distributions it or the custodian
receives on shares or other deposited securities, upon payment or deduction of its fees and expenses. You will receive these
distributions in proportion to the number of shares your ADSs represent.
•
•
Cash. The depositary will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if
it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any
government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the
foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot
convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will
not be liable for any interest.
Shares. The depositary may distribute additional ADSs representing any shares we distribute as a dividend or free
distribution. The depositary will only distribute whole ADSs. It will sell shares which would require it to deliver a
fraction of an ADS (or ADSs representing those shares) and distribute the net proceeds in the same way as it does with
cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new shares.
The depositary may sell a portion of the distributed shares (or ADSs representing those shares) sufficient to pay its fees
and expenses in connection with that distribution.
14
•
•
Rights to Receive Additional Shares. If we offer holders of our securities any rights to subscribe for additional shares or
any other rights, the depositary may (i) exercise those rights on behalf of ADS holders, (ii) distribute those rights to
ADS holders or (iii) sell those rights and distribute the net proceeds to ADS holders, in each case after deduction or
upon payment of its fees and expenses. To the extent
the depositary does not do any of those things, it will allow the rights to lapse. In that case, you will receive no value for
them. The depositary will exercise or distribute rights only if we ask it to and provide satisfactory assurances to the
depositary that it is legal to do so. If the depositary will exercise rights, it will purchase the securities to which the rights
relate and distribute those securities or, in the case of shares, new ADSs representing the new shares, to subscribing
ADS holders, but only if ADS holders have paid the exercise price to the depositary. U.S. securities laws may restrict
the ability of the depositary to distribute rights or ADSs or other securities issued on exercise of rights to all or certain
ADS holders, and the securities distributed may be subject to restrictions on transfer.
Other Distributions. The depositary will send to ADS holders anything else we distribute on deposited securities by any
means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the depositary has a choice. It
may decide to sell what we distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may
decide to hold what we distributed, in which case ADSs will also represent the newly distributed property. However, the
depositary is not required to distribute any securities (other than ADSs) to ADS holders unless it receives satisfactory
evidence from us that it is legal to make that distribution. The depositary may sell a portion of the distributed securities
or property sufficient to pay its fees and expenses in connection with that distribution. U.S. securities laws may restrict
the ability of the depositary to distribute securities to all or certain ADS holders, and the securities distributed may be
subject to restrictions on transfer.
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS
holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no
obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means
that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to
make them available to you.
Deposit, Withdrawal and Cancellation
How are ADSs issued?
The depositary will deliver ADSs if you or your broker deposits shares or evidence of rights to receive shares with the custodian.
Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the
depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order
of the person or persons that made the deposit.
How can ADS holders withdraw the deposited securities?
15
You may surrender the ADSs for the purpose of withdrawal at the depositary’s office. Upon payment of its fees and expenses and
of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the shares and any other
deposited securities underlying the ADSs to the ADS holder or a person the ADS holder designates at the office of the custodian.
Or, at your request, risk and expense, the depositary will deliver the deposited securities at its office, if feasible. However, the
depositary is not required to accept surrender of ADSs to the extent it would require delivery of a fraction of a deposited share or
other security. The depositary may charge you a fee and its expenses for instructing the custodian regarding delivery of deposited
securities.
How do ADS holders interchange between certificated ADSs and uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary
will cancel that ADR and will send to the ADS holder a statement confirming that the ADS holder is the registered holder of
uncertificated ADSs. Upon receipt by the depositary of a proper instruction from a registered holder of uncertificated ADSs
requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to the ADS holder
an ADR evidencing those ADSs.
Voting Rights
How do you vote?
ADS holders may instruct the depositary how to vote the number of deposited shares their ADSs represent. If we request the
depositary to solicit your voting instructions (and we are not required to do so), the depositary will notify you of a shareholders’
meeting and send or make voting materials available to you. Those materials will describe the matters to be voted on and explain
how ADS holders may instruct the depositary how to vote. For instructions to be valid, they must reach the depositary by a date
set by the depositary. The depositary will try, as far as practical, subject to the laws of the Cayman Islands and the provisions of
our articles of association or similar documents, to vote or to have its agents vote the shares or other deposited securities as
instructed by ADS holders. If we do not request the depositary to solicit your voting instructions, you can still send voting
instructions, and, in that case, the depositary may try to vote as you instruct, but it is not required to do so.
Except by instructing the depositary as described above, you won’t be able to exercise voting rights unless you surrender the
ADSs and withdraw the shares. However, you may not know about the meeting enough in advance to withdraw the shares. In any
event, the depositary will not exercise any discretion in voting deposited securities and it will only vote or attempt to vote as
instructed.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your
shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner
of
16
carrying out voting instructions. This means that you may not be able to exercise voting rights and there may be nothing you can
do if your shares are not voted as you requested.
In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to Deposited
Securities, if we request the Depositary to act, we agree to give the depositary notice of any such meeting and details concerning
the matters to be voted upon at least 45 days in advance of the meeting date.
Tender and Exchange Offers; Redemption, Replacement or Cancellation of Deposited Securities
The depositary will not tender deposited securities in any voluntary tender or exchange offer unless instructed to do by an ADS
holder surrendering ADSs and subject to any conditions or procedures the depositary may establish.
If deposited securities are redeemed for cash in a transaction that is mandatory for the depositary as a holder of deposited
securities, the depositary will call for surrender of a corresponding number of ADSs and distribute the net redemption money to
the holders of called ADSs upon surrender of those ADSs.
If there is any change in the deposited securities such as a sub-division, combination or other reclassification, or any merger,
consolidation, recapitalization or reorganization affecting the issuer of deposited securities in which the depositary receives new
securities in exchange for or in lieu of the old deposited securities, the depositary will hold those replacement securities as
deposited securities under the deposit agreement. However, if the depositary decides it would not be lawful and to hold the
replacement securities because those securities could not be distributed to ADS holders or for any other reason, the depositary
may instead sell the replacement securities and distribute the net proceeds upon surrender of the ADSs.
If there is a replacement of the deposited securities and the depositary will continue to hold the replacement securities, the
depositary may distribute new ADSs representing the new deposited securities or ask you to surrender your outstanding ADRs in
exchange for new ADRs identifying the new deposited securities.
If there are no deposited securities underlying ADSs, including if the deposited securities are cancelled, or if the deposited
securities underlying ADSs have become apparently worthless, the depositary may call for surrender or of those ADSs or cancel
those ADSs upon notice to the ADS holders.
Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the ADRs without your consent for any reason. If an
amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for
registration
17
fees, facsimile costs, delivery charges or similar items, or prejudices a substantial right of ADS holders, it will not become
effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an
amendment becomes effective, you are considered, by continuing to hold the ADSs, to agree to the amendment and to be bound
by the ADRs and the deposit agreement as amended.
How may the deposit agreement be terminated?
The depositary will initiate termination of the deposit agreement if we instruct it to do so. The depositary may initiate termination
of the deposit agreement if
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•
•
•
•
60 days have passed since the depositary told us it wants to resign but a successor depositary has not been appointed
and accepted its appointment;
we delist the ADSs from an exchange on which they were listed and do not list the ADSs on another exchange;
we appear to be insolvent or enter insolvency proceedings;
all or substantially all the value of the deposited securities has been distributed either in cash or in the form of
securities;
there are no deposited securities underlying the ADSs or the underlying deposited securities have become apparently
worthless; or
there has been a replacement of deposited securities.
If the deposit agreement will terminate, the depositary will notify ADS holders at least 90 days before the termination date. At
any time after the termination date, the depositary may sell the deposited securities. After that, the depositary will hold the money
it received on the sale, as well as any other cash it is holding under the deposit agreement, unsegregated and without liability for
interest, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. Normally, the depositary will sell as
soon as practicable after the termination date.
After the termination date and before the depositary sells, ADS holders can still surrender their ADSs and receive delivery of
deposited securities, except that the depositary may refuse to accept a surrender for the purpose of withdrawing deposited
securities or reverse previously accepted surrenders of that kind if it would interfere with the selling process. The depositary may
refuse to accept a surrender for the purpose of withdrawing sale proceeds until all the deposited securities have been sold. The
depositary will continue to collect distributions on deposited securities, but, after the termination date, the depositary is not
required to register any transfer of ADSs or distribute any dividends or other distributions on deposited securities to the ADSs
holder (until they surrender their ADSs) or give any notices or perform any other duties under the deposit agreement except as
described in this paragraph.
Limitations on Obligations and Liability to ADR Holders
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Limits on our obligations and the obligations of the depositary; limits on liability to holders of ADSs
The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the
liability of the depositary. We and the depositary:
•
•
•
•
•
•
•
•
are only obligated to take the actions specifically set forth in the deposit agreement without negligence or bad faith,
and the depositary will not be a fiduciary or have any fiduciary duty to holders of ADSs;
are not liable if we are or it is prevented or delayed by law or by events or circumstances beyond our or its ability to
prevent or counteract with reasonable care or effort from performing our or its obligations under the deposit
agreement;
are not liable if we or it exercises discretion permitted under the deposit agreement;
are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not
made available to holders of ADSs under the terms of the deposit agreement, or for any special, consequential or
punitive damages for any breach of the terms of the deposit agreement;
have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the deposit agreement
on your behalf or on behalf of any other person;
are not liable for the acts or omissions of any securities depository, clearing agency or settlement system;
may rely upon any documents we believe or it believes in good faith to be genuine and to have been signed or
presented by the proper person; and
the depositary has no duty to make any determination or provide any information as to our tax status, or any liability
for any tax consequences that may be incurred by ADS holders as a result of owning or holding ADSs or be liable for
the inability or failure of an ADS holder to obtain the benefit of a foreign tax credit, reduced rate of withholding or
refund of amounts withheld in respect of tax or any other tax benefit.
In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.
In addition, the deposit agreement provides that each party to the deposit agreement (including each holder, beneficial owner and
holder of interests in the ADSs) irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a
trial by jury in any lawsuit or proceeding against the depositary or our company related to our
19
shares, the ADSs or the deposit agreement. If we or the depositary were to oppose a jury trial demand based on the waiver, the
court would determine whether the waiver is enforceable based on the facts and circumstances of that case in accordance with
applicable law.
Requirements for Depositary Actions
Before the depositary will deliver or register a transfer of ADSs, make a distribution on ADSs, or permit withdrawal of shares,
the depositary may require:
•
•
•
payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by
third parties for the transfer of any shares or other deposited securities;
satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and
compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including
presentation of transfer documents.
The depositary may refuse to deliver ADSs or register transfers of ADSs when the transfer books of the depositary or our transfer
books are closed or at any time if the depositary or we think it advisable to do so.
Your Right to Receive the Shares Underlying the ADSs
ADS holders have the right to cancel their ADSs and withdraw the underlying shares at any time except:
•
•
•
when temporary delays arise because: (i) the depositary has closed its transfer books or we have closed our transfer
books; (ii) the transfer of shares is blocked to permit voting at a shareholders’ meeting; or (iii) we are paying a
dividend on our shares;
when you owe money to pay fees, taxes and similar charges; or
when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply
to ADSs or to the withdrawal of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the deposit agreement.
Direct Registration System
In the deposit agreement, all parties to the deposit agreement acknowledge that the Direct Registration System, also referred to as
DRS, and Profile Modification System, also referred to as Profile, will apply to the ADSs. DRS is a system administered by DTC
that
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facilitates interchange between registered holding of uncertificated ADSs and holding of security entitlements in ADSs through
DTC and a DTC participant. Profile is feature of DRS that allows a DTC participant, claiming to act on behalf of a registered
holder of uncertificated ADSs, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver
those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS
holder to register that transfer.
In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit
agreement understand that the depositary will not determine whether the DTC participant that is claiming to be acting on behalf
of an ADS holder in requesting registration of transfer and delivery as described in the paragraph above has the actual authority
to act on behalf of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code). In the deposit
agreement, the parties agree that the depositary’s reliance on and compliance with instructions received by the depositary through
the DRS/Profile system and in accordance with the deposit agreement will not constitute negligence or bad faith on the part of the
depositary.
Shareholder Communications; Inspection of Register of Holders of ADSs
The depositary will make available for your inspection at its office all communications that it receives from us as a holder of
deposited securities that we make generally available to holders of deposited securities. The depositary will send you copies of
those communications or otherwise make those communications available to you if we ask it to. You have a right to inspect the
register of holders of ADSs, but not for the purpose of contacting those holders about a matter unrelated to our business or the
ADSs.
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Equity Interest Pledge Agreement
Exhibit 4.26
This Equity Interest Pledge Agreement (the “Agreement”) is entered into by and among the following Parties on
September 12, 2019 in Beijing, People’s Republic of C hina (the “PRC”):
Party A: Tencent Music (Beijing) Co., Ltd. (the “Pledgee”), a wholly foreign-owned enterprise incorporated and existing under
the laws of the PRC, with its registered address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East Tianchen
Road, Chaoyang District, Beijing;
Party B: Gu Dejun, a Chinese citizen with Chinese Identification No. [
]; and
]
Yang Qihu, a Chinese citizen with Chinese Identification No. [
(together with Gu Dejun hereinafter referred to as a “Pledgor” respectively and as the “Pledgors” collectively);
Party C: Xizang Qiming Music Co., Ltd., a limited liability company incorporated and existing under the laws of the PRC, with
its registered address at No.3-504 Industrial Park Management Committee, Duilong Deqing District, Lhasa, Tibet.
In this Agreement, each of the Pledgee, the Pledgors and Party C shall be referred to as a “Party” respectively or as the “Parties”
collectively.
Whereas:
1.
The Pledgors Gu Dejun and Yang Qihu are Chinese citizens. As of the date of this Agreement, the registered capital of
Party C is RMB 10,000,000, and Gu Dejun holds 50% equity interests of Party C, representing RMB 5,000,000 of
Party C’s registered capital; Yang Qihu holds 50% equity interests of Party C, representing RMB 5,000,000 of Party
C’s registered capital. Party C is a limited liability company registered in Tibet, China, and is engaged in the business
of “investment in music and internet projects (excluding financial, securities, insurance and futures business);
corporate management and planning (projects which shall be approved according to the laws and regulations are
subject to approval by relevant departments before business operation)”. Party C hereby acknowledges the rights and
obligations of the Pledgors and the Pledgee under this Agreement and intends to provide any necessary assistance in
registering the Pledge.
1
2.
3.
The Pledgee is a wholly foreign-owned enterprise registered in China. The Pledgee and Party C have executed an
Exclusive Business Cooperation Agreement in Beijing (as defined below). The Pledgee, the Pledgors and Party C
have executed an Exclusive Option Agreement (as defined below). The Pledgee and Pledgor Gu Dejun have executed
a Debt Assignment and Offset Agreement (as defined below). The Pledgee and the Pledgor Yang Qihu have executed
a Loan Agreement (as defined below). Each of the Pledgors has executed a Power of Attorney in favor of the Pledgee
(as defined below).
To ensure that Party C and the Pledgors fully perform its or their obligations under the Exclusive Business
Cooperation Agreement, the Exclusive Option Agreement, the Loan Agreement, the Debt Assignment and Offset
Agreement and the Power of Attorney, the Pledgors pledge to the Pledgee all the equity interests they hold in Party C
as security for the performance of Party C’ and the Pledgors’ obligations under the Exclusive Business Cooperation
Agreement, the Exclusive Option Agreement, the Loan Agreement, the Debt Assignment and Offset Agreement and
the Power of Attorney.
To perform the terms of the Transaction Documents, the Parties have mutually agreed to execute this Agreement upon
the following terms.
1.
Definitions
1.1.
1.2.
1.3.
1.4.
Unless otherwise provided in this Agreement, the terms below shall have the following meanings:
Pledge: means the security interest granted by the Pledgors to the Pledgee pursuant to Section 2 of this Agreement,
i.e., the right of the Pledgee to be compensated on a preferential basis with any proceeds received from conversion,
auction or sale of the Pledged Equity Interest.
Pledged Equity Interest: means 100% of the equity interests in Party C collectively held by the Pledgors now,
representing RMB 10,000,000 of Party C’s registered capital, and all the future equity rights and interests in Party C
held by the Pledgors.
Term of Pledge: means the term set forth in Section 3.1 of this Agreement.
Transaction Documents: means the Exclusive Business Cooperation Agreement entered into by and between Party C
and the Pledgee on February 8, 2018 in Beijing (the “Exclusive Business Cooperation Agreement”); the Exclusive
Option Agreement entered into by and among the Pledgors, Party C and the Pledgee on 12 September, 2019 in Beijing
(the “Exclusive Option Agreement”); the Debt Assignment and Offset Agreement entered into by and
2
1.5.
1.6.
1.7.
1.8.
2.
2.1.
2.2.
among the Pledgee and Pledgor Gu Dejun on 12 September, 2019; the Loan Agreement entered into by and between
the Pledgee and Pledgor Yang Qihu on 8 February, 2018 (the “Loan Agreement”); the power of attorney executed by
the Pledgors respectively on 12 September, 2019 and 8 February, 2018 in Beijing (the “Power of Attorney”), and any
amendments, revisions and/or restatements to the aforesaid documents.
Contractual Obligations: means all the obligations of the Pledgors under the Exclusive Option Agreement, the
Power of Attorney and this Agreement, and all the obligations of Party C under the Exclusive Business Cooperation
Agreement, the Exclusive Option Agreement, the Loan Agreement, the Debt Assignment and Offset Agreement and
this Agreement.
Secured Indebtedness: means all direct, indirect, consequential losses and losses of anticipated profits suffered by the
Pledgee as a result of any Event of Default of the Pledgors and/or Party C, of which the basis for the amount of such
losses includes without limitation reasonable business plans and profit forecasts of the Pledgee, the service fees that
Party C is obliged to pay under Exclusive Business Cooperation Agreement, as well as all expenses as incurred by the
Pledgee in connection with its enforcement for the performance of Contractual Obligations against the Pledgors
and/or Party C.
Event of Default: means any circumstances as set forth in Section 7 of this Agreement.
Notice of Default: means the notice issued by the Pledgee in accordance with this Agreement declaring an Event of
Default.
The Pledge
The Pledgors hereby agree to pledge to the Pledgee the Pledged Equity Interest in accordance with this Agreement as
security for the performance of the Contractual Obligations and the repayment of the Secured Indebtedness. Party C
hereby agrees for the Pledgors to pledge the Pledged Equity Interest to the Pledgee in accordance with this
Agreement.
During the Term of Pledge, the Pledgee is entitled to receive any dividends or distributions in respect of the Pledged
Equity Interest. With the prior written consent of the Pledgee, the Pledgors may collect such dividends or distributions
in respect of the Pledged Equity Interest. Any dividends or distributions received by the Pledgee in respect of the
Pledged Equity Interest after deduction of income tax paid by Pledgors shall, upon the Pledgee’s request, (1) be
deposited into a bank account designated by the Pledgee, be placed under the custody of the Pledgee, be used as
security for the Contractual Obligations and
3
2.3.
2.4.
3.
3.1.
be first applied towards full satisfaction of the Secured Indebtedness; or (2) to the extent permitted by the PRC laws,
be unconditionally donated to the Pledgee or any person designated by the Pledgee.
With the prior written consent of the Pledgee, the Pledgors may subscribe for increased capital in Party C. Any
increase in the capital contributed by the Pledgors to the registered capital of Party C as a result of any capital increase
shall also be deemed as the Pledged Equity Interest.
In the event that Party C is to be dissolved or liquidated as required by any mandatory rules of the PRC laws, upon the
lawful completion of such dissolution or liquidation procedure, any proceeds distributed by Party C to the Pledgors
shall, upon the Pledgee’s request, (1) be deposited into a bank account designated by the Pledgee, be placed under the
custody of the Pledgee, and be used as security for the Contractual Obligations and be first applied towards full
satisfaction of the Secured Indebtedness; or (2) to the extent permitted by the PRC laws, be unconditionally donated to
the Pledgee or any person designated by the Pledgee.
Term of Pledge
The Pledge shall become effective on such date when the pledge of the Pledged Equity Interest contemplated herein
has been registered with the relevant administration for industry and commerce. The Pledge shall be continuously
valid until full performance of the Contractual Obligations and full satisfaction of the Secured Indebtedness. The
Pledgors and Party C shall, (1) register the Pledge in the shareholders’ register of Party C within 3 business days
following the execution of this Agreement, and (2) submit an application to the relevant administration for industry
and commerce for the registration of the Pledge contemplated herein within 30 business days following the execution
of this Agreement. The Parties covenant that for the purpose of registration of the Pledged Equity Interest, the Parties
and other shareholders of Party C shall submit to the administration of industry and commerce this Agreement or an
equity interest pledge agreement in the form required by the administration of industry and commerce of where Party
C locates, which shall truly reflect the information of the Pledge hereunder (the “AIC Pledge Agreement”). For
matters not specified in the AIC Pledge Agreement, the parties shall be bound by the provisions of this Agreement.
The Pledgors and Party C shall submit all necessary documents and complete all necessary procedures, as required by
the PRC laws and regulations and the relevant administration of industry and commerce, to ensure that the Pledge
shall be registered as soon as possible after filing.
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3.2.
4.
4.1.
During the Term of Pledge, in the event the Pledgors and/or Party C fail to fulfill the Contractual Obligations or pay
the Secured Indebtedness, the Pledgee shall be entitled to, but not be obliged to, exercise the Pledge in accordance
with this Agreement.
Custody for Certificates of the Pledge
During the Term of Pledge, the Pledgors shall deliver to the Pledgee within one (1) week following the execution of
this Agreement the certificate of capital contributions to Party C and the register of shareholders which records the
Pledge. The Pledgee will place such documents in custody throughout the entire Term of Pledge specified in this
Agreement.
5.
Representations and Warranties of the Pledgors and Party C
The Pledgors and Party C hereby severally and jointly represent and warrant to the Pledgee as of the date hereof as
follows:
5.1.
5.2.
5.3.
5.4.
5.5.
6.
6.1.
The Pledgors, Gu Dejun and Yang Qihu, are the legal and beneficial owners of the Pledged Equity Interest.
The Pledgee is entitled to dispose of and transfer the Pledged Equity Interest in accordance with this Agreement.
Except for the Pledge, the Pledgors have not created any other pledges or other security interest on the Pledged Equity
Interest.
The Pledgors and Party C have obtained all necessary approvals and consents from government authorities and third
parties (if any) in connection with the execution, delivery and performance of this Agreement.
The execution, delivery and performance of this Agreement do not (i) result in any violation of any relevant PRC
laws; (ii) result in any conflict with the articles of association or other constitutional documents of Party C; (iii) result
in any breach of any agreement to which it is a party or by which it is bound, or constitute any default under any
agreement to which it is a party or by which it is bound; (iv) result in any breach of any permit or license issued or
granted to it and/or any condition of the validity thereof; or (v) result in the revocation or suspension of, or imposition
of conditions on, any permit or license issued to it.
Undertakings by the Pledgors and Party C
During the Term of Pledge, the Pledgors and Party C severally and jointly undertake to the Pledgee that:
5
6.1.1.
6.1.2.
6.1.3.
Without the prior written consent of the Pledgee, the Pledgors shall not transfer the Pledged Equity Interest, create or
permit to be created any security interest or other encumbrances on the Pledged Equity Interest, except for the
performance of the Transaction Documents.
The Pledgors and Party C shall comply with the provisions of all the laws and regulations relating to the pledge of
rights, and shall, within five (5) days upon receipt of any notice, order or recommendation issued or promulgated by
the relevant competent authorities regarding the Pledge, present such notice, order or recommendation to the Pledgee,
and concurrently comply with such notice, order or recommendation, or object thereto upon the reasonable request or
consent of the Pledgee.
The Pledgors and Party C shall promptly notify the Pledgee of any event or notice received by the Pledgors that may
have an impact on the Pledged Equity Interest or any portion thereof, and that may change any undertakings and
obligations of the Pledgors hereunder or may have an impact on the fulfillment of any obligations by the Pledgors
hereunder.
6.1.4.
Party C shall complete its business term extension registration formalities three (3) months prior to the expiry of its
business term such that the validity of this Agreement shall be maintained.
6.2.
6.3.
The Pledgors agree that the rights granted to the Pledgee in respect of the Pledge hereunder shall not be interrupted or
harmed by any legal procedure initiated by the Pledgors, any successors of the Pledgors or their entrusting party or
any other persons.
The Pledgors undertake to the Pledgee that in order to protect or perfect the security for the Contractual Obligations
and the Secured Indebtedness under this Agreement, the Pledgors shall execute in good faith and cause other parties
who have interests in the Pledge to execute all the certificates of rights, agreements, and/or perform and procure other
parties who have interests in the Pledge to perform acts as required by the Pledgee, facilitate the exercise of the
Pledgee’s rights granted hereunder and enter into all relevant documents regarding ownership of the Pledged Equity
Interest with the Pledgee or any person (individuals or legal persons) designated by the Pledgee, as well as provide the
Pledgee with all notices, orders and decisions regarding the Pledge as required by the Pledgee within a reasonable
period of time.
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6.4.
7.
7.1.
The Pledgors hereby undertake to the Pledgee to comply with and perform all the undertakings, representations and
warranties and terms hereunder. In the event that the Pledgors fail to perform or fail to fully perform such
undertakings, representations and warranties and terms hereunder, the Pledgors shall indemnify the Pledgee against all
the losses resulting therefrom.
Event of Default
Each of the following circumstances shall constitute an Event of Default:
7.1.1.
The Pledgors breach any of its obligations under the Transaction Documents and/or this Agreement.
7.1.2.
Party C breaches any of its obligations under the Transaction Documents and/or this Agreement.
7.2.
7.3.
8.
8.1.
8.2.
8.3.
Should there arises any event set forth in Section 7.1 or any circumstance that may result in the foregoing events, the
Pledgors and Party C shall immediately notify the Pledgee in writing.
Unless an Event of Default set forth in this Section 7.1 has been remedied at the request of the Pledgee within twenty
(20) days upon receipt of the notice of the Pledgee to the Pledgors and/or Party C requesting the rectification of such
Event of Default, the Pledgee may issue a Notice of Default to the Pledgors in writing at any time thereafter,
requesting the exercise of the Pledge in accordance with Section 8 hereof.
Exercise of the Pledge
The Pledgee shall issue a Notice of Default to the Pledgors for the exercise of the Pledge.
Subject to the provisions of Section 7.3, the Pledgee may exercise its right to dispose of the Pledge at any time after
the issuance of the Notice of Default in accordance with Section 8.1. Upon the Pledgee’s exercise of its right to
dispose of the Pledge, the Pledgors shall no longer own any right and interest in respect of the Pledged Equity Interest.
Upon the issuance of the Notice of Default in accordance with Section 8.1, the Pledgee is entitled to exercise all the
remedies, rights and powers available to it under the PRC laws, the Transaction Documents and this Agreement,
including without limitation to converse, auction or sell the Pledged Equity Interests for prior satisfaction of
indebtedness. The Pledgee shall not be held liable for any losses arising from its reasonable exercise of such rights and
powers.
7
8.4.
8.5.
8.6.
8.7.
9.
9.1.
9.2.
The proceeds received by the Pledgee as a result of the exercise of the Pledge shall be first applied towards payment
of the taxes and expenses payable in connection with the disposal of the Pledged Equity Interest and the performance
of the Contractual Obligations and the repayment of the Secured Indebtedness to the Pledgee. Any remaining balance
after the deduction of the foregoing payments, if any, shall be returned to the Pledgors or any other person who is
entitled to such balance under applicable laws and regulations, or be deposited with the notary public at the place
where the Pledgee is located, any costs incurred arising out of such deposit shall be borne by the Pledgors; and to the
extent permitted by the PRC laws, the Pledgors shall unconditionally donate such balance to the Pledgee or any
person designated by the Pledgee.
The Pledgee shall be entitled to elect to exercise, simultaneously or successively, any of its breach of contract
remedies; the Pledgee shall not be required to first exercise other breach of contract remedies prior to exercising its
right to converse, auction or sell the Pledged Equity Interest hereunder.
The Pledgee shall be entitled to designate in writing its legal counsel or other agents to exercise on its behalf the
Pledge, and neither the Pledgors nor Party C shall object thereto.
When the Pledgee disposes of the Pledge in accordance with this Agreement, the Pledgors and Party C shall provide
necessary assistance to the Pledgee for its exercise of the Pledge.
Default Liabilities
In the event that the Pledgors or Party C materially breach any provision under this Agreement, the Pledgee is entitled
to terminate this Agreement and/or claim damages from the Pledgors or Party C; this Section 9 shall not preclude any
other rights entitled to the Pledgee as provided under this Agreement.
The Pledgors or Party C may not terminate or cancel this Agreement in any event unless otherwise provided under the
laws.
10.
Assignment
10.1.
10.2.
The Pledgors and Party C shall not donate, transfer or dispose of their rights and obligations under this Agreement
without prior written consent of the Pledgee.
This Agreement shall be binding upon the Pledgors and its successors and any permitted assignees, and effective upon
the Pledgee and each of its successors and assignees.
8
10.3.
10.4.
10.5.
11.
11.1.
The Pledgee may assign any or all of its rights and obligations under the Transaction Documents and this Agreement
to any person designated by it at any time. In this case, the assignee shall enjoy and assume the rights and obligations
of the Pledgee under the Transaction Documents and this Agreement as if the assignee were a party hereto or thereto,
as applicable.
In the event of a change of Pledgee due to assignment, the Pledgors shall, at the request of the Pledgee, execute a new
pledge agreement with the new pledgee with the same terms and conditions as this Agreement, and register such new
pledge with the relevant administration for industry and commerce.
The Pledgors and Party C shall strictly comply with the provisions of this Agreement and other relevant agreements to
which any Party is a party, including the Transaction Documents, and perform the obligations thereunder, and refrain
from any action/omission that may affect the effectiveness and enforceability thereof. Unless with the written
instructions of the Pledgee, the Pledgors shall not exercise their remaining rights in respect of the Pledged Equity
Interest.
Termination
Upon the full and complete performance by the Pledgors and Party C of all of their Contractual Obligations and full
satisfaction of the Secured Indebtedness, the Pledgee shall, upon the Pledgors’ request, release the Pledge of the
Pledged Equity Interest hereunder and cooperate with the Pledgors in relation to both the deregistration of the Pledge
of the Pledged Equity Interest in the shareholders’ register of Party C and the deregistration of the Pledge of the
Pledged Equity Interest with the relevant administration of industry and commerce.
11.2.
The provisions under Section 9, Section 13, Section 14 and this Section 11.2 shall survive the termination of this
Agreement.
12.
Costs and Other Expenses
All costs and actual expenses arising in connection with this Agreement, including without limitation the legal fees,
processing fees, stamp duty, any other taxes and expenses, shall be borne by Party C.
9
13.
Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written consent of
the other Party, disclose any confidential information to any third parties, except for information: (a) that is or will be available to
the public (other than through the unauthorized disclosure to the public by the Party receiving confidential information); (b) that
is required to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or
other government authorities; or (c) that is disclosed by any Party to its shareholders, directors, employees, legal counsels or
financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, directors, employees, legal
counsels or financial advisors shall be bound by the confidentiality obligations similar to the terms set forth in this Section.
Disclosure of any confidential information by the shareholders, directors, employees or entities engaged by any Party shall be
deemed as disclosure of such confidential information by such Party, which Party shall be held liable for breach of contract.
14.
Governing Law and Disputes Resolution
14.1.
14.2.
14.3.
The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the laws of the PRC.
Any disputes arising in connection with the implementation and performance of this Agreement shall be settled
through friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30) days
upon issuance of the written notice by one Party to the other Parties for consultations, such disputes shall be submitted
by either Party to the China International Economic and Trade Arbitration Commission for arbitration in accordance
with its arbitration rules. The arbitration shall take place in Beijing. The arbitration award shall be final and binding
upon all the Parties.
The Parties agree that the arbitral tribunal or the arbitrator shall have the right to award any remedies in accordance
with the terms hereunder and applicable PRC laws, including without limitation temporary and permanent injunctive
remedies (as required by the business operation of Party C or compulsory transfer of the assets), the specific
performance of the Contractual Obligations, the remedies in respect of Party C’s equity interests or real estates, and
the liquidation orders against Party C.
10
14.4.
14.5.
15.
15.1.
15.2.
15.3.
15.4.
To the extent permitted by PRC laws, pending the formation of an arbitral tribunal or under the appropriate
circumstances, the Parties are entitled to resort to a court of competent jurisdiction for temporary injunctive remedies
or other temporary remedies to support the arbitration. In this regard, the Parties reached a consensus that to the extent
as permitted by applicable laws, the courts in Hong Kong, the Cayman Islands, the PRC and the place where Party C’s
major assets are located shall be deemed to have jurisdiction.
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during the
pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall continue
to exercise their respective rights and perform their respective obligations hereunder.
Notices
All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered
personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to
the designated address of such party as listed below. A confirmation copy of each notice shall also be sent by E-mail.
The dates on which notices shall be deemed to have been effectively delivered shall be determined as follows:
Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed
effectively delivered on the date of receipt or refusal at the address specified for notices.
Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful transmission
(as evidenced by an automatically generated confirmation of transmission).
For the purpose of notification, the addresses of the Parties are as follows:
Party A: Tencent Music (Beijing) Co., Ltd.
Address: Room 504, 5th Floor, Gate C7, National Conventional Center South District, No.7 East Tianchen Road,
Chaoyang District, Beijing
Attention: Zhao Xiang
Tel: [
E-mail: [
]
]
Party B:
Name: Gu Dejun
Address: 17th Floor, Songri Dingsheng Building, No.9996 Shennan Road, Nanshan District, Shenzhen
11
Tel: [
E-mail: [
]
]
Name: Yang Qihu
Address: Room 504, 5th Floor, Gate C7, National Conventional Center South District, No.7 East Tianchen Road,
Chaoyang District, Beijing
Tel: [
E-mail: [
]
]
Party C: Xizang Qiming Music Co., Ltd.
Address: Room 504, 5th Floor, Gate C7, National Conventional Center South District, No.7 East Tianchen Road,
Chaoyang District, Beijing
Attention: Zhao Xiang
Tel: [
E-mail: [
]
]
15.5.
Each Party may at any time change its address for notices by delivering a notice to the other Parties in accordance
with this Section.
16.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in
any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this
Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such invalid,
illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by law and the
intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to the economic effect
of those invalid, illegal or unenforceable provisions.
17.
Effectiveness
17.1.
17.2.
This Agreement comes into effect upon duly execution by all the Parties.
Any amendments, changes and supplements to this Agreement shall be in writing and shall become effective upon
signing or stamping by the Parties and completion of the governmental registration procedures (if applicable) in
accordance with the regulations.
12
18.
Language and Counterparts
This Agreement is written in Chinese in five (5) originals, with each of the Pledgee, the Pledgors (Gu Dejun, Yang
Qihu) and Party C holding one original, and the other one original will be submitted for registration.
[The remainder of this page is intentionally left blank]
13
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their
respective authorized representative on the date first above written.
Party A: Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal Representative
Party B:
The Pledgor: Gu Dejun
Signature: /s/ Gu Dejun
The Pledgor: Yang Qihu
Signature: /s/ Yang Qihu
Party C: Xizang Qiming Music Co., Ltd.
/s/ Seal of Xizang Qiming Music Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal Representative
Exclusive Option Agreement
Exhibit 4.27
This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of September
12, 2019 in Beijing, the People’s Republic of China (“China” or the “PRC”):
Party A:
Party B:
Party C:
Tencent Music (Beijing) Co., Ltd., a wholly foreign-owned enterprise, organized and existing under the laws of
the PRC, with its address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East Tianchen Road,
Chaoyang District, Beijing;
Gu Dejun, a Chinese Citizen, with Identification No. []; and
Yang Qihu, a Chinese Citizen with Identification No.: [ ]; and
Xizang Qiming Music Co., Ltd., a limited liability company, organized and existing under the laws of the PRC,
with its address at No.3-504 Industrial Park Management Committee, Duilong Deqing District, Lhasa, Tibet.
In this Agreement, Party A, Party B, and Party C shall each be referred to as a “Party” respectively, and shall be
collectively referred to as the “Parties”.
Whereas:
1.
2.
3.
Party B including Gu Dejun and Yang Qihu. They are shareholders of Party C and as of the date hereof collectively hold
100 % of the equity interests of Party C, representing RMB 10,000,000 in the registered capital of Party C. Gu Dejun holds
50% of the equity interests of Party C, representing RMB 5,000,000 in the registered capital thereof, and Yang Qihu holds
50% of the equity interests of Party C, representing RMB 5,000,000 in the registered capital thereof.
Party B intends to irrevocably grant Party A an exclusive option to purchase the entire equity interest in Party C without
prejudice of PRC laws, and Party A intends to accept such equity interest purchase option (defined as below).
Party C intends to irrevocably grant Party A an exclusive option to purchase its entire assets without prejudice to PRC
laws, and Party A intends to accept such asset purchase option (defined as below).
After mutual discussions and negotiations, the Parties have now reached the following agreement:
1
1.
Sale and Purchase of Equity Interest and Assets
1.1 Option Granted
1.1.1
1.1.2
Whereas Party A paid Party B RMB 10 as consideration, and Party B confirmed the receipt and the
sufficiency of such consideration, Party B hereby irrevocably grants Party A an irrevocable and
exclusive right to purchase, or designate one or more persons (each, a “Designee”) to purchase the
equity interests in Party C then held by Party B once or at multiple times at any time in part or in whole
at Party A’s sole and absolute discretion to the extent permitted by PRC laws and at the price described
in Section 1.3 herein (“Equity Interest Purchase Option”). Except for Party A and the Designee(s), no
other person shall be entitled to the Equity Interest Purchase Option or other rights with respect to the
equity interests of Party B. Party C hereby agrees to the grant by Party B of the Equity Interest
Purchase Option to Party A. The term “person” as used herein shall refer to individuals, corporations,
partnerships, partners, enterprises, trusts, or non-corporate organizations.
Party C hereby exclusively, irrevocably and unconditionally grants Party A an irrevocable and
exclusive right to require Party C to transfer part or all of company assets (the assets may be
transferred in whole or in part at Party A’s sole discretion and commercial consideration, “Purchased
Asset ”) to Party A or its Designee to the extent permitted by PRC laws and under the terms and
conditions herein (“Asset Purchase Option”). Except for Party A and the Designee(s), no other person
shall be entitled to the Asset Purchase Option or any other right with respect to Party C’s assets. Party
A agrees to accept such Asset Purchase Option.
1.1.3
Party B hereby jointly and severally agrees that Party C grants such Asset Purchase Option to Party A
in accordance with Section 1.1.2 above and other terms herein, and the Purchased Asset may be
transferred to Party A or Designee(s) by Party A when the Asset Purchase Option is exercised.
1.2 Steps for Exercise
1.2.1
1.2.2
The exercise of the Equity Interest Purchase Option and the Asset Purchase Option by Party A shall be
subject to the provisions of the laws and regulations of China.
When Party A exercises the Equity Interest Purchase Option, a written notice shall be issued to Party B
(the “Equity Interest Purchase Option Notice”), specifying:(a) Party A’s or the Designee’s decision to
exercise the Equity Interest Purchase Option; (b) the portion of equity interests to be purchased by
Party A or the Designee from Party B (the “Optioned Interests”); and (c) the date for purchasing the
Optioned Interests or the date for the transfer of the Optioned Interests.
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1.2.3
When Party A exercises the Asset Purchase Option, a written notice shall be issued to Party B (the
“Asset Purchase Option Notice”), specifying:(a) Party A’s or the Designee’s decision to exercise the
Asset Purchase Option; (b) the list of assets to be purchased by Party A or the Designee from Party B
(the “Optioned Asset”); and (c) the date for purchasing the Optioned Asset or the date for the transfer
of the Optioned Asset.
1.3 Purchase Price
1.3.1
1.3.2
1.3.3
The purchase price (“Benchmark Purchase Price”) of all equity interests shall be RMB 10. If PRC law
requires a minimum price higher than the Benchmark Purchase Price when Party A exercises the
Equity Interest Purchase Option, the minimum price regulated by PRC law shall be the purchase price
(collectively, the “Equity Interest Purchase Price”).
Party B undertakes that it shall transfer the full amount of Equity Interest Purchase Price obtained by
Party B to Party A’s designated bank account.
In terms of Asset Purchase Option, Party A or its Designee shall pay RMB 1 as the purchase price for
each exercise of the Asset Purchase Option. If PRC law requires a minimum price higher than the
aforementioned net book value of the assets, the minimum price regulated by PRC law shall be the
purchase price (collectively, the “Asset Purchase Price”).
1.3.4
Party C undertakes that it shall transfer the full amount of Asset Interest Purchase Price obtained by
Party C to Party A’s designated bank account.
1.4 Transfer of Optioned Interests
For each exercise of the Equity Interest Purchase Option:
1.4.1
1.4.2
Party B shall cause Party C to promptly convene a shareholders’ meeting, at which a resolution shall be
adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s).
Party B shall obtain written statements from the other shareholders (if any) of Party C giving consent
to the transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first
refusal related thereto.
3
1.4.3
1.4.4
Party B shall execute an equity interest transfer contract with respect to each transfer with Party A
and/or each Designee (whichever is applicable), in accordance with the provisions of this Agreement
and the Equity Interest Purchase Option Notice regarding the Optioned Interests.
The relevant Parties shall execute all other necessary contracts, agreements, or documents, obtain all
necessary government licenses and permits, and take all necessary actions to transfer the valid
ownership of the Optioned Interests to Party A and/or the Designee(s), unencumbered by any security
interests, and cause Party A and/or the Designee(s) to become the registered owner(s) of the Optioned
Interests. For the purpose of this Section and this Agreement, “security interests” shall include
securities, mortgages, third party’s rights or interests, any stock options, acquisition right, right of first
refusal, right to offset, ownership retention, or other security arrangements, but shall be deemed to
exclude any security interest created by this Agreement, Party B’s Equity Interest Pledge Agreement,
and Party B’s Power of Attorney. “Party B’s Equity Interest Pledge Agreement” as used in this
Agreement shall refer to the Equity Interest Pledge Agreement executed by and among Party A, Party
B and Party C on the date hereof and any modifications, amendments, and restatements thereto. “Party
B’s Power of Attorney” as used in this Agreement shall refer to the Power of Attorney executed by
Party B on the date hereof granting Party A with a power of attorney and any modifications,
amendments, and restatements thereto.
1.5 Transfer of Purchased Assets
For each exercise of the Equity Interest Purchase Option:
1.5.1
1.5.2
1.5.3
Party C shall obtain all necessary internal authorizations in accordance with Party B’s then effective
articles of association.
Party C shall enter into an asset transfer contract with respect to each transfer with Party A and/or each
Designee (whichever is applicable), in accordance with the provisions of this Agreement and the Asset
Purchase Option Notice regarding the Purchased Assets.
The relevant Parties shall execute all other necessary contracts, agreements, or documents, obtain all
necessary government licenses and permits, and take all necessary actions to transfer the valid
ownership of the Purchased Assets to Party A and/or the Designee(s), unencumbered by any security
interests.
4
2.
Covenants
2.1
Covenants regarding Party C
Party B (as shareholders of Party C) and Party C hereby covenant on the following:
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
2.1.8
Without the prior written consent of Party A, they shall not in any manner supplement, change, or
amend the articles of association of Party C, increase or decrease its registered capital, or change its
structure of registered capital in other manners.
They shall maintain Party C’s corporate existence in accordance with good financial and business
standards and practices, as well as obtain and maintain all necessary government licenses and permits
by prudently and effectively operating its business and handling its affairs.
Without the prior written consent of Party A, they shall not at any time following the date hereof, sell,
transfer, mortgage, or dispose of in any manner any material assets of Party C or legal or beneficial
interest in the material business or revenues of Party C of more than RMB 100,000, or allow the
encumbrance thereon of any security interests.
Without the prior written consent of Party A, they shall not incur, inherit, guarantee, or suffer the
existence of any debt, except for (i) payables incurred in the ordinary course of business other than
through loans; and (ii) debts disclosed to Party A which Party A’s written consent has been obtained.
They shall always operate all of Party C’s businesses within the normal business scope to maintain the
asset value of Party C and refrain from any action/omission that may affect Party C’s operating status
and asset value.
Without the prior written consent of Party A, they shall not cause Party C to execute any material
contract, except the contracts in the ordinary course of business (for the purpose of this subsection, a
contract with a price exceeding RMB 100,000 shall be deemed a material contract).
Without the prior written consent of Party A, they shall not cause Party C to provide any person with a
loan or credit.
They shall provide Party A with information on Party C’s business operations and financial condition
upon Party A’s request.
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2.1.9
If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and
business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for
companies that operate similar businesses and own similar assets in the same area.
2.1.10 Without the prior written consent of Party A, they shall not cause or permit Party C to merge,
consolidate with, acquire, or invest in any person.
2.1.11
2.1.12
They shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to Party C’s assets, business, or revenue.
To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate
documents, take all necessary or appropriate actions, file all necessary or appropriate complaints, and
raise necessary or appropriate defenses against all claims.
2.1.13 Without the prior written consent of Party A, they shall ensure that Party C shall not in any manner
distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall
immediately distribute all distributable profits to its shareholders.
2.1.14
At the request of Party A, they shall appoint any person designated by Party A as the director or
executive director of Party C.
2.1.15 Without Party A’s prior written consent, they shall not engage in any business in competition with
Party A or its affiliates.
2.1.16
Unless otherwise required by PRC law, Party C shall not be dissolved or liquidated without prior
written consent by Party A.
2.2
Covenants of Party B
Party B hereby covenants to the following:
2.2.1
Without the prior written consent of Party A, at any time from the date of execution of this Agreement,
Party B shall not sell, transfer, mortgage, or dispose of in any other manner any legal or beneficial
interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon, except for
the interest placed in accordance with Party B’s Equity Interest Pledge Agreement and Party B’s Power
of Attorney.
6
2.2.2
2.2.3
2.2.4
2.2.5
2.2.6
2.2.7
2.2.8
2.2.9
2.2.10
Party B shall cause the shareholders’ meeting and/or the directors (or the executive director) of Party C
not to approve any sale, transfer, mortgage, or disposition in any other manner of any legal or
beneficial interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon
of any other security interest without the prior written consent of Party A, except for the interest placed
in accordance with Party B’s Equity Interest Pledge Agreement and Party B’s Power of Attorney.
Without the prior written consent of Party A, Party B shall cause the shareholders’ meeting or the
directors (or the executive director) of Party C not to approve the merger or consolidation with any
person, or the acquisition of or investment in any person.
Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to the equity interests in Party C held by Party B.
Party B shall cause the shareholders’ meeting or the directors (or the executive director) of Party C to
vote their approval of the transfer of the Optioned Interests as set forth in this Agreement and to take
any and all other actions that may be requested by Party A.
To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary
or appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate
complaints, and raise necessary or appropriate defenses against all claims.
Party B shall appoint any designee of Party A as the director or the executive director of Party C, at the
request of Party A.
Party B hereby waives its right of first refusal with respect to the transfer of equity interest by any
other shareholder of Party C to Party A (if any), and gives consent to the execution by each other
shareholder of Party C with Party A and Party C the exclusive option agreement, the equity interest
pledge agreement and the power of attorney similar to this Agreement, Party B’s Equity Interest Pledge
Agreement and Party B’s Power of Attorney, and accepts not to take any actions in conflict with such
documents executed by the other shareholders.
Party B shall promptly donate any profits, interests, dividends, or proceeds of liquidation to Party A or
any other person designated by Party A to the extent permitted under the applicable PRC laws. And
Party B shall strictly abide by the provisions of this Agreement and other contracts jointly or separately
executed by and among Party B, Party C, and Party A, perform the obligations hereunder and
thereunder, and refrain from any action/omission that may affect the
7
effectiveness and enforceability thereof. To the extent that Party B has any remaining rights with
respect to the equity interests subject to this Agreement hereunder or under Party B’s Equity Interest
Pledge Agreement or under Party B’s Power of Attorney, Party B shall not exercise such rights
excluding in such manner in accordance with the written instructions of Party A.
3.
Representations and Warranties
Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and
each date of transfer, that:
3.1
3.2
3.3
3.4
3.5
3.6
They have the power, capacity, and authority to execute and deliver this Agreement and any equity interest
transfer contracts to which they are parties concerning each transfer of the Optioned Interests as described
thereunder (each, a “Transfer Contract”), and to perform their obligations under this Agreement and any Transfer
Contract. Party B and Party C agree to enter into Transfer Contracts substantially consistent with the terms of this
Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the Transfer
Contracts to which they are parties constitute or will constitute their legal, valid, and binding obligations, and
shall be enforceable against them in accordance with the provisions thereof.
Party B and Party C have obtained any and all approvals and consents from the relevant government authorities
and third parties (if required) for the execution, delivery, and performance of this Agreement.
The execution and delivery of this Agreement or any Transfer Contract and the obligations under this Agreement
or any Transfer Contracts shall not: (i) cause any violations of any applicable PRC laws; (ii) be inconsistent with
the articles of association, bylaws, or other organizational documents of Party C; (iii) cause the violation of any
contracts or instruments to which they are a party or which are binding on them, or constitute any breach under
any contracts or instruments to which they are a party or which are binding on them; (iv) cause any violation of
any condition for the grant and/or continued effectiveness of any licenses or permits issued to either of them; or
(v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued
to either of them.
Party B has a good and merchantable title to the equity interests held by Party B in Party C. Except for Party B’s
Equity Interest Pledge Agreement and Party B’s Power of Attorney, Party B has not placed any security interest
on such equity interests.
Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the
aforementioned assets.
Party C does not have any outstanding debts, except for (i) debt incurred within its normal business scope; and (ii)
debts disclosed to Party A for which Party A’s written consent has been obtained.
8
3.7
3.8
Party C has complied with all laws and regulations of China applicable to asset acquisitions. And
There is no pending or threatened litigation, arbitration, or administrative proceedings relating to the equity
interests in Party C, assets of Party C, or Party C itself.
4.
Effective Date and Term
This Agreement shall become effective upon execution by the Parties, and remain in effect until all equity interests held by
Party B in Party C have been transferred or assigned to Party A and/or any other person designated by Party A in
accordance with this Agreement.
5.
Governing Law and Disputes Resolution
5.1
Governing Law
The execution, effectiveness, interpretation, performance, amendment, and termination of this Agreement as well
as any dispute resolution hereunder shall be governed by the laws of the PRC.
5.2
Methods of Disputes Resolution
In the event of any dispute arising with respect to the construction and performance of this Agreement, the Parties
shall first attempt to resolve the dispute through friendly negotiations. In the event that the Parties fail to reach an
agreement on the dispute within 30 days after either Party’s written request to the other Parties for dispute
resolution through negotiations, either Party may submit the relevant dispute to the China International Economic
and Trade Arbitration Commission for arbitration, in accordance with its arbitration rules. The arbitration shall be
conducted in Beijing, and the arbitration award shall be final and binding to all Parties.
Each Party agrees that the arbitral tribunal or arbitrator shall have the right to gives any remedies, including
preliminary and permanent injunctive relief (such as injunction against carrying out business activities, or
mandating the transfer of assets), specific performance of contractual obligations, remedies concerning the equity
interest or assets of Party C and awards directing Party C to conduct liquidation.
To the extent permitted by PRC laws, when awaiting the formation of the arbitration tribunal or otherwise under
appropriate conditions, either Party may seek preliminary injunctive relief or other interlocutory remedies from a
court with competent jurisdiction to facilitate the arbitration. Without violating the applicable governing laws, the
Parties agree that the courts of Hong Kong SAR, Cayman Islands, China and the place where the main assets of
Party C are located shall all be deemed to have competent jurisdiction.
9
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any dispute, except for the matters under dispute, the Parties shall continue to exercise
their respective rights under this Agreement and perform their respective obligations under this Agreement.
6.
Taxes and Fees
Each Party shall pay any and all transfer and registration taxes, expenses, and fees incurred thereby or levied thereon in
accordance with the laws of the PRC in connection with the preparation and execution of this Agreement and the Transfer
Contracts, as well as the consummation of the transactions contemplated under this Agreement and the Transfer Contracts.
7.
Notices
7.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, prepaid postage, commercial courier services, or facsimile
transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by
email. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
7.1.1
Notices given by personal delivery, courier services, registered mail, or prepaid postage shall be deemed
effectively given on the date of receipt or refusal at the address specified for such notices.
7.1.2
Notices given by facsimile transmission shall be deemed effectively given on the date of successful
transmission (as evidenced by an automatically generated confirmation of the transmission).
7.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A:
Address:
Attn:
Phone:
Email(cid:0)
Party B:
Name(cid:0)
Address:
Phone:
Email:
Tencent Music (Beijng) Co., Ltd.
Room 504, 5F, Gate C7, National Conventional Center South District, No.7 East Tianchen
Road, Chaoyang District, Beijing
Zhao Xiang
[]
[]
Gu Dejun
17F, Songri Dingsheng Building, No. 9996, Shennan Road, Nanshan District, Shenzhen
[]
[]
Name(cid:0)
Yang Qihu
10
Address:
Phone:
Email:
Party C:
Address:
Attn:
Phone:
Email(cid:0)
Room 504, 5F, Gate C7, National Conventional Center South District, No.7 East Tianchen
Road, Chaoyang District, Beijing
[]
[]
Xizang Qiming Music Co., Ltd.
Room 504, 5F, Gate C7, National Conventional Center South District, No.7 East Tianchen
Road, Chaoyang District, Beijing
Zhao Xiang
[]
[]
7.3
Any Party may at any time change its address for notices by having a notice delivered to the other Parties in
accordance with the terms hereof.
8.
Confidentiality
The Parties acknowledge that the existence and the terms of this Agreement, and any oral or written information
exchanged between the Parties in connection with the preparation and performance of this Agreement are regarded as
confidential information. Each Party shall maintain the confidentiality of all such confidential information, and without
obtaining the written consent of other Parties, it shall not disclose any relevant confidential information to any third
parties, except for the information that: (a) is or will be featured in the public domain (other than through the receiving
Party’s unauthorized disclosure); (b) is under the obligation to be disclosed pursuant to the applicable laws or regulations,
rules of any stock exchange, or orders of the court or other government authorities; or (c) is required to be disclosed by any
Party to its shareholders, directors, employees, legal counsels, or financial advisors regarding the transaction contemplated
hereunder, provided that such shareholders, directors, employees, legal counsels, or financial advisors shall be bound by
the confidential obligations similar to those set forth in this Section. Disclosure of any confidential information by the
shareholders, director, employees of, or agencies engaged by any Party shall be deemed disclosure of such confidential
information by such Party and that Party shall be held liable for breach of this Agreement.
9.
Further Warranties
The Parties agree to promptly execute the documents that are reasonably required for or are conducive to the
implementation of the provisions and purposes of this Agreement and to take further actions that are reasonably required
for or are conducive to the implementation of the provisions and purposes of this Agreement.
10.
Breach of Agreement
10.1
If Party B or Party C conducts any material breach of any term of this Agreement, Party A shall have right to
terminate this Agreement and/or require Party B or Party C to compensate all damages This Section 10 shall
not prejudice any other rights of Party A herein.
11
10.2
Party B or Party C shall not have any right to terminate this Agreement in any event unless otherwise required
by the applicable laws.
11.
Force Majeure Event
11.1
11.2
“Force Majeure Event” means any event that is beyond one Party’s scope of reasonable control, and is
unavoidable under the affected Party’s reasonable care, including but not limited to, natural disasters, wars,
riots, etc. However, lack of credit, funding or financing may not be considered as beyond one Party’s reasonable
control. When the implementation of this Agreement is delayed or hindered due to any Force Majeure Event,
the affected Party shall not bear any liability for such delayed and hindered performance under this Agreement.
The Party affected by Force Majeure Event seeking to waive any liability under this Agreement shall notify the
other Party as soon as possible of the exemption and the steps to be taken to complete the performance.
The Party affected by Force Majeure Event shall not bear any liability under this Agreement. The Party seeking
to waive liability can only be exempted when he affected Party has made reasonable and feasible efforts to
perform this Agreement and such exemption shall be limited to such delayed and hindered performance. Once
the reasons for such exemption are corrected and remedied, the Parties agree to use their best efforts to perform
this Agreement.
12. Miscellaneous
12.1
Amendments, changes, and supplements
Any amendments, changes, and supplements to this Agreement shall require the execution of a written
agreement by all of the Parties.
12.2
Entire agreement
Except for the amendments, supplements, or changes in writing executed after the execution of this Agreement,
this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the
subject matter hereof, and shall supersede all prior oral and written consultations, representations, and contracts
reached with respect to the subject matter of this Agreement.
12.3
Headings
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain, or
otherwise affect the meanings of the provisions of this Agreement.
12.4
Language
12
This Agreement is written in Chinese in four copies, with each Party having one copy.
12.5
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal, or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality, or enforceability
of the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties
shall strive in good faith to replace such invalid, illegal, or unenforceable provisions with effective provisions
that accomplish to the greatest extent permitted by the relevant laws and the intentions of the Parties, and the
economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid,
illegal, or unenforceable provisions.
12.6
Successors
This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and
the permitted assigns of such Parties.
12.7
Survival
12.7.1
12.7.2
12.8
Waivers
Any obligations that occur or are due as a result of this Agreement upon the expiration or early
termination of this Agreement shall survive the expiration or early termination thereof.
The provisions of Sections 5, 8, 10 and this Section 12.7 shall survive the termination of this
Agreement.
Any Party may waive the terms and conditions of this Agreement, provided that such waiver must be provided
in writing and shall require the signatures of the Parties. No waiver by any Party in certain circumstances with
respect to a breach by other Parties shall be deemed as a waiver by such Party with respect to any similar breach
in other circumstances.
[The remainder of this page is intentionally left blank]
13
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as
of the date first above written.
Party A:
Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
By:
Name:
Title:
/s/ Yang Qihu
Yang Qihu
Legal Representative
Party B:
By:
Name:
By:
Name:
/s/ Gu Dejun
Gu Dejun
/s/ Yang Qihu
Yang Qihu
Party C:
Xizang Qiming Music Co., Ltd
/s/ Seal of Xizang Qiming Music Co., Ltd
By:
Name:
Title:
/s/ Yang Qihu
Yang Qihu
Legal Representative
Power of Attorney
Exhibit 4.30
I, Gu Dejun, a Chinese citizen with the Chinese Identification No. [
], holds 50% of the equity interest in Xizang
Qiming Music Co., Ltd. (the “Xizang Qiming”) as of the date of this Power of Attorney (representing RMB 5 million registered
capital of Xizang Qiming), hereby irrevocably authorize Tencent Music (Beijing) Co., Ltd. (the “WFOE”) to exercise the
following rights with respect to the existing and future equity interests held by myself in Xizang Qiming (the “Owned Equity
Interest”) during the effective term of this Power of Attorney:
Authorizing WFOE as my sole and exclusive proxy, to exercise, including without limitation, the following rights on my
behalf with full authority with respect to the Owned Equity Interest: 1) to attend the shareholders’ meetings of Xizang Qiming; 2)
to exercise all shareholder’s rights and shareholder’s voting rights which I am entitled with under the laws and the articles of
association of Xizang Qiming, including without limitation, rights to sell, transfer, pledge or otherwise dispose of all or any part
of the Owned Equity Interest; and 3) as my authorized representative, to appoint and elect the legal representative, directors,
supervisors, managers and other senior management of Xizang Qiming.
WFOE shall be authorized to execute, on my behalf, any and all agreements to which I shall be a party as specified in the
Exclusive Option Agreement entered into as of 12, September, 2019 by and among me, WFOE and Xizang Qiming, the Equity
Interest Pledge Agreement entered into as of 12, September, 2019 by and among me, WFOE and Xizang Qiming, and the Debt
Assignment and Offset Agreement entered into as of 12, September, 2019 by and between me and WFOE (together with any
amendments, revisions or restatements, the “Transaction Documents”), and duly perform the Transaction Documents. The
authority granted under this Power of Attorney shall not be limited by the exercise of such right in any way.
Any act conducted or any documents executed by WFOE with respect to the Owned Equity Interest shall be deemed
conducted or executed by myself which I shall acknowledge.
WFOE shall be entitled to assign the authority to any other individual or entity for conducting the abovementioned matters
without the necessity to inform me or obtain my prior consent. WFOE shall appoint a Chinese citizen to exercise the
abovementioned rights as required by the PRC laws (if any).
1
As long as I am a shareholder of Xizang Qiming, this Power of Attorney shall be irrevocable and remain valid and
effective from the date of this Power of Attorney.
During the effective term of this Power of Attorney, I hereby waive all rights in connection with the Owned Equity Interest
that have been granted to WFOE under this Power of Attorney, and will refrain from exercising such rights on my own.
[The remainder of this page is intentionally left blank]
2
This Page is the signature page to the Power of Attorney.
Signature: /s/ Gu Dejun
Name: Gu Dejun
12 September, 2019
Accepted by:
Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal representative
Acknowledged by:
Xizang Qiming Music Co., Ltd.
/s/ Seal of Xizang Qiming Music Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal Representative
Spousal Consent
Exhibit 4.32
The undersigned, Chu Jie, (Identification No.: [ ]), is the lawful spouse of Gu Dejun (Identification No.: [ ]). I
hereby unconditionally and irrevocably agree to the execution of the following documents by Gu Dejun as of 12 September, 2019
(the “Transaction Documents”) and the disposal of the equity interest of Xizang Qiming Music Co., Ltd. (the “Domestic
Company”) held by Gu Dejun and registered under his name pursuant to the provisions of the following documents:
(1)
(2)
(3)
(4)
the equity interest pledge agreement by and among Tencent Music (Beijing) Co., Ltd. (the “WFOE”), the Domestic
Company and other parties;
the exclusive option agreement by and among the WFOE, the Domestic Company and other parties;
the debt assignment and offset agreement by and between Gu Dejun and the WFOE; and
the power of attorney issued by Gu Dejun to the WFOE.
I hereby confirm that I do not enjoy any interests or rights in the Domestic Company and hereby undertake not to make
any assertions in respect of the equity interest of the Domestic Company. I further confirm that, Gu Dejun can perform the
Transaction Documents and further amend or terminate the Transaction Documents or execute other agreements to replace the
Transaction Documents absent any authorization or consent from me.
I hereby undertake to execute all necessary documents, and take all necessary actions, to ensure appropriate performance
of the Transaction Documents (as amended from time to time).
I hereby agree and undertake that, if I acquire any equity interests in the Domestic Company for whatever reasons, I shall
be bound by the Transaction Documents (as amended from time to time) and shall comply with the obligations of a shareholder
of the Domestic Company thereunder. For this purpose, upon the WFOE’s request, I shall execute a series of written documents
in substantially the same format and content as the Transaction Documents (as amended from time to time).
Signature:
Date:
/s/Chu Jie
12 September, 2019
1
Debt Assignment and Offset Agreement
Exhibit 4.34
This Debt Assignment and Offset Agreement (this “Agreement”) is entered into by and among Hu Mn (Identification
], the “Transferee”), and Tencent Music
], the “Transferor”), Gu Dejun (Identification No. [
No. [
(Beijing) Co. Ltd. (“Tencent Music”) as of September 12, 2019:
Whereas: Hu Min and Gu Dejun entered into a Share Transfer Agreement (the “Share Transfer Agreement”) as of September
12, 2019, pursuant to which the Transferor shall transfer to Transferee 50% of equity interest held by him in Xizang Qiming
Music Co., Ltd. (the “VIE Company”) (representing RMB 5 million in its registered capital, the “Target Equity”). According to
the Share Transfer Agreement, the consideration of the Target Equity is RMB 5 million (the “Transfer Price”).
Whereas: the Transferor and Tencent Music entered into a Loan Agreement on February 8, 2018 (the “Loan Agreement”),
pursuant to which Tencent Music shall provide a loan in the amount of RMB 5 million to the Transferor. In this regard, the
Transferor intends to transfer the RMB 5 million debt (“Loan”) under the Loan Agreement to the Transferee.
In view of above, the Parties have now reached into the following agreement:
1.
2.
3.
The Transferor agrees to transfer his obligation to pay the Loan to the Transferee, and the Transferee agrees to undertake the
obligation to pay the Loan. As the consideration that the Transferee agrees to undertake the obligation to pay the Loan, the
portion of the Transfer Price equal to the Loan that the Transferee shall pay to the Transferor, shall be deemed paid. When
this Agreement comes into effect, the Transferee shall replace the Transferor and become the borrower under the Loan
Agreement and the Transferee shall pay the Loan pursuant to the Loan Agreement and fulfill other obligations under the
Loan Agreement.
Tencent Music, as the creditor of the Loan, hereby agrees the assignment of the Loan under Article 1 hereof.
This agreement shall come into force automatically upon the effective date of the Share Transfer Agreement.
[The remainder of this page is intentionally left blank and below are signature pages to this Agreement]
1
[This page is the signature page of Debt Assignment and Offset Agreement. There is no text on this page]
Hu Min
Signed:/s/ Hu Min
Gu Dejun
Signed: /s/ Gu Dejun
Tencent Music (Beijing) Co. Ltd.
/s/ Seal of Tencent Music (Beijing) Co. Ltd.
Legal Representative (Signature): /s/ Yang Qihu
2
Spouse Consent Letter
Exhibit 4.47
The undersigned, Jiang Shibo, (Identification No.: [
], “My
Spouse”). I hereby unconditionally and irrevocably agree to the execution of the following documents by My Spouse as of
March 26, 2018 (the “Transaction Documents”) and the disposal of the equity interest of Guangzhou Kugou Computer
Technology Co., Ltd. (the “Domestic Company”) held by My Spouse pursuant to the provisions of the following documents:
]), is the lawful spouse of Gao Yaping (Identification No.: [
(1)
(2)
(3)
The equity interest pledge agreement by and among Gao Yaping, Tencent Music (Beijing) Co., Ltd. (the “WFOE”), the
Domestic Company and other parties;
The exclusive option agreement by and among Gao Yaping, the WFOE, the Domestic Company and other parties; and
The voting trust agreement by and among Gao Yaping, the WFOE, the Domestic Company and other parties.
I hereby confirm that I do not enjoy any interests or rights in the Domestic Company and hereby undertake not to make any
assertions in respect of the equity interest of the Domestic Company held by My Spouse. I further confirm that, My Spouse can
perform the Transaction Documents and further amend or terminate the Transaction Documents or execute other agreements to
replace the Transaction Documents absent any authorization or consent from me.
I hereby agree and undertake that, if I acquire any equity interests in the Domestic Company for whatever reasons, I shall be
bound by the Transaction Documents (as amended from time to time) and shall comply with the obligations of a shareholder of
the Domestic Company thereunder. For this purpose, upon the WFOE’s requests, I shall execute a series of written documents in
substantially the same format and content as the Transaction Documents (as amended from time to time).
Signature:/s/ Jiang Shibo
Date: November 29, 2018
Exhibit 4.48
Equity Interest Pledge Agreement
Of
Beijing Kuwo Technology Co., Ltd.
By and among
Shareholders Listed in Schedule A
Yeelion Online Network Technology (Beijing) Co., Ltd.
And
Beijing Kuwo Technology Co., Ltd.
October 1, 2019
This Equity Interest Pledge Agreement (this “Agreement”) is entered into on October 1, 2019 by and among:
EQUITY INTEREST PLEDGE AGREEMENT
1.
2.
3.
All shareholders listed in Schedule A. Please refer to Schedule A for detailed information of each shareholder.
(Each shareholder listed in Schedule A shall be hereinafter referred to as a “Pledgor” respectively, and as the
“Pledgors” collectively.)
Yeelion Online Network Technology (Beijing) Co., Ltd. (hereinafter referred to as the “Pledgee”)
Registered Address: B-521-B062, 2/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
Beijing Kuwo Technology Co., Ltd. (hereinafter referred to as the “Company”)
Registered Address: B-207-161, 2/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
(In this Agreement, each of the Pledgors, the Pledgee and the Company shall be referred to as a “Party” respectively, and as the
“Parties” collectively.)
WHEREAS:
(1)
(2)
(3)
The Pledgors are registered shareholders on record of the Company as of the execution date of this Agreement,
collectively holding 100% of the equity interests in the Company (hereinafter the “Company Equities”). Upon the
execution date of this Agreement, the Pledgors’ capital contributions to the registered capital of the Company and
proportions of shareholding are set out in Schedule A hereto.
The Parties herein entered into an Exclusive Option Agreement on October 1, 2019 (hereinafter the “Exclusive
Option Agreement”), pursuant to which the Pledgors shall, to the extent permitted by the PRC Laws, transfer all or
partial Company Equities held by the Pledgors to the Pledgee and/or any other entity or individual designated by the
Pledgee in accordance with the Pledgee’s request.
The Parties herein entered into a Voting Trust Agreement on October 1, 2019 (hereinafter the “Voting Trust
Agreement”), pursuant to which the Pledgors shall irrevocably entrust its full rights and authorities to the person
designated by the Pledgee on the occasion to exercise all the shareholder voting power granted to the Pledgors in the
Company.
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(4)
(5)
(6)
The Company and the Pledgee entered into an Exclusive Technology Service Agreement on July 12, 2016
(hereinafter the “Service Agreement”), pursuant to which the Company exclusively employs the Pledgee to provide
relevant technical services, and agrees to pay the corresponding service fees to the Pledgee for such technical
services.
Mr. XIE Guomin, Mr. SHI Lixue (hereinafter the “Borrowers” collectively) and the Pledgee entered into a Loan
Agreement (hereinafter the “Loan Agreement”) on July 12, 2016, pursuant to which the Pledgee has provided a loan
of RMB10,000,000 to the Borrowers to pay the equity transfer price for the subscription of the original registered
capital of the Company. Mr. Xie Guomin, Ms. Wang Meiqi and the Pledgee entered into a debt assignment and offset
agreement (hereinafter the “Debt Assignment and Offset Agreement”) on October 1, 2019, pursuant to which Ms.
Wang Meiqi inherits all of Mr. Xie Guomin’s rights and obligations under the Loan Agreement.
As security for the performance of the Contractual Obligations (as defined hereunder) and for the full payment of the
Secured Indebtedness, the Pledgors agree to pledge all their equity interests held by them in the Company in favor of
the Pledgee, and grant the Pledgee the most prioritized pledge right, with the Company’s consent on such equity
pledge arrangement.
THEREFORE, upon mutual discussion, the Parties agree as follows:
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Definitions
1.1
Unless otherwise defined by the context, the following terms shall have the following meanings in this
Agreement:
Contractual
Obligations
shall refer to (i) for the Pledgors excluding the Borrowers, all the contractual obligations under the
Exclusive Option Agreement, the Voting Trust Agreement and this Agreement; (ii) for the
Borrowers, all the contractual obligations under the Exclusive Option Agreement, Voting Trust
Agreement, the Loan Agreement and this Agreement; (iii) for the Company, all the contractual
obligations under the Exclusive Option Agreement, Voting Trust Agreement, Service Agreement
and this Agreement.
2
Transaction
Agreements
Event of
Default
Secured Indebtedness shall refer to the Company’s obligation to pay the service fees under the Service Agreement and
other obligations, the Borrowers’ obligations of repayment, and all the direct, indirect and
derivative losses and losses of anticipated profits, suffered by the Pledgee, incurred as a result of
any Event of Default (as defined hereunder) by the Pledgors and/or the Company. The
amount of such loss shall be calculated in accordance with, without limitation, the reasonable
business plan and profit forecast of the Pledgee, the service fees payable by the Company to the
Pledgee under the Service Agreement, the principal payable by the Borrowers under the Loan
Agreement, and all expenses occurred in connection with enforcement by the Pledgee of the
Pledgor’s and/or the Company’s Contract Obligations.
shall refer to the Exclusive Option Agreement, the Voting Trust Agreement, the Service
Agreement and the Loan Agreement.
shall refer to any breach to any contractual obligations under the Exclusive Option Agreement by
the Pledgors excluding the Borrowers, any Borrower’s breach to any contractual obligations under
the Exclusive Option Agreement, the Voting Trust Agreement, the Loan Agreement and/or this
Agreement, and the Company’s breach to any contractual obligations under the Exclusive Option
Agreement, the Voting Trust Agreement, the Service Agreement and/or this Agreement.
shall refer to all Company Equities legally held by the Pledgors upon the effective date of this
Agreement (the specific equity interest pledged by each Pledgor is set out in Schedule A in this
Agreement), the increased capital contribution and dividend under Clauses 2.6 and 2.7 herein, and
other equity interest in the Company held by the Pledgors by any others means.
shall refer to the then effective laws, administrative regulations, administrative rules, local
regulations, judicial interpretations and other binding regulatory documents of the People’s
Republic of China (for the purpose of this Agreement, excluding
Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan).
Pledged Equity
PRC Laws
1.2
1.3
In this Agreement, any reference to any PRC Laws shall be deemed to include (1) a reference to such PRC Laws
as modified, amended, supplemented or reenacted, effective before or after the date of this Agreement; and (2) a
reference to any other decision, circular or rule made pursuant to such PRC Laws or effective as a result of such
PRC Laws.
Unless otherwise stated in the context of this Agreement, a reference to a provision, clause, section or paragraph
shall refer to a corresponding provision, clause, section or paragraph of this Agreement.
3
2
Equity Pledge
2.1
2.2
2.3
2.4
The Pledgors hereby agree to pledge, in accordance with the terms of this Agreement, their lawfully owned and
disposable equity interests in favor of the Pledgee as the security for the repayment of the Secured Indebtedness.
The Company hereby agrees that Pledgors pledge the Pledged Equities in favor of the Pledgee in accordance with
the terms of this Agreement.
The Pledgors undertake to record the share pledge arrangements (“Share Pledge”) in the register of shareholders
on the effective date of this Agreement. The Pledgors further undertake to make the best efforts and take all
necessary actions to apply with the competent industrial and commercial authority for the registration of the
Pledged Equity under this Agreement within ten (10) business days after the execution date of this Agreement.
The Pledgors and the Pledgee shall, pursuant to PRC Laws and all requirements of relevant industrial and
commercial authorities, submit all necessary documents and deal with all necessary procedures, ensuring that the
pledge right can be registered as soon as possible after the application submission, and deliver the original copy
of the registration certificate (including without limitation the pledge registration notification) to the Pledgee; the
relevant fees shall be borne by the Company.
During the term of this Agreement, the Pledgee shall not be liable in whatsoever manner for any decrease in the
value of the Pledged Equities and the Pledgors are not entitled to seek any form of recourse or make any request,
unless such decrease is caused by the Pledgors’ intention or gross negligence having direct causation to the result.
Subject to Section 2.3 above, if the Pledged Equities could experience material impairment which is capable to
prejudice the rights of the Pledgee, the Pledgee may at any time auction or sell the Pledged Equities on behalf of
the Pledgors and may, as agreed with the Pledgors, apply the proceeds from such auction or sale towards
accelerated repayment of the Secured Indebtedness, or deposit such proceeds with a notary public at the place
where the Pledgee is located (any costs thereby incurred shall be entirely borne by the Pledgee).
2.5
Upon occurrence of any Event of Default, the Pledgee shall be entitled to dispose of the Pledged Equities in such
manner as prescribed in Article 4 of this Agreement.
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2.6
2.7
The Pledgors shall be entitled to increase the capital of the Company with prior written consent of the Pledgee.
The amount of capital added to the Company’s registered capital because of the Pledgors’ contribution shall be
deemed as the Pledged Equities. The Pledgors undertake to record the equity pledge for the increased amount of
registered capital under this Clause 2.6 in the register of shareholders within ten (10) business days after the
capital increase, to apply with the competent industrial and commercial authority for the registration, and to
deliver the original copy of the registration certificate (including without limitation to the pledge registration
notification) to the Pledgee; the relevant fees shall be borne by the Company.
During the term of pledge, the Pledgors are entitled to receive proceeds (including without limitation any
dividend, profit and other income) generated by the Pledged Equities. The Pledgors shall not receive any
dividend or bonus in respect of the Pledged Equities without prior consent of the Pledgee. The Pledgors’ dividend
or bonus obtained from the Pledged Equities shall be deposited in the bank account designated by the Pledgee,
being administrated by the Pledgee, and shall be used for the repayment for the Secured Indebtedness.
2.8
Upon occurrence of any Event of Default, the Pledgee shall be entitled to dispose of any Pledgor’s any pledged
Equities in the manner as prescribed in this Agreement.
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Release of Pledge
3.1
After full and complete performance of all the Contractual Obligations and full repayment of all the Secured
Indebtedness by the Pledgors and the Company, the Pledgee shall, at the request of the Pledgors, release the
equity pledge under this Agreement and cooperate with the Pledgors to deregister the equity pledge recorded in
the register of shareholders and to deregister the pledge with the competent industrial and commercial authority.
Reasonable costs thereby incurred shall be borne by the Pledgee.
4
Disposal of Pledged Equities
4.1
The Parties hereby agree that upon occurrence of any Event of Default, the Pledgee shall be entitled to exercise
all rights and power to claim remedies available under the PRC Laws, the Transaction Agreements and this
Agreement with written notice to the Pledgors, including without limitation the right to auction or sell the
Pledged Equities and to be indemnified in priority with the proceeds thereof. The Pledgee shall not be held liable
for any losses from its lawful and reasonable exercise of such rights and power.
5
4.2
4.3
4.4
The Pledgee shall be entitled to appoint in writing its legal advisor or any other agent to exercise any and all of its
foregoing rights and power, to which the Pledgors shall not raise any objection and shall provide necessary
assistance.
The Pledgee shall be entitled to deduct all reasonable costs actually incurred in connection with its exercise of
any or all of its aforesaid rights and power from the proceeds obtained from such exercise of rights and power.
The proceeds obtained from the exercise by the Pledgee of its rights and power shall be applied in the following
order of precedence:
(i)
(ii)
(iii)
payment of all costs arising out of the disposal of the Pledged Equities and the exercise by the Pledgee
of its rights and power (including fees paid to its legal advisor and agent);
payment of the taxes payable in connection with the disposal of the Pledged Equities; and
repayment of the Secured Indebtedness to the Pledgee;
Any balance after the deduction of the aforesaid payments shall either be returned by the Pledgee to the Pledgors
or any other person who is entitled to such balance under relevant laws and regulations, or be deposited with a
notary public at the place where the Pledgee is located (any costs thereby incurred shall be entirely borne by the
Pledgee).
4.5
The Pledgee shall have the option to exercise concurrently or successively any of the remedies available to it; the
Pledgee shall not be required to exhaust all other remedies available to it prior to auction or sale of the Pledged
Equities under this Agreement.
5
Fees and Expenses
5.1
All costs and expenses actually incurred in connection with the creation of the equity pledge under this
Agreement, including without limitation the stamp duty, any other taxes and all legal fees, shall be borne by the
Company.
6
6
Continuity and No Waiver
6.1
The Pledged Equities shall be continuous security and shall remain valid until full performance of the Contractual
Obligations or full repayment of the Secured Indebtedness. No waiver or grace period granted by the Pledgee to
the Pledgors in respect of any breach or any delay by the Pledgee in exercising any of its rights under the
Transaction Agreements and this Agreement shall affect the rights available to the Pledgee under this Agreement,
applicable PRC Laws and the Transaction Agreements to demand at any time thereafter strict performance by the
Pledgors of the Transaction Agreements and this Agreement, or any of the rights available to the Pledgee arising
from any subsequent breach by the Pledgors of the Transaction Agreements and/or this Agreement.
7
Representations and Warranties of the Pledgors
Excluding the circumstances as disclosed in Schedule A, each Pledgor hereby respectively and not jointly represent and
warrant to the Pledgee that:
7.1
7.2
7.3
7.4
7.5
If the Pledgor is a natural person, he is a Chinese citizen with full civil capacity, and has legal rights and capacity
to execute this Agreement and bears legal obligations under this Agreement. If the Pledgor is not a natural
person, it is a legal entity duly incorporated under PRC Laws with legal rights and capacity to execute this
Agreement and bears legal obligations under this Agreement.
As of the effective date of this Agreement, the Pledgor is the only lawful owner of the Pledged Equities free from
any existing dispute in relation to the ownership thereof. Other than the security interests created on the Pledged
Equities under this Agreement and the rights created under the Transaction Agreements, the Pledgor has the right
to dispose of the Pledged Equities or any part thereof.
Other than the security interests created on the Pledged Equities under this Agreement and the rights created
under the Transaction Agreements, the Pledged Equities are free from any other security interests or third party
rights and interests and any other restriction.
The Pledged Equities can be lawfully pledged and transferred, and the Pledgor has full rights and power to pledge
the Pledged Equities to the Pledgee in accordance with the terms of this Agreement.
This agreement, once duly executed by the Pledgor, constitutes legal, valid and binding obligations to the
Pledgor.
7
7.6
7.7
7.8
7.9
7.10
7.11
As necessary to the execution and performance of this Agreement and the equity pledge under this Agreement,
any consent, permission, waiver or authorization by any third party or any approval, license or exemption by any
governmental body or registration or filing formalities (if required by law) with any governmental body have
been obtained or handled and will remain in full force during the term of this Agreement.
The execution and performance of this Agreement by the Pledgor do not violate or conflict with any law
applicable to the Pledgor in effect, any agreement to which the Pledgor is a party or by which its assets are bound,
any court judgment, any arbitral award, or any decision of any administrative authority.
The pledge under this Agreement constitutes a first ranking security interest on the Pledged Equities held by the
Pledgor.
All taxes and fees payable in connection with obtaining the Pledged Equities have been paid in full in accordance
with the laws by the Pledgor.
There are no pending or, to the knowledge of the Pledgor, threatened suits, arbitrations, or other legal proceedings
or claims before any court or arbitral tribunal, or administrative proceedings, or other legal proceedings or claims
before any governmental body or administrative authority against the Pledged Equities, the Pledgor or their
properties , which will have a material or adverse effect on the economic conditions of the Pledgor or the
Pledgor’s ability to perform its obligations and security liability under this Agreement.
The Pledgor hereby warrants to the Pledgee that the representations and warranties made above will remain true
and correct and will be fully complied with under all circumstances until full performance of the Contractual
Obligations or the full repayment of the Secured Indebtedness.
8
Representations and Warranties of the Company
The Company hereby represents and warrants to the Pledgee that:
8.1
The Company is a limited liability company duly registered and lawfully existing under PRC Laws with
independent legal personality, and has full and independent legal status and capacity to execute and deliver this
Agreement and may sue or be sued as an independent party.
8
8.2
8.3
8.4
8.5
8.6
8.7
8.8
All reports, documents and information provided by it to the Pledgee prior to or upon the effectiveness of this
Agreement with respect to matters pertaining to the Pledged Equity or required by this Agreement are true and
correct in all material respects as of the effectiveness of this Agreement.
All reports, documents and information provided by it to the Pledgee after the effectiveness of this Agreement
with respect to matters pertaining to the Pledged Equity or required by this Agreement are true and valid in all
material respects as of the effectiveness of this Agreement.
This agreement, once properly signed by the Company, constitutes legal, valid and binding obligations to the
Company.
It has full internal corporate power and authority to execute and deliver this Agreement and all other documents
to be executed by it in connection with the transactions contemplated hereunder as well as full power and
authority to consummate the transactions contemplated hereunder;
There are no pending or, to the knowledge of the Company, threatened suits, arbitrations, or other legal
proceedings or claims before any court or arbitral tribunal, or administrative proceedings, or other legal
proceedings or claims before any governmental body or administrative authority against the Pledged Equities, the
Company or its assets, which will have a material or adverse effect on the economic conditions of the Company
or the Pledgor’s ability to perform its obligations and security liability under this Agreement.
The Company hereby agrees to be jointly liable to the Pledgee for the representations and warranties made by
each Pledgor under Article 7 hereunder.
The Company hereby warrants to the Pledgee that the foregoing representations and warranties will remain true
and correct and fully complied with under all circumstances at any time prior to full performance of the
Contractual Obligations or full repayment of the Secured Indebtedness.
9
Undertakings by the Pledgors
The Pledgors each respectively and not jointly undertake to the Pledgee that:
9.1
Without prior written consent of the Pledgee, the Pledgors will not create or permit to be created any new pledge
or any other security interest on the Pledged Equity and any pledge or other security interest created on all or any
part of the Pledged Equity without prior written consent of the Pledgee shall be null and void.
9
9.2
9.3
9.4
9.5
9.6
9.7
Without prior written notice to and prior written consent from the Pledgee, the Pledgors will not assign the
Pledged Equity and all purported assignment of the Pledged Equity by the Pledgors shall be null and void. The
proceeds received by the Pledgors from the assignment of the Pledged Equity shall be first applied towards full
repayment to the Pledgee of the Secured Indebtedness or shall be deposited with a third party as agreed with the
Pledgee.
Should there arise any suit, arbitration or other claims which are likely to have an adverse effect on the Pledgors’
or the Pledgee’s interest under the Transaction Agreements and this Agreement or on the Pledged Equity, the
Pledgors undertake that they will notify the Pledgee in writing of the same as promptly as possible without delay
and will, in accordance with the reasonable request of the Pledgee, take all necessary measures to ensure the
Pledgee’s rights and interests of pledge in and to the Pledged Equity.
The Pledgors undertake to complete the registration procedure to extend the Company’s business period in three
(3) months before the expiry of the Company’s business period, in order to maintain the validity of this
Agreement.
The Pledgors will not do or permit to be done any act or action likely to have an adverse effect on the interest of
the Pledgee under the Transaction Agreements and this Agreement or on the Pledged Equity. The Pledgors waive
their preferential right of purchase if and when the Pledgee realizes its rights of pledge.
The Pledgors will, in accordance with the reasonable request of the Pledgee, take all steps and execute all
documents (including without limitation any supplement hereto) necessary to ensure the Pledgee’s rights and
interests of pledge in and to the Pledged Equity as well as the exercise and realization by the Pledgee of such
rights and interests.
Should the exercise of the rights of pledge hereunder result in an assignment of any Pledged Equity, the Pledgors
undertake that they will take all measures to enable the realization of such assignment.
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10
Undertakings by the Company
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
The Company will use every effort to assist with the obtaining of any consents, permissions, waivers,
authorizations of any third party or any approval, license or exemption from any governmental body or the
completion of any registration or filing formalities with any governmental body (if required by law), requisite in
each case for the execution and performance of this Agreement and the creation of the Equity Pledge hereunder,
and will maintain the same in full force and effect during the term hereof.
Without prior written consent of the Pledgee, the Company will not assist or permit the Pledgors to create any
new pledge or any other security interest on the Pledged Equity.
Without prior written consent of the Pledgee, the Company will not assist or permit the Pledgors to assign the
Pledged Equity.
Should there arise any suit, arbitration or other claims which are likely to have an adverse effect on the Company,
the Pledged Equities or the Pledgee’s interest under the Transaction Agreements and this Agreement, the
Company undertakes that it will notify the Pledge in writing of the same as promptly as possible without delay
and will, in accordance with the reasonable request of the Pledgee, take all necessary measures to ensure the
Pledgee’s pledge rights and interests in and to the Pledged Equity.
The Company undertakes to complete the registration procedure to extend its business period in three (3) months
before the expiry of its business period, in order to maintain the validity of this Agreement.
The Company will not do or permit to be done any act or action likely to have an adverse effect on the interest of
the Pledgee under the Transaction Agreements and this Agreement or on the Pledged Equity.
The Pledgors will during the first month of each calendar quarter submit to the Pledgee the financial statements
of the Company for the preceding calendar quarter, including without limitation the balance sheet, the income
statement and the cash flow statement.
The Company will, in accordance with the reasonable request of the Pledgee, take all steps and execute all
documents (including without limitation any supplement hereto) necessary to ensure the Pledgee’s rights and
interests of pledge in and to the Pledged Equity as well as the exercise and realization by the Pledgee of such
rights and interests.
11
10.9
Should the exercise of the rights of pledge hereunder result in an assignment of any Pledged Equity, the Company
undertakes that it will take all measures to enable the realization of such assignment.
11
Fundamental Changes of Circumstances
11.1
As a supplementary agreement and without contravening other provisions of the Transaction Agreements and this
Agreement, if, at any time, in the opinion of the Pledgee, as a result of any promulgation of or amendment to any
PRC Laws, regulations or rules, or of any change in the interpretation or application of such laws, regulations or
rules, or of any change in relevant registration procedures, the maintaining of the validity of this Agreement
and/or the disposal of the Pledged Equity in the manner prescribed hereunder becomes illegal or contravenes such
laws, regulations or rules, the Pledgors and the Company shall, on the Pledgee’s written instruction and in
accordance with its reasonable request, immediately take any actions and/or execute any agreements or other
documents so as to:
(i)
(ii)
(iii)
maintain the validity of this Agreement;
facilitate the disposal of the Pledged Equity in the manner prescribed hereunder; and/or
maintain or realize the security created or purported to be created hereunder.
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Effectiveness and Term of Agreement
12.1
This Agreement is valid once duly executed by all Parties. This Agreement is the final version agreement which
the Parties have reached upon in respect of the equity pledge and relevant issues; this Agreement shall fully
replace any and all of previous consultation, negotiation or discussion which all Parties have reached upon, and
any and all of letters of intent, memorandums, agreements or other documents which all Parties have reached
upon and agreed. If there is any conflict, contravention or inconsistence in such consultation, negotiation,
discussion results, such letters of intent, memorandum, agreements or other documents against this Agreement,
this Agreement shall prevail. All Parties shall, bearing the principle of good faith, make all efforts to assist in
having such equity pledge registered in the competent industrial and commercial authority in a short period. For
this purpose, the Company shall apply for the registration with the competent industrial and commercial authority
in reasonable time.
12
The Pledgors shall deliver to the Pledgee for custody the capital contribution certificate for the Equity Interest
and the shareholders’ register containing the Pledge on the effective date of this Agreement. Upon the
effectiveness of this Agreement, the Pledgors shall, at the Pledgee’s request, provide the pledge registration
certificate issued by the competent industrial and commercial authority to the Pledgee in a form satisfactory to
the Pledgee. The Pledgee will keep these documents in its custody during the whole pledge period prescribed in
this Agreement.
The term of this Agreement shall end when the Contractual Obligations is performed in full or when the Secured
Indebtedness is repaid in full.
To avoid ambiguity, each Pledgor is not jointly liable to any obligation or liability of other Pledgor or the
Company.
Any notice, request, demand and other correspondences required by or made pursuant to this Agreement shall be
made in writing and delivered to the relevant Party.
Aforesaid notice or other correspondences shall be deemed delivered when it is transmitted if transmitted by fax
or telex; or upon delivery, if delivered in person; or five (5) days after posting, if delivered by mail; or upon the
signature of the recipient, if delivered by courier service. However, if the notice is returned due to the recipient’s
fault or the recipient’s refusal to sign, the notice is deemed delivered on the date when the notice is returned.
12.2
12.3
13
Notice
13.1
13.2
14 Miscellaneous
14.1
14.2
The Pledgors and the Company agree that the Pledgee may, immediately upon notice to the Pledgors and the
Company, assign its rights and/or obligations hereunder to any third party; and that without prior written consent
of the Pledgee, neither the Pledgors nor the Company may assign their respective rights, obligations or liabilities
hereunder to any third party. The successors or permitted assignees (if any) of the Pledgors and the Company
shall be obligated to continue to perform the Pledgors’ and the Company’s respective obligations hereunder.
The sum of the Secured Indebtedness determined by the Pledgee in its discretion in connection with its exercise
of its rights of pledge with respect to the Pledged Equity in accordance with the terms hereof shall constitute the
conclusive evidence for the Secured Indebtedness hereunder.
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14.3
14.4
This Agreement is made in Chinese in five (5) originals with each Party hereof retaining one (1) copy. The
Parties specifically agree that the Agreement restored in PDF format sent by emails from the Parties is regarded
as original and can be used separately as evidence for the establishment and validation of this Agreement.
The entry into, effectiveness, performance, modification, interpretation and termination of this Agreement shall
be governed by PRC Laws.
14.5
Dispute Resolution
(1)
(2)
(3)
(4)
Any dispute, argument or claim (hereinafter the “disputes”) arising out of or in connection with of this
Agreement or breach, termination or invalidity of this Agreement shall be settled by both Parties of the
disputes through consultations. The Party raising the claim shall promptly inform the other Party that
disputes have arisen and illustrate the nature of the dispute via a notice with date. In the absence of an
agreement being reached by the Parties within thirty (30) days after the dispute notice, the dispute may
be brought by any Party the dispute before the China International Economic and Trade Arbitration
Commission (hereinafter “CIETAC”) to be arbitrated in Beijing pursuant to CIETAC’s effective
arbitration rules upon the submission of the dispute and this Clause 14.5. The arbitration award shall be
final and binding on the Parties to the dispute.
The arbitral tribunal shall consist of three (3) arbitrators. Each Party to the dispute has the right to
respectively appoint one (1) arbitrator, and the third (3rd) arbitrator shall be jointly appointed by both
Parties to the dispute. If the Parties to the dispute cannot reach agreement on the appointment of the third
(3rd) arbitrator, such arbitrator shall be appointed by the director of the Arbitration Commission. The
third arbitrator shall be the chief arbitrator of the arbitral tribunal.
When making an arbitral award, the arbitrator shall take into account the intention of hereto determined
by this agreement the Parties.
The arbitral award made by the arbitral tribunal pursuant to this Clause 14.5 shall be made in writing and
shall be final and binding upon both Parties to the dispute. Both Parties to the dispute should do their
best to enable any of such arbitral awards to be implemented in time and provide any necessary
assistance to the implementation.
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(5)
The aforesaid provisions of this Clause 14.5 shall not prevent the concerned Parties from applying for
any prior protection or injunction for any reason, including without limitation the subsequent
enforcement of the arbitral award.
14.6
14.7
14.8
14.9
No right, power or remedy empowered to any Party by any provision of this Agreement shall preclude any other
right, power or remedy enjoyed by such Party in accordance with law or any other provisions hereof and no
exercise by a Party of any of its rights, powers and remedies shall preclude its exercise of its other rights, powers
and remedies.
No failure or delay by a Party in exercising any right, power or remedy under this Agreement or laws (hereinafter
the “Party’s Rights”) shall result in a waiver of such right, and no single or partial waiver by a Party of the
Party’s Rights shall preclude such Party from exercising such rights in any other way or exercising the remaining
part of the Party’s Rights. The Parties shall, via negotiation in good faith, endeavor to replace those invalid,
illegal or unenforceable provisions with provisions that permitted by laws and effective to the most extent that the
Parties expect, while such effective provisions and those invalid, illegal or unenforceable provisions shall be alike
as much as possible in the economic effects.
The section headings herein are inserted for convenience of reference only and shall in no event be used in or
affect the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent of any other provisions hereof, and if at any
time any one or more provisions hereof become invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof shall not be affected thereby.
14.10
Any amendments or supplements to this Agreement shall be made in writing and except where the Pledgee
assigns its rights hereunder in accordance with Clause 14.1, such amendments or supplements shall take effect
only when properly signed by the Parties hereto.
14.11
This Agreement shall be binding upon the legal successors of the Parties.
15
14.12
Concurrently with the execution of this Agreement, the Pledgors shall each execute a power of attorney
(hereinafter the “POA”) in the form as indicated in Schedule B, entrusting the nominee or any person designated
by the Pledgee to execute on its behalf in accordance with this Agreement any and all of legal documents as may
be required in order for the Pledgee to exercise its rights hereunder. Such POA shall be submitted to the Pledgee
for custody and may be presented by the Pledgee to relevant governmental authorities whenever necessary.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
16
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Yeelion Online Network Technology (Beijing) Co., Ltd.
/s/ Seal of Yeelion Online Network Technology (Beijing) Co.,
Ltd.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Beijing Kuwo Technology Co., Ltd.
/s/ Seal of Beijing Kuwo Technology Co., Ltd.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Wang Meiqi
Signed: /s/ Wang Meiqi
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Shi Lixue
Signed: /s/ Shi Lixue
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Linzhi Lichuang Information Technology Co., Ltd.
/s/ Seal of Linzhi Lichuang Information Technology Co., Ltd.
Schedule A
Company Name:
Registered Address:
Registered Capital:
Shareholding Structure:
Basic information of the Company
Beijing Kuwo Technology Co., Ltd.
B-207-161, 2/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
RMB 26,068,822 Yuan
#
1
2
3
Shareholder’s Name
Wang Meiqi
Shi Lixue
Linzhi Lichuang Information
Technology Co., Ltd.
Identification No. /
Registration No.
[ ]
[ ]
91540400MA6T10ME4F
Registered
Capital
6,000,000
4,000,000
16,068,822
Shareholding
Percentage
23.02%
15.34%
61.64%
26,068,822
100.00%
Schedule B
Power of Attorney
The undersigned,___________, hereby irrevocably authorize PRC Identification No.: , as my trustee or authorized representative for
signature, to sign all necessary or useful legal documents with respect to the fulfilling of my obligations under the Equity Interest Pledge Agreement
entered into by and among myself, Yeelion Online Network Technology (Beijing) Co., Ltd. and Beijing Kuwo Technology Co., Ltd. on ______,
20__ with respect to equity interests of Beijing Kuwo Technology Co., Ltd..
Name
By:
Date:
Exhibit 4.49
Exclusive Option Agreement
Of
Beijing Kuwo Technology Co., Ltd.
By and Among
All the shareholders listed in Schedule A
Yeelion Online Network Technology (Beijing) Co., Ltd.
And
Beijing Kuwo Technology Co., Ltd.
October 1, 2019
Exclusive Option Agreement
This Exclusive Option Agreement (the “Agreement”) is entered into on October 1, 2019, by and among the following Parties:
1.
2.
3.
All the shareholders listed in Schedule A, of which the information see Schedule A.
(All the shareholders listed in Schedule A separately and collectively referred to as the “Existing Shareholders”);
Yeelion Online Network Technology (Beijing) Co., Ltd. (the “WFOE”)
Registered address: B-521-B062, 5/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
Beijing Kuwo Technology Co., Ltd. (the “Company”)
Registered address: B-207-161, 2/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
(In this Agreement, each Party shall be referred to as a “Party” respectively or as the “Parties” collectively.)
Whereas:
(1) Mr. Xie Guomin and Mr. Shi Lixue as the transferees respectively entered into a share transfer agreement with other related
parties (collectively the “Transferors”) on March 31, 2016. In accordance with the debt arrangements of assignment and
offsetting by relevant parties, the share transfer price RMB 10,000,000 should pay by Mr. Xie Guomin and Mr. Shi Lixue to
the WFOE should be deemed as the loan (the “Loan”), which was lent to Mr. Xie Guomin and Mr. Shi Lixue by the
WFOE.
(2)
In order to further clarify the rights and obligations of the borrowers and the lender, Mr. Xie Guomin and Mr. Shi Lixue
entered into a loan agreement (the “Loan Agreement”) with the WFOE on July 12, 2016. Mr. Xie Guomin, Ms. Wang
Meiqi and the WFOE entered into a share transfer agreement (the “Share Transfer Agreement”) and a debt assignment
and offset agreement (the “Debt Assignment and Offset Agreement”) on August 20, 2019, pursuant to which Mr. Xie
Guomin transferred the registered capital of the company held by him to Ms. Wang Meiqi. All parties thereof agreed that
the loan that the WFOE lent to Mr. Xie Guomin shall offset the share transfer payment that Ms. Wang Meiqi should pay to
Mr. Xie Guomin. Ms. Wang Meiqi shall inherit all rights and obligations of Mr. Xie Guomin in the Loan Agreement.
(3) Linzhi Lichuang Information Technology Co., Ltd. entered into a subscription agreement to subscribe the Company’s
increased registered capital on July 12, 2016.
1
(4) The Existing Shareholders currently are registered shareholders of the Company, lawfully and legally holding all the equity
of the Company. As of the date of this Agreement, the amount of contribution of each Existing Shareholder in the registered
capital is shown in Schedule A.
(5) The Existing Shareholders intends to transfer all the equity to the WFOE and/or any other entity or individual designated by
the WFOE without prejudice to the PRC law, and the WFOE intends to accept such transfer.
(6) The Company intends to transfer its assets to the WFOE and/or any other entity or individual designated by the WFOE
without prejudice to the PRC law, and the WFOE intends to accept such assets.
(7) The Existing Shareholders and the Company agree to irrevocably grant the exclusive Equity Call Option and Assets Call
Option to the WFOE in order to complete the equity and assets transfer mentioned above. Without prejudice to the PRC law
and according to the Equity Call Option and Assets Call Option, the Existing Shareholders or the Company shall transfer
the Option Equity Interest and the Company Assets (defined as follows) to the WFOE and/or any other entity or individual
designated by the WFOE according to this Agreement at the request of the WFOE.
(8) The Company agrees that the Existing Shareholders grant the Equity Call Option to the WFOE pursuant to this Agreement.
(9) The Existing Shareholders agree that the Company grants Assets Call Option to the WFOE pursuant to this Agreement.
Therefore, the Parties hereby agree as follows upon mutual negotiations:
Article 1 Definition
1.1 Unless otherwise required in the context, the following terms in this Agreement shall have the following meanings:
“PRC Law”
means the then effective laws, administrative regulations, administrative rules, local
regulations, judicial interpretations and other binding regulatory documents of the
PRC (excluding Hong Kong Special Administrative Region, Macao Special
Administrative Region and Taiwan Region).
2
“Equity Call Option”
means the option to purchase the equity interests in the Company granted by the
Existing Shareholders to the WFOE pursuant to the terms and conditions of this
Agreement.
“Assets Call Option”
means the option to purchase any assets of the Company granted by the Company to
the WFOE pursuant to the terms and conditions of this Agreement.
“Option Equity Interest”
means, in respect of each Existing Shareholder, the equity interest owned by him or
her (including the additional equity interest obtained by him or her due to capital
increase, share transfer or any other reasons) in the Registered Capital (defined as
follows) of the Company, and in respect of all the Existing Shareholders, the 100%
equity interests in the Registered Capital of the Company.
“Registered Capital of the
Company”
means the registered capital of the Company as of the signing date of this
Agreement, i.e., RMB26,068,822, and includes any increased registered capital
within the term of this Agreement.
“Transfer Equity Interests”
“Transfer Assets”
means the equity interests which the WFOE or its designated entity or individual is
entitled to purchase from all Existing Shareholders or any Existing Shareholder at
the request of the WFOE upon its exercise of the Equity Call Option in accordance
with Section 3 hereof, the amount of which may be all or part of the Option Equity
Interest and shall be determined by the WFOE at its sole discretion in accordance
with the then effective PRC Law and its commercial needs.
means the assets of the Company which the WFOE or its designated entity or
individual is entitled to purchase from the Company at the request of the WFOE
upon its exercise of the Assets Call Option in accordance with Section 3 hereof, the
amount of which may be all or part of the assets of the Company and shall be
determined by the WFOE at its sole discretion in accordance with the then effective
PRC Law and its commercial needs.
3
“Exercise”
means the exercise of the Equity Call Option or Assets Call Option by the WFOE.
“Transfer Price”
“Operating Licenses”
“Company Assets”
“Material Agreement”
means the aggregate consideration payable to the Existing Shareholders or the
Company by the WFOE or its designated entity or individual for the Transfer Equity
Interests or the Transfer Assets in each Exercise.
means any approvals, permits, filings or registrations which are necessary for the
lawful and effective operation by the Company of all its businesses, including but
not limited to the Business License, the Audio & Video Service Permission, the Value-
added Telecommunication Service Business License, and other relevant licenses and
permits as required by the then effective PRC Law.
means all the tangible and intangible assets which the Company owns or is entitled
to use within the term of this Agreement, including but not limited to any fixed
assets, moveable assets and intellectual property, including trademarks, copyrights,
patents, proprietary technology, domain names and software use rights, etc.
means any agreement to which the Company is a party and which has material
impact on the businesses or the assets of the Company, including but not limited to
the Exclusive Technology Service Agreement entered into by and between the
Company and the WFOE on July 12, 2016 and other material agreements relating to
the business of the Company.
1.2 Any PRC Law referred to herein shall(cid:0)
(cid:0)1(cid:0)
(cid:0)2(cid:0)
include the amendments, changes, supplements and reenactments thereto, irrespective of whether they take effect
before or after the execution of this Agreement; and
include the references to other decisions, notices or regulations enacted in accordance therewith or which become
effective as a result thereof.
1.3 Unless otherwise specified herein, all references to article, clause, item or paragraph shall refer to the relevant part hereof.
4
Article 2 Grant of Equity Call Option and Assets Call Option
2.1. The Existing Shareholders hereby severally and jointly agree to irrevocably and unconditionally grant an exclusive Equity
Call Option to the WFOE, according to which the WFOE may, to the extent permitted under the PRC Law and subject to
the terms and conditions of this Agreement, request the Existing Shareholders to transfer the Option Equity Interest to the
WFOE or its designated entity or individual. The WFOE agrees to accept such Equity Call Option.
2.2. The Company hereby agrees to the grant of the Equity Call Option to the WFOE by the Existing Shareholders under
Section 2.1 and other provisions of this Agreement.
2.3. The Company hereby agrees to irrevocably and unconditionally grant an exclusive Assets Call Option to the WFOE,
according to which the WFOE may, to the extent permitted under the PRC Law and subject to the terms and conditions of
this Agreement, request the Company to transfer all or any of the Company Assets to the WFOE or its designated entity or
individual. The WFOE agrees to accept such Assets Call Option.
2.4. The Existing Shareholders hereby severally and jointly agree to the grant of the Assets Call Option to the WFOE by the
Company under Section 2.3 and other provisions of this Agreement.
Article 3 Manner of Exercise of Options
3.1.
3.2.
3.3.
Subject to the terms and conditions of this Agreement and to the extent permitted under the PRC Law, the WFOE shall
have the sole discretion in deciding the schedule, manner and times of its Exercise.
Subject to the terms and conditions of this Agreement and to the extent permitted by the then effective PRC Law, the
WFOE is entitled to request the Existing Shareholders to transfer all or part of the equity interests in the Company to the
WFOE or its designated entity or individual at any time.
Subject to the terms and conditions of this Agreement and to the extent permitted by the then effective PRC Law, the
WFOE is entitled to request the Company to transfer all or part of its assets to the WFOE or its designated entity or
individual at any time.
5
3.4.
3.5.
In respect of the Equity Call Option, the WFOE has discretion to determine the amount of the Transfer Equity Interests to
be transferred to the WFOE and/or its designated entity or individual from the Existing Shareholders in each Exercise, and
the Existing Shareholders shall transfer the Transfer Equity Interests to the WFOE and/or its designated entity or individual
respectively according to the amount as requested by the WFOE. The WFOE and/or its designated entity or individual
shall pay the Transfer Price to the Existing Shareholders for transfer of the Transfer Equity Interests in each Exercise.
In respect of the Assets Call Option, the WFOE has discretion to determine the specific Transfer Assets to be transferred to
the WFOE and/or its designated entity or individual from the Company, and the Company shall transfer the Transfer
Assets to the WFOE and/or its designated entity or individual at the request of the WFOE. The WFOE and/or its
designated entity or individual shall pay the Transfer Price to the Company for transfer of the Transfer Assets in each
Exercise.
3.6. Upon each Exercise, the WFOE may request transfer of all or any part of the Transfer Equity Interests or the Transfer
Assets to itself or any third party designated by it.
3.7. Upon its decision of each Exercise, the WFOE shall issue a notice to the Existing Shareholders or the Company, as case
may be, on the exercise of the Equity Call Option or the Assets Call Option (the “Exercise Notice”, the form of which is
attached in Schedule B and Schedule C hereto). The Existing Shareholders or the Company shall, upon receipt of the
Exercise Notice, promptly transfer all the Transfer Equity Interests or the Transfer Assets to the WFOE and/or its
designated entity or individual according to the Exercise Notice and in such manner as provided under Section 3.4 or
Section 3.5 of this Agreement.
Article 4 Transfer Price
4.1
In respect of the Equity Call Option, in each Exercise, the Transfer Price that WFOE or its designated entity or individual
shall pay to the respective Existing Shareholders shall be the amount in proportion to their respective contributions to the
Registered Capital of the Company. For the avoidance of doubt, WFOE may, in accordance with Article 4.3 of the Loan
Agreement, pay to Ms. Wang Meiqi and/or Mr. Shi Lixue relevant Transfer Price. Under this circumstance, without
prejudice to the applicable law, WFOE shall purchase or designate a third party to purchase the equity held by the
respective Existing Shareholders at the Transfer Price equal to the required repayment amount. The proportion of the
equity purchased by WFOE accounting for the equity then held by the respective Existing Shareholders shall be the same
as the proportion of the required repayment amount accounting for the total outstanding amount of the respective Existing
Shareholders under the Loan Agreement.
6
4.2
4.3
In respect of the Assets Call Option, in each Exercise, WFOE or its designated entity or individual shall pay the Company
the net book value of the relevant assets. Under this circumstance, without prejudice to the applicable law, all the purchase
price obtained by the Company shall be used as the directional dividends paid to Ms. Wang Meiqi and Mr. Shi
Lixue. Then Ms. Wang Meiqi and Mr. Shi Lixue shall use all these dividends to repay the loan under the Loan
Agreement. The proportion of the purchased assets accounting for the total assets of the Company shall be the same as the
proportion of the required repayment amount accounting for the total outstanding amount of the respective Existing
Shareholders under the Loan Agreement.
If relevant PRC Law then applicable to the WFOE’s Exercise of Equity Call Option or Assets Call Option requires to make
assess evaluation of the equity or assets to be transferred or makes restrictions on the transfer price of the equity or assets
to be transferred, WFOE, the Existing Shareholders and the Company agree that the Transfer Price shall be the lowest
price permitted by the PRC Law. If the lowest price permitted by the PRC Law is higher than the corresponding capital
contribution of the transfer equity and/or the net book value of the purchased assets, the Existing Shareholders and/or the
Company shall pay all the remaining of the excess amount to WFOE after deducting all the taxes and fees required by the
applicable PRC Law.
5.1. The Existing Shareholders hereby severally and not jointly represent and warrant as follows, except for the disclosure of
Article 5 Representations and Warranties
Schedule A:
5.1.1
If the Existing Shareholder is a natural person, he/she is a PRC citizen with full capacity, having full and
independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act as an
independent legal subject of litigation. If the Existing Shareholder is not a natural person, it is a legal entity
validly established and lawfully existing under the laws of the PRC, having full and independent legal status
and legal capacity to execute, deliver and perform this Agreement, and may act as an independent legal
subject of litigation.
5.1.2
Each of the Existing Shareholders has full power and authority to execute, deliver and perform this
Agreement and all the other documents to be entered into by them which are related to the transaction
contemplated hereunder, as well as to consummate the transaction hereunder.
7
5.1.3
5.1.4
This Agreement is duly and lawfully executed and delivered by the Existing Shareholders and shall constitute
legal, valid and binding obligations to them, which shall be enforceable against them in accordance with the
terms herein.
The Existing Shareholders are the registered legal owners of the Option Equity Interest as of the date hereof,
and the Option Equity Interest is free and clear of any liens, pledges, claims, other encumbrances or third
party interests, except for the pledge rights created by the Equity Interest Pledge Agreements dated October 1,
2019, and the proxy rights created by the Voting Trust Agreement dated October 1, 2019, among the
Company, the WFOE and the respective Existing Shareholders. Pursuant to this Agreement, the WFOE
and/or its designated entity or individual can, upon the Exercise, obtain ownership of the Transfer Equity
Interests free and clear of any liens, pledges, claims, other encumbrances or third party right.
5.2. The Company hereby represents and warrants as follows:
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
The Company is a limited liability company duly registered and validly existing under PRC Law with an
independent corporate legal person status. The Company has full and independent legal status and legal
capacity to execute, deliver and perform this Agreement and can act as an independent party in any lawsuits.
The Company has full power and authority to execute, deliver and perform this Agreement and all other
documents relating to the transaction contemplated herein which are to be executed by it, and it has full
power and authority to consummate the transaction contemplated herein.
This Agreement is duly and lawfully executed and delivered by the Company and shall constitute legal, valid
and binding obligations to it.
The Company Assets are free and clear of any liens, mortgages, claims, other encumbrances or third party
rights. Pursuant to this Agreement, upon the Exercise, the WFOE and/or any of its designated entity or
individual is/are entitled to the good ownership of the Company Assets free from any liens, mortgages,
claims, any other security interests and third party rights.
The Existing Shareholders are the registered legal owners of the Option Equity Interest as of the date hereof,
aggregately holding 100% equity of the Company. The Option Equity Interest is free and clear of any liens,
pledges, claims, other encumbrances or third party interests, except for the pledge rights created by the Equity
Interest Pledge Agreements dated
8
October 1, 2019, and the proxy rights created by the Voting Trust Agreement dated October 1, 2019, among
the Company, the WFOE and the respective Existing Shareholders. Pursuant to this Agreement, the WFOE
and/or its designated entity or individual can, upon the Exercise, obtain ownership of the Transfer Equity
Interests free and clear of any liens, pledges, claims, other encumbrances or third party right.
5.3. The WFOE hereby represents and warrants as follows:
5.3.1
5.3.2
5.3.3
It is a wholly foreign-owned enterprise duly incorporated and validly existing under PRC Law with an
independent legal person status, and has full and independent legal status and legal capacity to execute,
deliver and perform this Agreement and can act as an independent party in any lawsuits.
It has full power and authority to execute, deliver and perform this Agreement and all other documents
relating to the transaction contemplated herein which are to be executed to it, and it has full power and
authority to consummate the transaction contemplated herein.
This Agreement is duly and lawfully executed and delivered by WFOE and shall constitute legal, valid and
binding obligations to it.
Each of Existing Shareholders hereby severally and not jointly undertakes as follows:
Article 6 Undertakings by the Existing Shareholders
6.1 During the term of this Agreement, without prior written consent of the WFOE, each of Existing Shareholders:
6.1.1
6.1.2
6.1.3
Shall not transfer or otherwise dispose of any Option Equity Interest or create any encumbrances or third
party interests upon any Option Equity Interest.
Shall not increase or reduce the Registered Capital of the Company, or cause or agree to the merger of the
Company with any other entities;
Shall not dispose of, or procure the management of the Company to dispose of, any material Company Assets
or create any encumbrances or third party interests upon any Company Assets;
9
6.1.4
6.1.5
6.1.6
6.1.7
6.1.8
6.1.9
Shall not, and shall procure the management of the Company not to, terminate any Material Agreement to
which the Company is a party, or enter into any other agreements which are in conflict with the existing
Material Agreements;
Shall not appoint or dismiss any director, supervisor or any other management of the Company whom shall be
appointed or dismissed by the Existing Shareholders;
Shall not procure the Company to declare or distribute any distributable profits, dividends or other
distributions;
Shall not vote in favor of the Company's termination, liquidation or dissolution;
Shall not vote in favor of amending the association of the Company.
Shall not vote in favor of the Company to lend or borrow any loan, or provide guarantee or other forms of
security arrangements, or assume any material obligations except for those occur during the ordinary course
of business.
6.2 During the term of this Agreement, each of the Existing Shareholders shall not engage in any actions or omissions which
may affect the validity of the Operating Licenses.
6.3 Upon issuance of the Exercise Notice by the WFOE, each of Existing Shareholders:
6.3.1
Shall immediately convene shareholders’ meeting to adopt a resolution and take any other necessary actions,
to approve the transfer of all of the Transfer Equity Interests or Transfer Assets at the Transfer Price by the
Existing Shareholders or the Company to the WFOE and/or its designated entity or individual, as well as
waive his or her right of first refusal, if any;
10
6.3.2
Shall transfer all of the Transfer Equity Interests at the Transfer Price under the Article 4 to the WFOE and/or
its designated entity or individual by entering into an equity transfer agreement with the WFOE and/or its
designated entity or individual immediately, and at the request of the WFOE and subject to relevant laws and
regulations, provide necessary support to the WFOE (including provide and execute all relevant legal
documents, process all procedure for governmental approvals and registrations and assume all relevant
obligations) for acquisition of all the Transfer Equity Interests by the WFOE and/or its designated entity or
individual, free and clear of any legal defects, any encumbrances, third party interests, or any other
restrictions on the Transfer Equity Interests.
6.4
If the aggregated Transfer Price received by any of the Existing Shareholders from transfer of his or her Transfer Equity
Interests exceeds his or her contribution to the Registered Capital of the Company, or such Existing Shareholder receives
any profits, dividends or other distributions distributed by the Company, such Existing Shareholder agrees to waive the
excessive portion of the Transfer Price and any such profits, dividends or distributions (with tax and fees being deducted) to
the extent permitted by PRC Law, and the WFOE is entitled to such excessive portion of the Transfer Price and such profits,
dividends or distributions. The Existing Shareholders shall instruct relevant transferee or the Company to wire the above
gains to a bank account designated by the WFOE.
7.1 The Company undertakes as follows:
Article 7 Undertakings by the Company
7.1.1
7.1.2
7.1.3
In the event the execution and performance of this Agreement and the grant of the Equity Call Option or the
Assets Call Option hereunder is subject to any third party’s consents, approvals, waivers, licenses, or any
approvals, permits, waivers, registrations or filings from or with governmental authorities (as required by the
laws), the Company shall make efforts to assist in the above procedure.
Without prior written consent of the WFOE, the Company shall not assist or permit the Existing Shareholders
to transfer or dispose of any Option Equity Interest or create any encumbrances or other third party interest
upon the Option Equity Interest.
Without prior written consent of the WFOE, the Company shall not transfer or otherwise dispose of any
material Company Assets or create any encumbrances or other third party interest upon any Company Assets.
11
7.1.4
It shall not take or allow any acts or actions which could have adverse effect upon the interests of the WFOE
under this Agreement, including but not limited to any acts or actions as restricted under Section 6.1 hereof.
7.2 The Company undertakes that upon issuance of the Exercise Notice by the WFOE:
7.2.1
7.2.2
It shall immediately procure the Existing Shareholders to convene shareholders’ meeting to adopt a resolution
and take any other necessary actions, to approve the transfer of all of the Transfer Assets at the Transfer Price
by the Company to the WFOE and/or its designated entity or individual;
It shall transfer all of the Transfer Assets at the Transfer Price to the WFOE and/or its designated entity or
individual by entering into an assets transfer agreement with the WFOE and/or its designated entity or
individual immediately, and at the request of the WFOE and subject to relevant laws and regulations, procure
the Existing Shareholders to provide necessary support to the WFOE (including provide and execute all
relevant legal documents, process all procedure for governmental approvals and registrations and assume all
relevant obligations) for acquisition of all the Transfer Assets by the WFOE and/or its designated entity or
individual, free and clear of any legal defects, any encumbrances, third party interests, or any other
restrictions on the Company Assets.
Article 8 Confidentiality
8.1 Notwithstanding the termination of this Agreement, each Party shall keep confidential all of the business secrets,
proprietary information, customer information as well as any other information of confidential nature it receives from the
other Parties in connection with the execution and performance of this Agreement (collectively referred to as the
“Confidential Information”). Without prior written consent of the disclosing party of the Confidential Information or
unless required by relevant laws and regulations or requirements of the stock exchange on which a Party’s affiliate is listed,
any Party receiving the Confidential Information shall not disclose any such Confidential Information to any other third
party, or use any such Confidential Information directly or indirectly for any purpose other than for the performance of this
Agreement.
8.2 The following information shall not constitute the Confidential Information:
(a) Any information which, as shown by written evidence, has previously been known to the receiving Party by way of
legal means;
12
(b) Any information which enters the public domain other than as a result of a fault of the receiving Party; or
(c) Any information lawfully acquired by the receiving Party from another source subsequent to the receipt of relevant
information.
8.3 The receiving party may disclose Confidential Information to its relevant employees, agents or professionals engaged by it,
provided that such receiving party shall ensure that the aforesaid persons are subject to the terms and conditions of this
Agreement and the receiving party shall be liable for any liabilities arising from breach of the terms and conditions hereof
by the aforesaid persons.
8.4 Notwithstanding any other provisions herein, the validity of this Section 8 shall survive the termination of this Agreement.
Article 9 Term of This Agreement
This Agreement shall become effective as of the date of the execution by the Parties. This Agreement is the final agreement
reached between the Parties on the exclusive option and relevant issues which shall supersedes any and all prior consultations,
negotiations or discussions, representations, memorandum, agreements or other documents (including but not limited to the
Exclusive Option Agreement entered into by and among the Company, the WFOE and the Existing Shareholders (excluding Ms.
Wang Meiqi) on July 12, 2016). In case of any conflict, contradiction or inconsistency, this Agreement shall prevail. This
Agreement shall remain valid until all of the Option Equity Interest and the Company Assets have been lawfully transferred to
the WFOE and/or its designated entity or individual in accordance with the provisions hereof.
Article 10 Notice
10.1
10.2
Any notice, request, demand and other correspondences as required by or made in accordance with this Agreement
shall be delivered to the relevant Party in writing.
The above notice or other correspondences shall be deemed to have been delivered upon delivery when it is
transmitted by facsimile or telex, or upon handed over to the receiver when it is delivered in person, or on the fifth
(5) day after posting when it is delivered by mail, or on the date of receipt by the recipient if by express
delivery. However, if the notice is returned due to the recipient’s fault or the recipient’s refusal to sign, the notice is
deemed delivered on the date when the notice is returned. In case of simultaneous delivery in any of the above
forms, the earliest deemed time of delivery shall prevail.
13
11.1
11.2
12.1
12.2
Article 11 Default Liabilities
The Parties agree and acknowledge that if any Party (the “Defaulting Party”) breaches any provision hereunder, or
fails to perform or delays in performing any obligations hereunder, such breach, failure or delay shall constitute a
default hereunder (the “Default”) and that in such event, the non-defaulting Party/Parties (the “Non-Defaulting
Party”) shall have the right to demand the Defaulting Party to cure such Default or take remedial measures within a
reasonable time. If the Defaulting Party fails to cure such Default or take remedial measures with such reasonable
time or within ten (10) days of the Non-Defaulting Party notifying the Defaulting Party in writing and requesting it
to cure such Default, the Non-Defaulting Party may elect, in its (their) discretion, to do the following:
11.1.1
11.1.2
if the Defaulting Party is any of the Existing Shareholders or the Company, the WFOE shall have the
right to terminate this Agreement and claim the Defaulting Party to indemnify the damages. For the
avoidance of doubt, the responsibility of Existing Shareholders or the responsibility between the
Existing Shareholders and the Company is independent, and any Existing Shareholder does not bear
any joint liability for any obligation or responsibility of the other Existing Shareholders or Company;
if the Defaulting Party is the WFOE, the Non-defaulting Party has right to claim the Defaulting Party
to indemnify the damages, provided that in no event shall the Non-defaulting Party have the right to
terminate or rescind this Agreement, except that the contrary is provided by the law.
Notwithstanding any other provisions herein, the effectiveness of this Article shall survive the suspension or
termination of this Agreement.
Article 12 Miscellaneous Provisions
This Agreement is made in Chinese in five (5) originals with each Party hereof retaining one (1) copy.
The execution, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be
governed by PRC laws.
14
12.3
Dispute Resolutions
(a) Any dispute arising out of or in relation to this Agreement, the Parties shall first resolve the dispute through
friendly negotiation. The requesting party shall notify the other party of the dispute and explain the nature of
the dispute by overloading the date notice. If the Parties fail to reach an agreement regarding such a dispute
within thirty (30) days of its occurrence, any Party is entitled to submit such dispute to the China International
Economic and Trade Arbitration Commission (the “CIETAC”) for arbitration in Beijing in accordance with
the then effective arbitration rules thereof and the arbitration award shall be final and binding.
(b) The arbitration tribunal shall consist of three (3) arbitrators, of whom the two parties have the right to appoint
one (1) each. The third arbitrator (3rd) should be appointed jointly by the two sides. If the party shall not be
able to reach an agreement on the joint designation of the third arbitrator, he/she should be appointed by the
director of the Arbitration Committee. The third arbitrator shall be the chief arbitrator of the arbitration
tribunal.
(c)
In making an arbitration award, the arbitrator shall take into account the intention of the Parties which may be
determined in accordance with this Agreement.
(d) The arbitration award made according to the Article12.3 in writing should be final and binding. The parties
shall do their utmost to ensure that any such arbitration award is duly executed and to provide any necessary
assistance thereto.
(e) The aforesaid provisions of the Article 12.3 shall not prevent the party concerned from applying for any pre
suit protection or prohibition remedy available for any reason, including but not limited to the enforcement of
subsequent enforcement of the arbitration tribunal.
Any rights, powers and remedies entitled to any Party by any provision herein shall not preclude any other rights,
powers and remedies entitled to such Party in accordance with laws and other provisions under this Agreement, and
a Party’s exercise of any of its rights, powers and remedies shall not preclude its exercise of other rights, powers and
remedies.
No failure or delay by a Party to exercise any of its rights, powers and remedies hereunder or in accordance with
laws (the “Rights”) shall be construed as a waiver of such Rights, and the waiver of any single or partial exercise of
the Rights shall not preclude its exercise of such Rights in any other way or its exercise of other Rights.
15
12.4
12.5
12.6
12.7
12.8
12.9
The headings of the sections herein are for reference only, and in no circumstances shall such headings be used in or
affect the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from other provisions. If at any time one or
several provisions herein shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability
of other provisions herein shall not be affected thereby.
This Agreement, upon its execution, supersedes any other legal documents executed by the Parties with respect to
the same subject hereof. Any amendments or supplements to this Agreement shall be in writing and shall become
effective upon duly execution by the Parties hereto.
No Party shall assign any of its rights and/or obligations hereunder to any third parties without prior written consent
from other Parties.
12.10
This Agreement shall be binding on the legal transferees or successors of the Parties.
[The remainder of this page is intentionally left blank]
16
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Yeelion Online Network Technology (Beijing) Co., Ltd.
/s/ Seal of Yeelion Online Network Technology (Beijing) Co., Ltd.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Beijing Kuwo Technology Co., Ltd.
/s/ Seal of Beijing Kuwo Technology Co., Ltd.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Wang Meiqi
Signed: /s/ Wang Meiqi
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Shi Lixue
Signed: /s/ Shi Lixue
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Linzhi Lichuang Information Technology Co., Ltd.
/s/ Seal of Linzhi Lichuang Information Technology Co., Ltd.
Schedule A
Company Name:
Registered Address:
Registered Capital:
Shareholding Structure:
#
1
2
3
Shareholder’s Name
Wang Meiqi
Shi Lixue
Linzhi Lichuang
Information Technology
Co., Ltd.
Basic information of the Company
Beijing Kuwo Technology Co., Ltd.
B-207-161, 2/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
RMB 26,068,822 Yuan
Identification No. /
Registration No.
[ ]
[ ]
91540400MA6T10ME4F
Registered Capital
6,000,000
4,000,000
16,068,822
Shareholding
Percentage
23.02%
15.34%
61.64%
26,068,822
100.00%
Schedule B
To: [name of the Existing Shareholders]
Form of the Exercise Notice
In view of the Exclusive Option Agreement dated as of October 1, 2019 (the “Option Agreement”) entered into by and among
the undersigned, Beijing Kuwo Technology Co., Ltd. (“the Company”) and [name of the Existing Shareholders], pursuant to
which you shall, upon request by us and to the extent permitted by the PRC laws and regulations, transfer the equity interests of
the Company held by you to us or any third party designated by us.
Therefore, we hereby issue this notice to you as follows:
We hereby request the exercise of the Equity Call Option under the Option Agreement and that the [*]% equity interests of the
Company held by you (the “Proposed Transferred Equity”) be
the designated
entity/individual]. You are required to promptly transfer all the Proposed Transferred Equity to us/ [name of the designated
entity/individual] upon receipt of this notice in accordance with the terms of the Option Agreement.
to us/ [name of
transferred
Yours faithfully,
Yeelion Online Network Technology (Beijing) Co., Ltd.
/s/ Seal of Yeelion Online Network Technology (Beijing) Co., Ltd.
Authorized Representative:
Date:
Schedule C
To: Beijing Kuwo Technology Co., Ltd. (the “Company”)
Form of the Exercise Notice
In view of the Exclusive Option Agreement dated as of October 1, 2019 (the “Option Agreement”) entered into by and among
the undersigned, the Company and all the shareholders of the Company at that time, pursuant to which the Company shall, upon
request by us and to the extent permitted by the PRC laws and regulations, transfer the assets of the Company to us or any third
party designated by us.
Therefore, we hereby issue this notice to the Company as follows:
We hereby request the exercise of the Assets Call Option under the Option Agreement and that the assets of the Company as
listed in the schedule attached hereto (the “Proposed Transferred Assets”) be transferred to us/ [name of the designated
eneity/individual]. You are required to promptly transfer all the Proposed Transferred Assets to us/ [name of the designated
entity/individual] upon receipt of this notice in accordance with the terms of the Option Agreement.
Yours faithfully,
Yeelion Online Network Technology (Beijing) Co., Ltd.
/s/ Seal of Yeelion Online Network Technology (Beijing) Co., Ltd.
Authorized Representative:
Date:
Exhibit 4.51
Voting Trust Agreement
Of
Beijing Kuwo Technology Co., Ltd.
By and Among
All the shareholders listed in Schedule A
Yeelion Online Network Technology (Beijing) Co., Ltd.
and
Beijing Kuwo Technology Co., Ltd.
October 1, 2019
Voting Trust Agreement
This Voting Trust Agreement (the “Agreement”) is entered into on October 1, 2019 by and among the following Parties:
1.
2.
3.
All the Shareholders Listed in Schedule A, of which the information please see Schedule A.
(All the shareholders listed in Schedule A separately and collectively referred to as the “Each of Shareholders”);
Yeelion Online Network Technology (Beijing) Co., Ltd. (the “WFOE”)
Registered address: B-521-B062, 5/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
Beijing Kuwo Technology Co., Ltd.(the “Company”)
Registered address: B-207-161, 2/F, Building 2, 1 Nongda South Road, Haidian District, Beijing
(In this Agreement, each Party shall be referred to as a “Party” respectively or as the “Parties” collectively.)
Whereas:
1.
Each of Shareholders is the shareholder of the Company and hold 100% equity interests of the Company.
2.
Each of Shareholders intend to respectively entrust the persons designated by the WFOE to exercise the voting rights they
hold in the Company and the WFOE wishes to accept such entrustment through its designated persons.
The Parties agree as follows through friendly negotiation:
Article 1 Voting Rights Entrustment
1.1
Each of Shareholders hereby irrevocably undertake to, after execution of this Agreement, respectively sign the power of
attorney according to the substance and form set forth in Schedule B hereof, under which the person (the “Trustee”) then
designated by the WFOE shall have the power and authority to exercise the following rights respectively granted to Each
of Shareholders as the shareholders of the Company according to the Article of Association of the Company (the
“Entrusted Rights”):
(1)
proposing to convene or attending shareholder meetings of the Company as the proxy of the Each of Shareholders,
according to the Article of Association;
1
(2)
exercising the voting rights on behalf of the Each of Shareholder in respect of all matters subject to discussion and
resolution at the shareholder meetings, including but not limited to the appointment and election of directors and
other senior management members who should be appointed by the shareholders;
(3)
other voting rights (including any other voting rights of shareholders conferred after the amendment of the Article of
Association) vested in shareholders under the Articles of Association of the Company.
The precondition of the above authorization and entrustment is that the Trustee is a PRC citizen and the WFOE consents to
such authorization and entrustment. When and only when a written notice is issued by the WFOE to Each of Shareholders
with respect to the removal of the Trustee, Each of Shareholders shall immediately revoke the entrustment to the existing
Trustee hereunder, and entrust any other PRC citizen then designated by the WFOE to exercise the Entrusted Rights in
accordance with this Agreement, and the new power of attorney shall supersede the previous one once it is executed.
Except for the above circumstances, Each of Shareholders shall not revoke the authorization and entrustment to the
Trustee.
The Trustee shall perform the entrusted obligation lawfully with diligence and duty of care within the authorization scope
provided in this Agreement. Each of Shareholders shall accept and assume relevant liabilities for any legal consequences
arising out of the exercise of the aforementioned Entrusted Rights.
Each of Shareholders hereby acknowledge that the Trustee is not required to solicit the opinions of Each of Shareholders
before exercising the Entrusted Rights. Nevertheless, the Trustee shall immediately notify Each of Shareholders after any
resolution or proposal for convening an interim shareholder meeting is made.
Article 2 Right of Information
For the purpose of exercising the Entrusted Rights under this Agreement, the Trustee shall have the right to understand the
operation, businesses, clients, financial affairs, employees of the Company and have access to relevant materials, while
Each of Shareholders and the Company shall provide sufficient cooperation in this regard.
1.2
1.3
2.1
2
Article 3 Exercise of Entrusted Rights
3.1
3.2
4.1
4.2
Each of Shareholders shall provide sufficient assistance to the Trustee for his or her exercise of the Entrusted Rights,
including prompt execution of the resolutions of the shareholders’ meeting made by the Trustee or other relevant legal
documents when necessary (e.g., to satisfy the document submission requirements for the approval of, registration or filing
with governmental authorities).
If at any time within the term of this Agreement, the entrustment or exercise of the Entrusted Rights hereunder is
unenforceable for any reason (except for the default by Each of Shareholders or the Company), the Parties shall
immediately seek the alternative plan which is most similar to the unenforceable provision and, if necessary, enter into
supplementary agreement to amend or adjust the provisions herein, so as to ensure the fulfilment of the purposes hereof.
Article 4 Exemption and Indemnification
The Parties acknowledge that in no event shall the WFOE be liable to or be required to compensate financially or in any
other aspect, any other party or any third party for any exercise of the Entrusted Rights by the person designated by the
WFOE.
Each of Shareholders and the Company agree to hold the WFOE harmless and compensate the WFOE for all losses
suffered or likely to suffered in connection with designating the Trustee to exercise the Entrusted Rights, including but not
limited to, any loss resulting from any litigation, demand, arbitration or claim initiated by any third party, and any loss
resulting from administrative investigation or penalty by governmental authorities. Nevertheless, losses suffered as a result
of the intentional misconduct or gross negligence of the Trustee shall not be indemnified.
Article 5 Representations and Warranties
5.1
Each of Shareholders severally and not jointly represents and warrants as follow, except for the disclosure of Schedule A:
5.1.1
If the shareholder is a natural person, he/she is a PRC citizen with full capacity, have full and independent
legal status and legal capacity to execute, deliver and perform this Agreement, and may act as an independent
party in any lawsuit. If the shareholder is not a natural person, the shareholder shall promise and undertake
that it is a limited liability company legally established and validly existing under the laws of the PRC and
has an independent legal personality; each of them has complete and independent legal status and legal
capacity to execute, deliver and perform this Agreement, and is independently a legal subject of litigation.
3
5.1.2
5.1.3
Each of them has full power and authority to execute and deliver this Agreement and all the other documents
to be entered into by them which are related to the transaction contemplated hereunder, as well as to
consummate the transaction hereunder. This Agreement shall be duly and lawfully executed and delivered by
Each of Shareholders and shall constitute their legal, valid and obligations, enforceable against them in
accordance with the provisions hereof.
Each of them is a legitimate shareholder of the Company recorded in the register of members at the time
when this Agreement came into effect and the authorized Rights are not subject to any third party
encumbrance, other than the encumbrance created under this Agreement as well as the Equity Interest Pledge
Agreement and the Exclusive Option Agreement concluded by and among Each of Shareholders, the
Company and the WFOE. In accordance with this Agreement, the Trustee may completely and fully exercise
the Entrusted Rights according to the Articles of Association of the Company then in effect.
5.2
The WFOE and the Company severally represents and warrants as follows:
5.2.1
5.2.2
Each of them is a limited liability company duly registered and legally existing under the laws of PRC where
it is registered and has independent legal personality; each of them has complete and independent legal status
and legal capacity to execute, deliver and perform this Agreement, and is independently a legal subject of
litigation.
Each of them has complete power and authorization to execute and deliver this Agreement and all other
documents that it will execute in relation to the transaction contemplated hereunder, and each of them has full
power and authorization to complete the transaction contemplated hereunder
5.3
The Company further represents and warrants as follows:
5.3.1
Each of Shareholders is legitimate shareholders of the Company recorded in the register of members at the
time when this Agreement came into effect and collectively hold 100% equity interests of the Company. The
authorized Rights are not subject to any third party encumbrance, other than the encumbrance created under
this Agreement as well as the Equity Interest Pledge Agreement and the Exclusive Option Agreement
concluded by and among each of Shareholders, the Company and the WFOE. In accordance with this
Agreement, the Trustee may completely and fully exercise the Entrusted Rights according to the Articles of
Association of the Company then in effect.
4
Article 6 Term of Agreement
6.1
6.2
6.3
6.4
6.5
Subject to Articles 6.3 and 6.4 of this Agreement, this Agreement shall take effect as of the date upon execution. The term
of this Agreement is twenty (20) years after becoming effective, unless all the Parties agree in writing to early termination
or this Agreement is terminated pursuant to Article 9.1 hereunder. This Agreement shall be automatically renewed for one
(1) year after the expiration of the term of this Agreement unless the WFOE informs all the other Parties not to renew
thirty (30) days in advance of the expiration of this Agreement, and so forth.
This Agreement is the final agreement reached between the Parties on the entrustment of voting rights and relevant issues
which shall supersedes any and all prior consultations, negotiations or discussions, representations, memorandum,
agreements or other documents (including but not limited to the Exclusive Option Agreement entered into by and among
the Company, the WFOE and relevant existing shareholders on July 12, 2016,) In case of any conflict, contradiction or
inconsistency, this Agreement shall prevail.
The Company or the WFOE shall, if necessary, within three (3) months prior to the expiration of their respective business
licenses, complete the approval and registration procedures for extending the business licenses to ensure the effectiveness
of this Agreement.
If any of Each of Shareholders transfers all equity interests it holds in the Company upon prior consent of the WFOE, such
Party shall cease to act as a party of this Agreement, but the rights and undertakings of the other Parties shall not be
adversely affected hereby.
If any of Each of Shareholders transfers all or part of the equity of the equity interests it holds in the Company upon prior
consent of the WFOE, unless otherwise informed by the WFOE in a written notice, the transferee or transferees agree to
inherit and fulfill such current shareholder or shareholders’ full responsibility, obligation and commitment under this
Agreement. The other shareholders shall ensure the transferred equity interests to satisfy the above conditions and refuse to
take any actions (including but not limit to pass relevant company resolutions, update the register of members and manage
the governmental approval and registration changing procedures) to facilitate or corporate the equity transfer otherwise.
5
Article 7 Notices
7.1 Any notice, request, demand and other correspondences required by or made in accordance with this Agreement shall be in
writing and delivered to the relevant Party.
7.2
8.1
The above notice or other correspondences shall be deemed as delivered (i) when it is transmitted by facsimile or telex, or
(ii) upon handed over to the receiver when it is delivered in person, or (iii) upon the fifth (5) day after posting when it is
delivered by mail, or (iv) on the date of receipt by the recipient if by express delivery. However, if the notice is returned
due to the recipient’s fault or the recipient’s refusal to sign, the notice is deemed delivered on the date when the notice is
returned. In case of simultaneous delivery in any of the above forms, the earliest deemed time of delivery shall prevail.
Article 8 Confidentiality
Regardless of whether this Agreement is terminated, each Party shall maintain strictly confidential all business secrets,
proprietary information, client information and all the other information of confidential nature, in relation to other Parties
and obtained during the formulation and performance of this Agreement (the “Confidential Information”). Each
receiving Party shall not disclose to any third party any Confidential Information, except with prior written consent of the
Party providing such information or in circumstances where such information must be disclosed to third parties according
to relevant laws, regulations or listing requirements. Each receiving Party shall not use or indirectly use any Confidential
Information except for the purpose of performing this Agreement.
8.2
Confidential Information does not include the following:
(a)
information that the receiving Party has previously known by lawful means, as supported by written evidence;
(b)
information that enters public domain without the receiving Party’s fault; or
(c)
information received by other lawful means after the receiving Party receive Confidential Information.
6
8.3
The receiving Party may disclose Confidential Information to its relevant employees, agents or professionals it employs,
but the receiving Party shall ensure that all such persons comply with relevant terms and conditions of this Agreement and
the receiving Party shall be responsible for any damages or consequences caused by the aforementioned persons in
violation of the relevant terms and conditions of this Agreement.
8.4 Notwithstanding other provisions of this Agreement, the effectiveness of this Article shall survive the termination of this
Agreement.
Article 9 Default Liability
9.1
The Parties agree and acknowledge that if any Party (the “Defaulting Party”) breaches any provision hereunder, or fails to
perform or delays in performing any obligations hereunder, such breach, failure or delay shall constitute a default
hereunder (the “Default”) and that in such event, the non-defaulting Party/Parties (the “Non-Defaulting Party”) shall
have the right to demand the Defaulting Party to cure such Default or take remedial measures within a reasonable time. If
the Defaulting Party fails to cure such Default or take remedial measures with such reasonable time or within ten (10) days
of the Non-Defaulting Party notifying the Defaulting Party in writing and requesting it to cure such Default, the Non-
Defaulting Party may elect, in its (their) discretion, to do the following:
9.1.1
9.1.2
If the Defaulting Party is any of Each of Shareholders or the Company, the WFOE shall have the right to
terminate this Agreement and claim the Defaulting Party to indemnify the damages. In order to avoid doubt,
the responsibility of shareholders or the responsibility between the shareholders and the Company is
independent, and the shareholders do not bear any joint liability for any obligation or responsibility of the
other existing shareholders or the Company.
If the Defaulting Party is the WFOE, the Non-defaulting Party has right to claim the Defaulting Party to
indemnify the damages, provided that in no event shall the Non-defaulting Party have the right to terminate or
rescind this Agreement, except that the contrary is provided by the law.
9.2 Notwithstanding any other provisions herein, the effectiveness of this Article shall survive the suspension or termination of
this Agreement.
7
Article 10 Miscellaneous Provisions
10.1 This Agreement is made in Chinese in five (5) originals with each Party hereof retaining one (1) copy. The Parties
specifically agree that the Agreement restored in PDF format sent by emails from the Parties is regarded as original and
can be used separately as evidence for the establishment and validation of this Agreement.
10.2 The execution, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed
by PRC laws.
10.3 Dispute Resolutions
(a) Any dispute arising out of or in relation to this Agreement, the Parties shall first resolve the dispute through friendly
negotiation. The requesting party shall notify the other party of the dispute and explain the nature of the dispute by
overloading the date notice. If the Parties fail to reach an agreement regarding such a dispute within thirty (30) days
of its occurrence, any Party is entitled to submit such dispute to the China International Economic and Trade
Arbitration Commission (the “CIETAC”) for arbitration in Beijing in accordance with the then effective arbitration
rules thereof and the arbitration award shall be final and binding.
(b) The arbitration tribunal shall consist of three (3) arbitrators, of whom the two parties have the right to appoint one (1)
each. The third arbitrator (3rd) should be appointed jointly by the two sides. If the party shall not be able to reach an
agreement on the joint designation of the third arbitrator, he/she should be appointed by the director of the
Arbitration Committee. The third arbitrator shall be the chief arbitrator of the arbitration tribunal.
(c)
In making an arbitration award, the arbitrator shall take into account the intention of the Parties which may be
determined in accordance with this Agreement.
(d) The arbitration award made according to the Article10.3 in writing should be final and binding. The parties shall do
their utmost to ensure that any such arbitration award is duly executed and to provide any necessary assistance
thereto.
(e) The aforesaid provisions of the Article 10.3 shall not prevent the party concerned from applying for any pre suit
protection or prohibition remedy available for any reason, including but not limited to the enforcement of subsequent
enforcement of the arbitration tribunal.
8
10.4 Any rights, powers and remedies entitled to any Party by any provision herein shall not preclude any other rights, powers
and remedies entitled to such Party in accordance with laws and other provisions under this Agreement, and a Party’s
exercise of any of its rights, powers and remedies shall not preclude its exercise of other rights, powers and remedies.
10.5 No failure or delay by a Party to exercise any of its rights, powers and remedies hereunder or in accordance with laws (the
“Rights”) shall be construed as a waiver of such Rights, and the waiver of any single or partial exercise of the Rights shall
not preclude its exercise of such Rights in any other way or its exercise of other Rights.
10.6 The headings of the sections herein are for reference only, and in no circumstances shall such headings be used in or affect
the interpretation of the provisions hereof.
10.7 Each provision contained herein shall be severable and independent from other provisions. If at any time one or several
provisions herein shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of other
provisions herein shall not be affected thereby.
10.8 Any amendments or supplements to this Agreement shall be in writing and shall become effective upon duly execution by
the Parties hereto.
10.9 No Party shall assign any of its rights and/or obligations hereunder to any third parties without prior written consent from
other Parties.
10.10 This Agreement shall be binding on the legal successors of the Parties.
[The remainder of this page is intentionally left blank]
9
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
Yeelion Online Network Technology (Beijing) Co., Ltd.
/s/ Seal of Yeelion Online Network Technology (Beijing) Co.,
Ltd.
Beijing Kuwo Technology Co., Ltd.
/s/ Seal of Beijing Kuwo Technology Co., Ltd.
Wang Meiqi
Signed: /s/ Wang Meiqi
Shi Lixue
Signed: /s/ Shi Lixue
Linzhi Lichuang Information Technology Co., Ltd.
/s/ Seal of Linzhi Lichuang Information Technology Co., Ltd.
Schedule A: List of Shareholders
#
1
2
3
Shareholder’s Name
Wang Meiqi
Shi Lixue
Linzhi Lichuang
Information Technology
Co., Ltd.
Total
Identification No. /
Registration No.
[ ]
[ ]
Registered Capital
6,000,000
4,000,000
Shareholding
Percentage
23.02%
15.34%
91540400MA6T10ME4F
16,068,822
61.64%
\
26,068,822
100.00%
Schedule B
Power of Attorney
This Power of Attorney (the “Power of Attorney”) is signed by ____________ (PRC Identification No.: ____________) on ______,
20__, to authorize ____________ (PRC Identification No.: ____________) (the “Trustee”).
The undersigned, Wang Meiqi, grants to the Trustee a general trust authorizing the Trustee to exercise, as my trustee and on my
behalf, the following rights enjoyed by me in the capacity as a shareholder of Beijing Kuwo Technology Co., Ltd. (the
“Company”)(cid:0)
(1)
(2)
proposing to convene or attending shareholder meetings of the Company pursuant to its article of association as my
proxy;
exercising the voting rights on behalf of myself in respect of all matters subject to discussion and resolution at the
shareholder meetings, including but not limited to the appointment and election of directors and other senior
management members who should be appointed by the shareholders;
(3)
other voting rights, including any other voting rights of shareholders conferred under the articles of association of the
Company after it has been amended.
I hereby irrevocably confirm that, unless Yeelion Online Network Technology (Beijing) Co., Ltd. (the “WFOE”) serves me a
written notice to replace the Trustee, this Power of Attorney will be valid until the expiry or early termination of the
Shareholders’ Voting Trust Agreement dated ______, 20__ by and among the WFOE, the Company and Each of Shareholders.
It is hereby authorized.
Name
By:
Date:
Debt Assignment and Offset Agreement
Exhibit 4.53
This Debt Assignment and Offset Agreement (the “Agreement”) is entered into on October 1, 2019 in Beijing, by and among
Xie Guomin (Passport No.: [ ]) (the “Transferor”), and Wang Meiqi (PRC Identification number: [ ]) (the
“Transferee”), and Yeelion Online Network Technology (Beijing) Co., Ltd.(cid:0)the “WFOE”(cid:0).
Whereas, Xie Guomin and Wang Meiqi entered into a share transfer Agreement on August 20, 2019 (the “Share Transfer
Agreement”), pursuant to which the Transferor shall transfer 23.02% equity interests held by him of Beijing Kuwo Technology
Co., Ltd. (the “VIE Company”) (the “Target Equity”, which equals to RMB 6,000,000 of the registered capital of the VIE
Company) to the Transferee. Pursuant to the Share Transfer Agreement, the consideration of the Target Equity is RMB 6,000,000
(the “Transfer Price”).
Whereas, the Transferor and Shi Lixue entered into a Loan Agreement with the WFOE on July 12, 2016 ( the “Loan
Agreement”), pursuant to which the WFOE lent RMB 6,000,000 (the “Loan”) to the Transferor.
In view of above, the parties agree as follows:
1.
2.
3.
The Transferor agrees to transfer its obligation to pay the Loan (including relevant interests) to the Transferee and the
Transferee agrees to inherit the obligation to pay the Loan (including relevant interests). As the consideration that the
Transferee agrees to inherit the obligation to pay the Loan (including relevant interests), the portion of the Transfer Price
equal to the Loan (including relevant interests) that the Transferee shall pay to the Transferor, shall be deemed paid. When
this Agreement comes into effect, the Transferee shall replace the Transferor and become the borrower under the Loan
Agreement and the Transferee shall pay the Loan (including relevant interests) pursuant to the Loan Agreement and fulfill
other obligations thereunder.
The WFOE, as the creditor of the Loan, agrees the assignment of the debt under Article 1 hereof.
This agreement shall come into force automatically upon the effective date of the Share Transfer Agreement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
1
The Signature Page of the Debt Assignment and Offset Agreement
Xie Guomin
Signed: /s/ Xie Guomin
Wang Meiqi
Signed: /s/ Wang Meiqi
Yeelion Online Network Technology (Beijing) Co., Ltd.
/s/ Seal of Yeelion Online Network Technology (Beijing) Co.,
Ltd.
Spouse Consent Letter
Exhibit 4.54
The undersigned, Xie Guoming, (Passport No.: [ ]), is the lawful spouse of Wang Meiqi (Identification No.: [ ], “My
Spouse”). I hereby unconditionally and irrevocably agree to the execution of the following documents by My Spouse as of
October 1, 2019 (the “Transaction Documents”) and the disposal of the equity interest of Beijing Kuwo Technology Co., Ltd.
(the “Domestic Company”) held by My Spouse and registered in her name pursuant to the provisions of the following
documents:
(1)
(2)
(3)
(4)
The equity interest pledge agreement by and among Wang Meiqi, Yeelion Online Network Technology (Beijing) Co., Ltd.
(the “WFOE”), the Domestic Company and other parties.
The exclusive option agreement by and among Wang Meiqi, the WFOE, the Domestic Company and other parties.
The voting trust agreement by and among Wang Meiqi, the WFOE, the Domestic Company and other parties; and
The debt assignment and offset agreement by and among myself, Wang Meiqi and the WFOE.
I hereby confirm that I do not enjoy any interests or rights in the Domestic Company and hereby undertake not to make any
assertions in respect of the equity interest of the Domestic Company held by My Spouse. I further confirm that, My Spouse can
perform the Transaction Documents and further amend or terminate the Transaction Documents or execute other agreements to
replace the Transaction Documents absent any authorization or consent from me.
I hereby undertake to execute all necessary documents, and take all necessary actions, to ensure appropriate performance of the
Transaction Documents (as amended from time to time).
Signature:
Date:
/s/ Xie Guomin
October 1, 2019
Equity Interest Pledge Agreement
Exhibit 4.61
This Equity Interest Pledge Agreement (the “Agreement”) is entered into by and among the following Parties on
August 28, 2019 in Shenzhen, People’s Republic of China (the “PRC”):
Party A: Tencent Music (Beijing) Co., Ltd. (the “Pledgee”), a wholly foreign-owned enterprise incorporated and existing under
the laws of the PRC, with its registered address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East Tianchen
Road, Chaoyang District, Beijing;
Party B: Ji Mingzhong, a Chinese Citizen with Identification No.: [ ]; and
Zhou Wenjiang, a Chinese Citizen with Identification No.: [ ]; (together with Ji Mingzhong, hereinafter referred to as a
“Pledgor” respectively and as the “Pledgors” collectively);
Party C: Niannian Youyu Culture Media (Wuhan) Co., Ltd., a limited liability company incorporated and existing under the
laws of the PRC, with its registered address at Unit 04B, 05, 06, 5th Floor, Yuexiu Wealth Center Office Building, No.1
Zhongshan Avenue (Building 6, Plot A, Qiaokou Golden Triangle), Qiaokou District, Wuhan.
In this Agreement, each of the Pledgee, the Pledgors and Party C shall be referred to as a “Party” respectively or as the “Parties”
collectively.
Whereas:
1.
The Pledgors Ji Mingzhong and Zhou Wenjiang are Chinese citizens. As of the date of this Agreement, the registered
capital of Party C is RMB 1,000,000, and Ji Mingzhong holds 50% equity interests of Party C, representing RMB
500,000 of Party C’s registered capital; Zhou Wenjiang holds 50% equity interests of Party C, representing RMB 500,000
of Party C’s registered capital. Party C is a limited liability company registered in Wuhan, China, and is engaged in the
business of “cultural activity planning; marketing planning; corporate image planning; film and television drama
planning, production and distribution; television program production; film and television cultural consulting services;
cultural and creative services; organization and planning of cultural and artistic exchange activities; photography services;
performance brokerage; stage lighting and sound design and installation; website construction and maintenance; software
design and development; design, production, agency release all kinds of advertisements at home and abroad; engage in
Internet cultural activities (involving licensed business items, which can only be operated with the permission of relevant
departments)”. Party C hereby acknowledges the rights and obligations of the
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Pledgors and the Pledgee under this Agreement and intends to provide any necessary assistance in registering the Pledge;
2.
3.
The Pledgee is a wholly foreign-owned enterprise registered in China. The Pledgee and Party C have executed an
Exclusive Business Cooperation Agreement (as defined below) in Shenzhen; the Pledgee, the Pledgors and Party C have
executed an Exclusive Option Agreement (as defined below); the Pledgee and each of the Pledgors have executed a Loan
Agreement (as defined below); each of the Pledgors has executed a Power of Attorney in favor of the Pledgee (as defined
below);
To ensure that Party C and the Pledgors fully perform its or their obligations under the Exclusive Business Cooperation
Agreement, the Exclusive Option Agreement, the Loan Agreement and the Power of Attorney, the Pledgors pledge to the
Pledgee all the equity interests they hold in Party C as security for the performance of Party C’ and the Pledgors’
obligations under the Exclusive Business Cooperation Agreement, the Exclusive Option Agreement, the Loan Agreement
and the Power of Attorney.
To perform the terms of the Transaction Documents, the Parties have mutually agreed to execute this Agreement upon the
following terms.
1.
Definitions
Unless otherwise provided in this Agreement, the terms below shall have the following meanings:
1.1.
1.2.
Pledge: means the security interest granted by the Pledgors to the Pledgee pursuant to Section 2 of this Agreement, i.e.,
the right of the Pledgee to be compensated on a preferential basis with any proceeds received from conversion, auction or
sale of the Pledged Equity Interest.
Pledged Equity Interest: means 100% of the equity interests in Party C collectively held by the Pledgors now,
representing RMB 1,000,000 of Party C’s registered capital, which including 50% of the equity interests in Party C held
by the Pledgor Ji Mingzhong, representing RMB 500,000 of Party C’s registered capital, pledged to Tencent Music
(Beijing) Co., Ltd. and 50% of the equity interests in Party C held by the Pledgor Zhou Wenjiang, representing RMB
500,000 of Party C’s registered capital, pledged to Tencent Music (Beijing) Co., Ltd. and all the future equity rights and
interests in Party C held by the Pledgors.
1.3.
Term of Pledge: means the term set forth in Section 3.1 of this Agreement.
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1.4.
1.5.
1.6.
Transaction Documents: means the Exclusive Business Cooperation Agreement entered into by and between Party C
and the Pledgee on August 28, 2019 in Shenzhen (the “Exclusive Business Cooperation Agreement”); the Exclusive
Option Agreement entered into by and among the Pledgors, Party C and the Pledgee on August 28, 2019 in Shenzhen (the
“Exclusive Option Agreement”); the Loan Agreement executed by each of the Pledgors, Ji Mingzhong and Zhou
Wenjiang on August 28, 2019 (the “Loan Agreement”); the Power of Attorney executed by each of the Pledgors on
August 28, 2019 in Shenzhen (the “Power of Attorney”), and any amendments, revisions and/or restatements to the
aforesaid documents.
Contractual Obligations: means all the obligations of the Pledgors under the Exclusive Option Agreement, the Power of
Attorney and this Agreement, and all the obligations of Party C under the Exclusive Business Cooperation Agreement,
the Exclusive Option Agreement, the Loan Agreement and this Agreement.
Secured Indebtedness: means all direct, indirect, consequential losses and losses of anticipated profits suffered by the
Pledgee as a result of any Event of Default of the Pledgors and/or Party C, of which the basis for the amount of such
losses includes without limitation reasonable business plans and profit forecasts of the Pledgee, the service fees that Party
C is obliged to pay under Exclusive Business Cooperation Agreement, as well as all expenses as incurred by the Pledgee
in connection with its enforcement for the performance of Contractual Obligations against the Pledgors and/or Party C.
1.7.
Event of Default: means any circumstances as set forth in Section 7 of this Agreement.
1.8.
Notice of Default: means the notice issued by the Pledgee in accordance with this Agreement declaring an Event of
Default.
2.
The Pledge
2.1.
2.2.
The Pledgors hereby agree to pledge to the Pledgee the Pledged Equity Interest in accordance with this Agreement as
security for the performance of the Contractual Obligations and the repayment of the Secured Indebtedness. Party C
hereby agrees for the Pledgors to so pledge the Pledged Equity Interest to the Pledgee in accordance with this Agreement.
During the Term of Pledge, the Pledgee is entitled to receive any dividends or distributions in respect of the Pledged
Equity Interest. With the prior written consent of the Pledgee, the Pledgors may collect such dividends or distributions in
respect of the Pledged Equity Interest. Any dividends or distributions received by the Pledgee in respect of the Pledged
Equity Interest after deduction of income
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tax paid by Pledgors shall, upon the Pledgee’s request, (1) be deposited into a bank account designated by the Pledgee, be
placed under the custody of the Pledgee, be used as security for the Contractual Obligations and be first applied towards
full satisfaction of the Secured Indebtedness; or (2) to the extent permitted by the PRC laws, be unconditionally donated
to the Pledgee or any person designated by the Pledgee.
2.3. With the prior written consent of the Pledgee, the Pledgors may subscribe for increased capital in Party C. Any increase in
the capital contributed by the Pledgors to the registered capital of Party C as a result of any capital increase shall also be
deemed as the Pledged Equity Interest.
2.4.
In the event that Party C is to be dissolved or liquidated as required by any mandatory rules of the PRC laws, upon the
lawful completion of such dissolution or liquidation procedure, any proceeds distributed by Party C to the Pledgors shall,
upon the Pledgee’s request, (1) be deposited into a bank account designated by the Pledgee, be placed under the custody
of the Pledgee, and be used as security for the Contractual Obligations and be first applied towards full satisfaction of the
Secured Indebtedness; or (2) to the extent permitted by the PRC laws, be unconditionally donated to the Pledgee or any
person designated by the Pledgee.
3.
Term of Pledge
3.1.
The Pledge shall become effective on such date when the pledge of the Pledged Equity Interest contemplated herein has
been registered with the relevant administration for industry and commerce. The Pledge shall be continuously valid until
full performance of the Contractual Obligations and full satisfaction of the Secured Indebtedness. The Pledgors and Party
C shall, (1) register the Pledge in the shareholders’ register of Party C within 3 business days following the execution of
this Agreement, and (2) submit an application to the relevant administration for industry and commerce for the
registration of the Pledge contemplated herein within 30 business days following the execution of this Agreement. The
Parties covenant that for the purpose of registration of the Pledged Equity Interest, the Parties and other shareholders of
Party C shall submit to the administration of industry and commerce this Agreement or an equity interest pledge
agreement in the form required by the administration of industry and commerce of where Party C locates, which shall
truly reflect the information of the Pledge hereunder (the “AIC Pledge Agreement”). For matters not specified in the
AIC Pledge Agreement, the parties shall be bound by the provisions of this Agreement. The Pledgors and Party C shall
submit all necessary documents and complete all necessary procedures, as required by the PRC laws and regulations and
the relevant administration of industry and commerce, to ensure that the Pledge shall be registered as soon as possible
after filing.
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3.2.
During the Term of Pledge, in the event the Pledgors and/or Party C fail to fulfill the Contractual Obligations or pay the
Secured Indebtedness, the Pledgee shall be entitled to, but not be obliged to, exercise the Pledge in accordance with this
Agreement.
4.
Custody for Certificates of the Pledge
4.1.
During the Term of Pledge, the Pledgors shall deliver to the Pledgee within one (1) week following the execution of this
Agreement the certificate of capital contributions to Party C and the register of shareholders which records the Pledge.
The Pledgee will place such documents in custody throughout the entire Term of Pledge specified in this Agreement.
5.
Representations and Warranties of the Pledgors and Party C
The Pledgors and Party C hereby severally and jointly represent and warrant to the Pledgee as of the date hereof as follows:
5.1.
The Pledgors, Ji Mingzhong and Zhou Wenjiang, are the legal and beneficial owners of the Pledged Equity Interest.
5.2.
The Pledgors are entitled to dispose of and transfer the Pledged Equity Interest in accordance with this Agreement.
5.3.
5.4.
5.5.
Except for the Pledge, the Pledgors have not created any other pledges or other security interest on the Pledged Equity
Interest.
The Pledgors and Party C have obtained all necessary approvals and consents from government authorities and third
parties (if any) in connection with the execution, delivery and performance of this Agreement.
The execution, delivery and performance of this Agreement do not (i) result in any violation of any relevant PRC laws;
(ii) result in any conflict with the articles of association or other constitutional documents of Party C; (iii) result in any
breach of any agreement to which it is a party or by which it is bound, or constitute any default under any agreement to
which it is a party or by which it is bound; (iv) result in any breach of any permit or license issued or granted to it and/or
any condition of the validity thereof; or (v) result in the revocation or suspension of, or imposition of conditions on, any
permit or license issued to it.
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6.
Undertakings by the Pledgors and Party C
6.1.
During the Term of Pledge, the Pledgors and Party C severally and jointly undertake to the Pledgee that:
6.1.1.
6.1.2.
6.1.3.
Without the prior written consent of the Pledgee, the Pledgors shall not transfer the Pledged Equity Interest,
create or permit to be created any security interest or other encumbrances on the Pledged Equity Interest,
except for the performance of the Transaction Documents.
The Pledgors and Party C shall comply with the provisions of all the laws and regulations relating to the
pledge of rights, and shall, within five (5) days upon receipt of any notice, order or recommendation issued or
promulgated by the relevant competent authorities regarding the Pledge, present such notice, order or
recommendation to the Pledgee, and concurrently comply with such notice, order or recommendation, or
object thereto upon the reasonable request or consent of the Pledgee.
The Pledgors and Party C shall promptly notify the Pledgee of any event or notice received by the Pledgors
that may have an impact on the Pledged Equity Interest or any portion thereof, and that may change any
undertakings and obligations of the Pledgors hereunder or may have an impact on the fulfillment of any
obligations by the Pledgors hereunder.
6.2.
6.3.
6.1.4.
Party C shall complete its business term extension registration formalities three (3) months prior to the expiry
of its business term such that the validity of this Agreement shall be maintained.
The Pledgors agree that the rights granted to the Pledgee in respect of the Pledge hereunder shall not be interrupted or
harmed by any legal procedure initiated by the Pledgors, any successors of the Pledgors or their entrusting party or any
other persons.
The Pledgors undertake to the Pledgee that in order to protect or perfect the security for the Contractual Obligations and
the Secured Indebtedness under this Agreement, the Pledgors shall execute in good faith and cause other parties who have
interests in the Pledge to execute all the certificates of rights, agreements, and/or perform and procure other parties who
have interests in the Pledge to perform acts as required by the Pledgee, facilitate the exercise of the Pledgee’s rights
granted hereunder and enter into all relevant documents regarding ownership of the Pledged Equity Interest with the
Pledgee or any person (individuals or legal persons) designated by the Pledgee, as well as provide the Pledgee with all
notices, orders and decisions regarding the Pledge as required by the Pledgee within a reasonable period of time.
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6.4.
The Pledgors hereby undertake to the Pledgee to comply with and perform all the undertakings, representations and
warranties and terms hereunder. In the event that the Pledgors fail to perform or fail to fully perform such undertakings,
representations and warranties and terms hereunder, the Pledgors shall indemnify the Pledgee against all the losses
resulting therefrom.
7.
Event of Default
7.1.
Each of the following circumstances shall constitute an Event of Default:
7.1.1.
The Pledgors breach any of its obligations under the Transaction Documents and/or this Agreement.
7.1.2.
Party C breaches any of its obligations under the Transaction Documents and/or this Agreement.
7.2.
7.3.
Should there arises any event set forth in Section 7.1 or any circumstance that may result in the foregoing events, the
Pledgors and Party C shall immediately notify the Pledgee in writing.
Unless an Event of Default set forth in this Section 7.1 has been remedied at the request of the Pledgee within twenty (20)
days upon receipt of the notice of the Pledgee to the Pledgors and/or Party C requesting the rectification of such Event of
Default, the Pledgee may issue a Notice of Default to the Pledgors in writing at any time thereafter, requesting the
exercise of the Pledge in accordance with Section 8 hereof.
8.
Exercise of the Pledge
8.1.
The Pledgee shall issue a Notice of Default to the Pledgors for the exercise of the Pledge.
8.2.
Subject to the provisions of Section 7.3, the Pledgee may exercise its right to dispose of the Pledge at any time after the
issuance of the Notice of Default in accordance with Section 8.1. Upon the Pledgee’s exercise of its right to dispose of the
Pledge, the Pledgors shall no longer own any right and interest in respect of the Pledged Equity Interest.
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8.3.
8.4.
Upon the issuance of the Notice of Default in accordance with Section 8.1, the Pledgee is entitled to exercise all the
remedies, rights and powers available to it under the PRC laws, the Transaction Documents and this Agreement,
including without limitation to converse, auction or sell the Pledged Equity Interests for prior satisfaction of indebtedness.
The Pledgee shall not be held liable for any losses arising from its reasonable exercise of such rights and powers.
The proceeds received by the Pledgee as a result of the exercise of the Pledge shall be first applied towards payment of
the taxes and expenses payable in connection with the disposal of the Pledged Equity Interest and the performance of the
Contractual Obligations and the repayment of the Secured Indebtedness to the Pledgee. Any remaining balance after the
deduction of the foregoing payments, if any, shall be returned to the Pledgors or any other person who is entitled to such
balance under applicable laws and regulations, or be deposited with the notary public at the place where the Pledgee is
located, any costs incurred arising out of such deposit shall be borne by the Pledgors; and to the extent permitted by the
PRC laws, the Pledgors shall unconditionally donate such balance to the Pledgee or any person designated by the Pledgee.
8.5.
The Pledgee shall be entitled to elect to exercise, simultaneously or successively, any of its breach of contract remedies;
the Pledgee shall not be required to first exercise other breach of contract remedies prior to exercising its right to
converse, auction or sell the Pledged Equity Interest hereunder.
8.6.
The Pledgee shall be entitled to designate in writing its legal counsel or other agents to exercise on its behalf the Pledge,
and neither the Pledgors nor Party C shall object thereto.
8.7. When the Pledgee disposes of the Pledge in accordance with this Agreement, the Pledgors and Party C shall provide
necessary assistance to the Pledgee for its exercise of the Pledge.
9.
Default Liabilities
9.1.
In the event that the Pledgors or Party C materially breach any provision under this Agreement, the Pledgee is entitled to
terminate this Agreement and/or claim damages from the Pledgors or Party C; this Section 9 shall not preclude any other
rights entitled to the Pledgee as provided under this Agreement.
9.2.
The Pledgors or Party C may not terminate or cancel this Agreement in any event unless otherwise provided under the
laws.
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10.
Assignment
10.1. The Pledgors and Party C shall not donate, transfer or dispose of their rights and obligations under this Agreement
without prior written consent of the Pledgee.
10.2. This Agreement shall be binding upon the Pledgors and its successors and any permitted assignees, and effective upon the
Pledgee and each of its successors and assignees.
10.3. The Pledgee may assign any or all of its rights and obligations under the Transaction Documents and this Agreement to
any person designated by it at any time. In this case, the assignee shall enjoy and assume the rights and obligations of the
Pledgee under the Transaction Documents and this Agreement as if the assignee were a party hereto or thereto, as
applicable.
10.4.
In the event of a change of Pledgee due to assignment, the Pledgors shall, at the request of the Pledgee, execute a new
pledge agreement with the new pledgee with the same terms and conditions as this Agreement, and register such new
pledge with the relevant administration for industry and commerce.
10.5. The Pledgors and Party C shall strictly comply with the provisions of this Agreement and other relevant agreements to
which any Party is a party, including the Transaction Documents, and perform the obligations thereunder, and refrain
from any action/omission that may affect the effectiveness and enforceability thereof. Unless with the written instructions
of the Pledgee, the Pledgors shall not exercise their remaining rights in respect of the Pledged Equity Interest.
11.
Termination
11.1. Upon the full and complete performance by the Pledgors and Party C of all of their Contractual Obligations and full
satisfaction of the Secured Indebtedness, the Pledgee shall, upon the Pledgors’ request, release the Pledge of the Pledged
Equity Interest hereunder and cooperate with the Pledgors in relation to both the deregistration of the Pledge of the
Pledged Equity Interest in the shareholders’ register of Party C and the deregistration of the Pledge of the Pledged Equity
Interest with the relevant administration of industry and commerce.
11.2. The provisions under Section 9, Section 13, Section 14 and this Section 11.2 shall survive the termination of this
Agreement.
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12.
Costs and Other Expenses
All costs and actual expenses arising in connection with this Agreement, including without limitation the legal fees,
processing fees, stamp duty, any other taxes and expenses, shall be borne by Party C.
13.
Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written
consent of the other Party, disclose any confidential information to any third parties, except for information: (a) that is or
will be available to the public (other than through the unauthorized disclosure to the public by the Party receiving
confidential information); (b) that is required to be disclosed pursuant to the applicable laws or regulations, rules of any
stock exchange, or orders of the court or other government authorities; or (c) that is disclosed by any Party to its
shareholders, directors, employees, legal counsels or financial advisors regarding the transaction contemplated hereunder,
provided that such shareholders, directors, employees, legal counsels or financial advisors shall be bound by the
confidentiality obligations similar to the terms set forth in this Section. Disclosure of any confidential information by the
shareholders, directors, employees or entities engaged by any Party shall be deemed as disclosure of such confidential
information by such Party, which Party shall be held liable for breach of contract.
14.
Governing Law and Disputes Resolution
14.1. The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
14.2. Any disputes arising in connection with the implementation and performance of this Agreement shall be settled through
friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30) days upon issuance
of the written notice by one Party to the other Parties for consultations, such disputes shall be submitted by either Party to
the China International Economic and Trade Arbitration Commission for arbitration for arbitration in accordance with its
arbitration rules. The arbitration shall take place in Beijing. The arbitration award shall be final and binding upon all the
Parties.
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14.3. The Parties agree that the arbitral tribunal or the arbitrator shall have the right to award any remedies in accordance with
the terms hereunder and applicable PRC laws , including without limitation temporary and permanent injunctive remedies
(as required by the business operation of Party C or compulsory transfer of the assets), the specific performance of the
Contractual Obligations, the remedies in respect of Party C’s equity interests or real estates, and the liquidation orders
against Party C.
14.4. To the extent permitted by PRC laws, pending the formation of an arbitral tribunal or under the appropriate
circumstances, the Parties are entitled to resort to a court of competent jurisdiction for temporary injunctive remedies or
other temporary remedies to support the arbitration. In this regard, the Parties reached a consensus that to the extent as
permitted by applicable laws, the courts in Hong Kong, the Cayman Islands, the PRC and the place where Party C’s major
assets are located shall be deemed to have jurisdiction.
14.5. Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during the
pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall continue to
exercise their respective rights and perform their respective obligations hereunder.
15.
Notices
15.1. All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered
personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to the
designated address of such party as listed below. A confirmation copy of each notice shall also be sent by E-mail. The
dates on which notices shall be deemed to have been effectively delivered shall be determined as follows:
15.2. Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed effectively
delivered on the date of receipt or refusal at the address specified for notices.
15.3. Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful transmission (as
evidenced by an automatically generated confirmation of transmission).
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Attention:
Phone:
Email:
Party B:
Name(cid:0)
Address:
Phone:
Email:
Name(cid:0)
Address:
Phone:
Email:
15.4. For the purpose of notification, the addresses of the Parties are as follows:
Party A: Tencent Music (Beijing) Co., Ltd.
Address:
Room 504, 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East
Road, Chaoyang District, Beijing
Zhao Xiang
[ ]
[ ]
Ji Zhongming
Feiyada High-tech Building, Gaoxinnan 1st Road, Nanshan District, Shenzhen, Guangdong
Province
[ ]
[ ]
Zhou Wenjiang
Room 1502 Building 8, No. 1085 Dingtai Fenghua Community, Qianhan Road, Nanshan District,
Shenzhen, Guangdong Province
[ ]
[ ]
Party C: Niannian Youyu Culture Media (Wuhan) Co., Ltd.
Address:
Attention:
Phone:
Email:
18 F, Songri Dingsheng Building, Nanshan District, Shenzhen
Liu Weiguang
[ ]
[ ]
15.5. Each Party may at any time change its address for notices by delivering a notice to the other Parties in accordance with
this Section.
16.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any
aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of
this Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such
invalid, illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by
law and the intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to
the economic effect of those invalid, illegal or unenforceable provisions.
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17.
Effectiveness
17.1. This Agreement comes into effect upon formal signing by all the Parties.
17.2. Any amendments, changes and supplements to this Agreement shall be in writing and shall become effective upon
signing or stamping by the Parties and completion of the governmental registration procedures (if applicable) in
accordance with the regulations.
18.
Language and Counterparts
This Agreement is written in Chinese in six (6) originals, with each of the Pledgee, the Pledgors (Ji Mingzhong and Zhou
Wenjiang) and Party C holding one original, and the other one original will be submitted for registration.
[The remainder of this page is intentionally left blank]
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IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party A: Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal Representative
Party B:
The Pledgor: Ji Mingzhong
Signature: /s/ Ji Mingzhong
The Pledgor: Zhou Wenjiang
Signature: /s/ Zhou Wenjiang
Party C: Niannian Youyu Culture Media Co., Ltd.
/s/ Seal of Niannian Youyu Culture Media Co., Ltd.
Signature: /s/ Ji Mingzhong
Name: Ji Mingzhong
Title: Legal Representative
Exclusive Option Agreement
Exhibit 4.62
This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of August 28,
2019 in Shenzhen, the People’s Republic of China (“China” or the “PRC”):
Party A:
Tencent Music (Beijing) Co., Ltd., a wholly foreign-owned enterprise, organized and existing under the laws of
the PRC, with its address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East Tianchen Road,
Chaoyang District, Beijing;
Party B:
Ji Mingzhong, a Chinese Citizen with Identification No.: [ ]; and
Zhou Wenjiang, a Chinese Citizen with Identification No.: [
];
Party C:
Niannian Youyu Culture Media (Wuhan) Co., Ltd., a limited liability company, organized and existing under
the laws of the PRC, with its address at Unit 04B, 05, 06, 5th Floor, Yuexiu Wealth Center Office Building, No.1
Zhongshan Avenue (Building 6, Plot A, Qiaokou Golden Triangle), Qiaokou District, Wuhan.
In this Agreement, Party A, Party B, and Party C shall each be referred to as a “Party” respectively, and shall be
collectively referred to as the “Parties”.
Whereas:
1.
2.
3.
Party B including Ji Mingzhong and Zhou Wenjiang. They are the shareholders of Party C and as of the date hereof
collectively hold 100 % of the equity interests of Party C, representing RMB 1,000,000 in the registered capital of Party C.
Ji Mingzhong holds 50% of the equity interests of Party C, representing RMB 500,000 in the registered capital thereof, and
Zhou Wenjiang holds 50% of the equity interests of Party C, representing RMB 500,000 in the registered capital thereof.
Party B intends to irrevocably grant Party A an exclusive option to purchase the entire equity interest in Party C without
prejudice of PRC laws, and Party A intends to accept such equity interest purchase option (defined as below).
Party C intends to irrevocably grant Party A an exclusive option to purchase its entire assets without prejudice to PRC
laws, and Party A intends to accept such asset purchase option (defined as below).
After mutual discussions and negotiations, the Parties have now reached the following agreement:
1
1.
Sale and Purchase of Equity Interest and Assets
1.1 Option Granted
1.1.1
1.1.2
Whereas Party A paid Party B RMB 10 as consideration, and Party B confirmed the receipt and the
sufficiency of such consideration, Party B hereby irrevocably grants Party A an irrevocable and
exclusive right to purchase, or designate one or more persons (each, a “Designee”) to purchase the
equity interests in Party C then held by Party B once or at multiple times at any time in part or in whole
at Party A’s sole and absolute discretion to the extent permitted by PRC laws and at the price described
in Section 1.3 herein (“Equity Interest Purchase Option”). Except for Party A and the Designee(s), no
other person shall be entitled to the Equity Interest Purchase Option or other rights with respect to the
equity interests of Party B. Party C hereby agrees to the grant by Party B of the Equity Interest
Purchase Option to Party A. The term “person” as used herein shall refer to individuals, corporations,
partnerships, partners, enterprises, trusts, or non-corporate organizations.
Party C hereby exclusively, irrevocably and unconditionally grants Party A an irrevocable and
exclusive right to require Party C to transfer part or all of company assets (the assets may be
transferred in whole or in part at Party A’s sole discretion and commercial consideration, “Purchased
Asset”) to Party A or its Designee to the extent permitted by PRC laws and under the terms and
conditions herein (“Asset Purchase Option”). Except for Party A and the Designee(s), no other person
shall be entitled to the Asset Purchase Option or any other right with respect to Party C’s assets. Party
A agrees to accept such Asset Purchase Option.
1.1.3
Party B hereby jointly and severally agrees that Party C grants such Asset Purchase Option to Party A
in accordance with Section 1.1.2 above and other terms herein, and the Purchased Asset may be
transferred to Party A or Designee(s) by Party A when the Asset Purchase Option is exercised.
1.2 Steps for Exercise
1.2.1
1.2.2
The exercise of the Equity Interest Purchase Option and the Asset Purchase Option by Party A shall be
subject to the provisions of the laws and regulations of China.
When Party A exercises the Equity Interest Purchase Option, a written notice shall be issued to Party B
(the “Equity Interest Purchase Option Notice”), specifying:(a) Party A’s or the Designee’s decision to
exercise the Equity Interest Purchase Option; (b) the portion of equity interests to be purchased by
Party A or the Designee from Party B (the “Optioned Interests”); and (c) the date for purchasing the
Optioned Interests or the date for the transfer of the Optioned Interests.
2
1.2.3
When Party A exercises the Asset Purchase Option, a written notice shall be issued to Party B (the
“Asset Purchase Option Notice”), specifying:(a) Party A’s or the Designee’s decision to exercise the
Asset Purchase Option; (b) the list of assets to be purchased by Party A or the Designee from Party B
(the “Optioned Asset”); and (c) the date for purchasing the Optioned Asset or the date for the transfer
of the Optioned Asset.
1.3 Purchase Price
1.3.1
1.3.2
1.3.3
The purchase price (“Benchmark Purchase Price”) of all equity interests shall be RMB 10. If PRC law
requires a minimum price higher than the Benchmark Purchase Price when Party A exercises the
Equity Interest Purchase Option, the minimum price regulated by PRC law shall be the purchase price
(collectively, the “Equity Interest Purchase Price”).
Party B undertakes that it shall transfer the full amount of Equity Interest Purchase Price obtained by
Party B to Party A’s designated bank account.
In terms of Asset Purchase Option, Party A or its Designee shall pay RMB 1 as the purchase price for
each exercise of the Asset Purchase Option. If PRC law requires a minimum price higher than the
aforementioned net book value of the assets, the minimum price regulated by PRC law shall be the
purchase price (collectively, the “Asset Purchase Price”).
1.3.4
Party C undertakes that it shall transfer the full amount of Asset Interest Purchase Price obtained by
Party C to Party A’s designated bank account.
1.4 Transfer of Optioned Interests
For each exercise of the Equity Interest Purchase Option:
1.4.1
1.4.2
1.4.3
Party B shall cause Party C to promptly convene a shareholders’ meeting, at which a resolution shall be
adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s);
Party B shall obtain written statements from the other shareholders (if any) of Party C giving consent
to the transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first
refusal related thereto;
Party B shall execute an equity interest transfer contract with respect to each transfer with Party A
and/or each Designee (whichever is applicable), in accordance with the provisions of this Agreement
and the Equity Interest Purchase Option Notice regarding the Optioned Interests;
3
1.4.4
The relevant Parties shall execute all other necessary contracts, agreements, or documents, obtain all
necessary government licenses and permits, and take all necessary actions to transfer the valid
ownership of the Optioned Interests to Party A and/or the Designee(s), unencumbered by any security
interests, and cause Party A and/or the Designee(s) to become the registered owner(s) of the Optioned
Interests. For the purpose of this Section and this Agreement, “security interests” shall include
securities, mortgages, third party’s rights or interests, any stock options, acquisition right, right of first
refusal, right to offset, ownership retention, or other security arrangements, but shall be deemed to
exclude any security interest created by this Agreement, Party B’s Equity Interest Pledge Agreement,
and Party B’s Power of Attorney. “Party B’s Equity Interest Pledge Agreement” as used in this
Agreement shall refer to the Equity Interest Pledge Agreement executed by and among Party A, Party
B and Party C on the date hereof and any modifications, amendments, and restatements thereto. “Party
B’s Power of Attorney” as used in this Agreement shall refer to the Power of Attorney executed by
Party B on the date hereof granting Party A with a power of attorney and any modifications,
amendments, and restatements thereto.
1.5 Transfer of Purchased Assets
For each exercise of the Equity Interest Purchase Option:
1.5.1
1.5.2
1.5.3
Party C shall obtain all necessary internal authorizations in accordance with Party B’s effective articles
of association;
Party C shall enter into an asset transfer contract with respect to each transfer with Party A and/or each
Designee (whichever is applicable), in accordance with the provisions of this Agreement and the Asset
Purchase Option Notice regarding the Optioned Assets;
The relevant Parties shall execute all other necessary contracts, agreements, or documents, obtain all
necessary government licenses and permits, and take all necessary actions to transfer the valid
ownership of the Purchased Assets to Party A and/or the Designee(s), unencumbered by any security
interests.
4
2.
Covenants
2.1
Covenants regarding Party C
Party B (as shareholders of Party C) and Party C hereby covenant on the following:
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
2.1.8
Without the prior written consent of Party A, they shall not in any manner supplement, change, or
amend the articles of association of Party C, increase or decrease its registered capital, or change its
structure of registered capital in other manners.
They shall maintain Party C’s corporate existence in accordance with good financial and business
standards and practices, as well as obtain and maintain all necessary government licenses and permits
by prudently and effectively operating its business and handling its affairs.
Without the prior written consent of Party A, they shall not at any time following the date hereof, sell,
transfer, mortgage, or dispose of in any manner any material assets of Party C or legal or beneficial
interest in the material business or revenues of Party C of more than RMB 100,000, or allow the
encumbrance thereon of any security interests.
Without the prior written consent of Party A, they shall not incur, inherit, guarantee, or suffer the
existence of any debt, except for (i) payables incurred in the ordinary course of business other than
through loans; and (ii) debts disclosed to Party A which Party A’s written consent has been obtained.
They shall always operate all of Party C’s businesses within the normal business scope to maintain the
asset value of Party C and refrain from any action/omission that may affect Party C’s operating status
and asset value.
Without the prior written consent of Party A, they shall not cause Party C to execute any material
contract, except the contracts in the ordinary course of business (for the purpose of this subsection, a
contract with a price exceeding RMB 100,000 shall be deemed a material contract).
Without the prior written consent of Party A, they shall not cause Party C to provide any person with a
loan or credit.
They shall provide Party A with information on Party C’s business operations and financial condition
upon Party A’s request.
5
2.1.9
If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and
business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for
companies that operate similar businesses and own similar assets in the same area.
2.1.10 Without the prior written consent of Party A, they shall not cause or permit Party C to merge,
consolidate with, acquire, or invest in any person.
2.1.11
2.1.12
They shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to Party C’s assets, business, or revenue.
To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate
documents, take all necessary or appropriate actions, file all necessary or appropriate complaints, and
raise necessary or appropriate defenses against all claims.
2.1.13 Without the prior written consent of Party A, they shall ensure that Party C shall not in any manner
distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall
immediately distribute all distributable profits to its shareholders.
2.1.14
At the request of Party A, they shall appoint any person designated by Party A as the director or
executive director of Party C.
2.1.15 Without Party A’s prior written consent, they shall not engage in any business in competition with
Party A or its affiliates.
2.1.16
Unless otherwise required by PRC law, Party C shall not be dissolved or liquated without prior written
consent by Party A.
2.2
Covenants of Party B
Party B hereby covenants to the following:
2.2.1
2.2.2
Without the prior written consent of Party A, at any time from the date of execution of this Agreement,
Party B shall not sell, transfer, mortgage, or dispose of in any other manner any legal or beneficial
interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon, except for
the interest placed in accordance with Party B’s Equity Interest Pledge Agreement and Party B’s Power
of Attorney.
Party B shall cause the shareholders’ meeting and/or the directors (or the executive director) of Party C
not to approve any sale, transfer, mortgage, or disposition in any other manner of any legal or
beneficial interest in the equity interests in Party C held by Party
6
2.2.3
2.2.4
2.2.5
2.2.6
2.2.7
2.2.8
2.2.9
2.2.10
B, or allow the encumbrance thereon of any other security interest without the prior written consent of
Party A, except for the interest placed in accordance with Party B’s Equity Interest Pledge Agreement
and Party B’s Power of Attorney.
Without the prior written consent of Party A, Party B shall cause the shareholders’ meeting or the
directors (or the executive director) of Party C not to approve the merger or consolidation with any
person, or the acquisition of or investment in any person.
Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to the equity interests in Party C held by Party B.
Party B shall cause the shareholders’ meeting or the directors (or the executive director) of Party C to
vote their approval of the transfer of the Optioned Interests as set forth in this Agreement and to take
any and all other actions that may be requested by Party A.
To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary
or appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate
complaints, and raise necessary or appropriate defenses against all claims.
Party B shall appoint any designee of Party A as the director or the executive director of Party C, at the
request of Party A.
Party B hereby waives its right of first refusal in regards to the transfer of equity interest by any other
shareholder of Party C to Party A (if any), and gives consent to the execution by each other shareholder
of Party C with Party A and Party C the exclusive option agreement, the equity interest pledge
agreement and the power of attorney similar to this Agreement, Party B’s Equity Interest Pledge
Agreement, and Party B’s Power of Attorney, and accepts not to take any actions in conflict with such
documents executed by the other shareholders;
Party B shall promptly donate any profits, interests, dividends, or proceeds of liquidation to Party A or
any other person designated by Party A to the extent permitted under the applicable PRC laws. And
Party B shall strictly abide by the provisions of this Agreement and other contracts jointly or separately
executed by and among Party B, Party C, and Party A, perform the obligations hereunder and
thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability
thereof. To the extent that Party B has any remaining rights with respect to the equity interests subject
to this Agreement hereunder or under Party B’s Equity Interest
7
Pledge Agreement or under Party B’s Power of Attorney, Party B shall not exercise such rights
excluding in such manner in accordance with the written instructions of Party A.
3.
Representations and Warranties
Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and
each date of transfer, that:
3.1
3.2
3.3
3.4
3.5
3.6
They have the power, capacity, and authority to execute and deliver this Agreement and any equity interest
transfer contracts to which they are parties concerning each transfer of the Optioned Interests as described
thereunder (each, a “Transfer Contract”), and to perform their obligations under this Agreement and any Transfer
Contracts. Party B and Party C agree to enter into Transfer Contracts substantially consistent with the terms of
this Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the Transfer
Contracts to which they are parties constitute or will constitute their legal, valid, and binding obligations, and
shall be enforceable against them in accordance with the provisions thereof.
Party B and Party C have obtained any and all approvals and consents from the relevant government authorities
and third parties (if required) for the execution, delivery, and performance of this Agreement.
The execution and delivery of this Agreement or any Transfer Contracts and the obligations under this Agreement
or any Transfer Contracts shall not: (i) cause any violations of any applicable PRC laws; (ii) be inconsistent with
the articles of association, bylaws, or other organizational documents of Party C; (iii) cause the violation of any
contracts or instruments to which they are a party or which are binding on them, or constitute any breach under
any contracts or instruments to which they are a party or which are binding on them; (iv) cause any violation of
any condition for the grant and/or continued effectiveness of any licenses or permits issued to either of them; or
(v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued
to either of them.
Party B has a good and merchantable title to the equity interests held by Party B in Party C. Except for Party B’s
Equity Interest Pledge Agreement and Party B’s Power of Attorney, Party B has not placed any security interest
on such equity interests.
Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the
aforementioned assets.
Party C does not have any outstanding debts, except for (i) debt incurred within its normal business scope; and (ii)
debts disclosed to Party A for which Party A’s written consent has been obtained.
8
3.7
3.8
Party C has complied with all laws and regulations of China applicable to asset acquisitions. And
There is no pending or threatened litigation, arbitration, or administrative proceedings relating to the equity
interests in Party C, assets of Party C, or Party C itself.
4.
Effective Date and Term
This Agreement shall become effective upon execution by the Parties, and remain in effect until all equity interests held by
Party B in Party C have been transferred or assigned to Party A and/or any other person designated by Party A in
accordance with this Agreement.
5.
Governing Law and Disputes Resolution
5.1
Governing Law
The execution, effectiveness, interpretation, performance, amendment, and termination of this Agreement as well
as any dispute resolution hereunder shall be governed by the laws of the PRC.
5.2
Methods of Disputes Resolution
In the event of any dispute arising with respect to the construction and performance of this Agreement, the Parties
shall first attempt to resolve the dispute through friendly negotiations. In the event that the Parties fail to reach an
agreement on the dispute within 30 days after either Party’s written request to the other Parties for dispute
resolution through negotiations, either Party may submit the relevant dispute to the China International Economic
and Trade Arbitration Commission for arbitration, in accordance with its arbitration rules. The arbitration shall be
conducted in Beijing, and the arbitration award shall be final and binding to all Parties.
Each Party agrees that the arbitral tribunal or arbitrator shall have the right to gives any remedies, including
preliminary and permanent injunctive relief (such as injunction against carrying out business activities, or
mandating the transfer of assets), specific performance of contractual obligations, remedies concerning the equity
interest or assets of Party C and awards directing Party C to conduct liquidation.
To the extent permitted by PRC laws, when awaiting the formation of the arbitration tribunal or otherwise under
appropriate conditions, either Party may seek preliminary injunctive relief or other interlocutory remedies from a
court with competent jurisdiction to facilitate the arbitration. Without violating the applicable governing laws, the
Parties agree that the courts of Hong Kong SAR, Cayman Islands, China and the place where the main assets of
Party C are located shall all be deemed to have competent jurisdiction.
9
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any dispute, except for the matters under dispute, the Parties shall continue to exercise
their respective rights under this Agreement and perform their respective obligations under this Agreement.
6.
Taxes and Fees
Each Party shall pay any and all transfer and registration taxes, expenses, and fees incurred thereby or levied thereon in
accordance with the laws of the PRC in connection with the preparation and execution of this Agreement and the Transfer
Contracts, as well as the consummation of the transactions contemplated under this Agreement and the Transfer Contracts.
7.
Notices
7.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, prepaid postage, commercial courier services, or facsimile
transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by
email. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
7.1.1
Notices given by personal delivery, courier services, registered mail, or prepaid postage shall be deemed
effectively given on the date of receipt or refusal at the address specified for such notices.
7.1.2
Notices given by facsimile transmission shall be deemed effectively given on the date of successful
transmission (as evidenced by an automatically generated confirmation of the transmission).
7.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A:
Address:
Attn:
Phone:
Email(cid:0)
Party B:
Name(cid:0)
Address:
Phone:
Email:
Tencent Music (Beijing) Co., Ltd.
Room 504, 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen
East Road, Chaoyang District, Beijing
Zhao Xiang
[ ]
[ ]
Ji Zhongming
Feiyada High-tech Building, Gaoxinnan 1st Road, Nanshan District, Shenzhen, Guangdong
Province
[ ]
[ ]
10
Name(cid:0)
Address:
Phone:
Email:
Party C:
Address:
Attn:
Phone:
Email(cid:0)
Zhou Wenjiang
Room 1502 Building 8, No. 1085 Dingtai Fenghua Community, Qianhan Road, Nanshan
District, Shenzhen, Guangdong Province
[ ]
[ ]
Niannian Youyu Culture Media (Wuhan) Co., Ltd.
18 F, Songri Dingsheng Building, Nanshan District, Shenzhen
Liu Weiguang
[ ]
[ ]
7.3
Any Party may at any time change its address for notices by having a notice delivered to the other Parties
in accordance with the terms hereof.
8.
Confidentiality
The Parties acknowledge that the existence and the terms of this Agreement, and any oral or written information
exchanged between the Parties in connection with the preparation and performance of this Agreement are regarded as
confidential information. Each Party shall maintain the confidentiality of all such confidential information, and without
obtaining the written consent of other Parties, it shall not disclose any relevant confidential information to any third
parties, except for the information that: (a) is or will be featured in the public domain (other than through the receiving
Party’s unauthorized disclosure); (b) is under the obligation to be disclosed pursuant to the applicable laws or regulations,
rules of any stock exchange, or orders of the court or other government authorities; or (c) is required to be disclosed by any
Party to its shareholders, directors, employees, legal counsels, or financial advisors regarding the transaction contemplated
hereunder, provided that such shareholders, directors, employees, legal counsels, or financial advisors shall be bound by
the confidential obligations similar to those set forth in this Section. Disclosure of any confidential information by the
shareholders, director, employees of, or agencies engaged by any Party shall be deemed disclosure of such confidential
information by such Party and that Party shall be held liable for breach of this Agreement.
9.
Further Warranties
The Parties agree to promptly execute the documents that are reasonably required for or are conducive to the
implementation of the provisions and purposes of this Agreement and to take further actions that are reasonably required
for or are conducive to the implementation of the provisions and purposes of this Agreement.
11
10.
Breach of Agreement
10.1
10.2
If Party B or Party C conducts any material breach of any term of this Agreement, Party A shall have right to
terminate this Agreement and/or require Party B or Party C to compensate all damages. This Section 10 shall
not prejudice any other rights of Party A herein;
Party B or Party C shall not have any right to terminate this Agreement in any event unless otherwise required
by the applicable laws.
11.
Force Majeure Event
11.1
11.2
“Force Majeure Event” means any event that is beyond one Party’s scope of reasonable control, and is
unavoidable under the affected Party’s reasonable care, including but not limited to, natural disasters, wars,
riots, etc. However, lack of credit, funding or financing may not be considered as beyond one Party’s reasonable
control. When the implementation of this Agreement is delayed or hindered due to any Force Majeure Event,
the affected Party shall not bear any liability for such delayed and hindered performance under this Agreement.
The Party affected by Force Majeure Event seeking to waive any liability under this Agreement shall notify the
other Party as soon as possible of the exemption and the steps to be taken to complete the performance.
The Party affected by Force Majeure Event shall not bear any liability under this Agreement. The Party seeking
to waive liability can only be exempted when he affected Party has made reasonable and feasible efforts to
perform this Agreement and such exemption shall be limited to such delayed and hindered performance. Once
the reasons for such exemption are corrected and remedied, the Parties agree to use their best efforts to perform
this Agreement.
12. Miscellaneous
12.1
Amendments, changes, and supplements
Any amendments, changes, and supplements to this Agreement shall require the execution of a written
agreement by all of the Parties.
12.2
Entire agreement
Except for the amendments, supplements, or changes in writing executed after the execution of this Agreement,
this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the
subject matter hereof, and shall supersede all prior oral and written consultations, representations, and contracts
reached with respect to the subject matter of this Agreement.
12
12.3
Headings
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain, or
otherwise affect the meanings of the provisions of this Agreement.
12.4
Language
This Agreement is written in Chinese in four copies, with each Party having one copy.
12.5
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal, or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality, or enforceability
of the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties
shall strive in good faith to replace such invalid, illegal, or unenforceable provisions with effective provisions
that accomplish to the greatest extent permitted by the relevant laws and the intentions of the Parties, and the
economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid,
illegal, or unenforceable provisions.
12.6
Successors
This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and
the permitted assigns of such Parties.
12.7
Survival
12.7.1
12.7.2
12.8
Waivers
Any obligations that occur or are due as a result of this Agreement upon the expiration or early
termination of this Agreement shall survive the expiration or early termination thereof.
The provisions of Sections 5, 8, 10 and this Section 12.7 shall survive the termination of this
Agreement.
Any Party may waive the terms and conditions of this Agreement, provided that such a waiver must be
provided in writing and shall require the signatures of the Parties. No waiver by any Party in certain
circumstances with respect to a breach by other Parties shall be deemed as a waiver by such a Party with respect
to any similar breach in other circumstances.
[The remainder of this page is intentionally left blank]
13
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as
of the date first above written.
Party A:
Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
/s/ Yang Qihu
Yang Qihu
Legal Representative
By:
Name:
Title:
Party B:
By:
Name:
By:
Name:
/s/ Ji Mingzhong
Ji Mingzhong
/s/ Zhou Wenjiang
Zhou Wenjiang
Party C:
Niannian Youyu Culture Media (Wuhan) Co., Ltd.
/s/ Seal of Niannian Youyu Culture Media (Wuhan) Co., Ltd.
By:
Name:
Title:
/s/ Ji Mingzhong
Ji Mingzhong
Legal Representative
Exclusive Business Cooperation Agreement
Exhibit 4.63
This Exclusive Business Cooperation Agreement (this “Agreement”) is entered into by and between the following parties
on August 28, 2019 in Shenzhen, the People’s Republic of China (“China” or the “PRC”).
Party A:
Party B:
Tencent Music (Beijing) Co., Ltd., a wholly foreign-owned enterprise, organized and existing under the laws of
the PRC, with its address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East Tianchen Road,
Chaoyang District, Beijing;
Niannian Youyu Culture Media (Wuhan) Co., Ltd., a limited liability company incorporated and existing
under the laws of the PRC, with its registered address at Unit 04B, 05, 06, 5th Floor, Yuexiu Wealth Center Office
Building, No.1 Zhongshan Avenue (Building 6, Plot A, Qiaokou Golden Triangle), Qiaokou District, Wuhan.
Each of Party A and Party B shall be hereinafter referred to as a “Party” respectively, and as the “Parties” collectively.
Whereas,
1.
2.
3.
Party A is a wholly foreign owned enterprise established in China, which has necessary resources to provide software
technology development, technical training, copyright agency services and organization of cultural and artistic exchange
activities;
Party B is a company established in China with exclusively domestic capital and is permitted to engage in cultural activity
planning; marketing planning; corporate image planning; film and television drama planning, production and distribution;
television program production; film and television cultural consulting services; cultural and creative services; organization
and planning of cultural and artistic exchange activities; photography services; performance brokerage; stage lighting and
sound design and installation; website construction and maintenance; software design and development; design,
production, agency release all kinds of advertisements at home and abroad; engage in Internet cultural activities (involving
licensed business items, which can only be operated with the permission of relevant departments). The businesses
conducted by Party B currently and any time during the term of this Agreement are collectively referred to as the “Main
Business”;
Party A is willing to provide Party B with information consulting services and other services in relation to the Main
Business during the term of this Agreement, utilizing its advantages in human resources and information. Party B is
willing to accept such services provided by Party A or Party A’s designee(s), each on the terms set forth herein.
1
Now, therefore, through mutual discussion, the Parties have reached the following agreements:
1.
Services Provided by Party A
1.1
Party B hereby appoints Party A as Party B's exclusive services provider to provide Party B with
comprehensive information consulting services and other services during the term of this Agreement, in
accordance with the terms and conditions of this Agreement, including but not limited to the follows:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Licensing Party B to use any software (if any) legally owned by Party A and providing software
maintenance and updating services for Party B;
Technical support and training for employees of Party B;
Providing services in related to consultancy, collection and research of project investment for Party
B (excluding market research business that wholly foreign-owned enterprises are prohibited from
conducting under PRC laws);
Providing consultation services in economic information, business information, technology
information, and business management consultation for Party B;
Providing marketing and promotion and corporate image planning services for Party B;
Leasing of equipment or properties; and
Other services requested by Party B from time to time to the extent permitted under PRC law.
1.2
Party B agrees to accept such services provided by Party A. Party B further agrees that unless with Party
A's prior written consent, during the term of this Agreement, Party B shall not directly or indirectly accept
the same or any similar services provided by any third party and shall not establish similar corporation
relationship with any third party regarding the matters contemplated by this Agreement. Party A may
designate other parties, who may enter into certain agreements described in Section 1.3 with Party B, to
provide Party B with relevant services as set forth in this Agreement.
1.3
Ways of Service Provision
1.3.1
Party A and Party B agree that during the term of this Agreement, as applicable, Party B may
enter into further service agreements with Party A or any other party designated by Party A,
which shall provide the specific contents, manner, personnel, and fees for the specific services.
2
1.3.2
1.3.3
To fulfill this Agreement, Party A and Party B agree that during the term of this Agreement, as
applicable, Party B may, at any time, enter into equipment or property lease agreement with
Party A or any other party designated by Party A, which shall permit Party B to use Party A’s
relevant equipment or property based on the needs of the business of Party B.
Party B hereby grants to Party A an irrevocable and exclusive option to purchase from Party B,
to the extent permitted under PRC laws and at Party A’s sole discretion, any or all of the assets
and business of Party B, at the minimum purchase price permitted by PRC laws. The Parties
shall then enter into a separate assets or business transfer agreement, specifying the terms and
conditions of the transfer of the assets.
2.
Service Fees and Payment
2.1
The fees payable by Party B to Party A during the term of this Agreement shall be calculated as follows:
2.1.1
Party B shall pay service fee to Party A monthly. The service fee for each month shall consist of
management fee and services provision fee, which shall be determined by the Parties through
negotiation in consideration of:
(1)
(2)
(3)
(4)
(5)
complexity and difficulty of the services provided by Party A;
title of and time consumed by employees of Party A providing the services;
contents and business value of the services provided by Party A;
market price of the same type of services;
operation conditions of Party B.
2.1.2
If Party A transfers technology to Party B or develops software or other technology as entrusted
by Party B or leases equipment or properties to Party B, the technology transfer price,
development fees or rental fees shall be determined by the Parties based on the actual
situations.
3.
Intellectual Property Rights and Confidentiality Clauses
3.1
Party A shall have exclusive and proprietary ownership, rights and interests in any and all intellectual
properties arising out of or created during the performance of this Agreement, including but not limited to
copyrights, patents, patent applications, software, technical secrets,
3
3.2
trade secrets and others. Party B shall execute all appropriate documents, take all appropriate actions,
submit all filings and/or applications, render all appropriate assistance and otherwise conduct whatever is
necessary as deemed by Party A at its sole discretion for the purposes of vesting any ownership, right or
interest of any such intellectual property rights in Party A, and/or perfecting the protections for any such
intellectual property rights in Party A.
The Parties acknowledge that the existence and the terms of this Agreement and any oral or written
information exchanged between the Parties in connection with the preparation and performance of this
Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such
confidential information, and without obtaining the written consent of the other Party, it shall not disclose
any relevant confidential information to any third party, except for the information that: (a) is or will be in
the public domain (other than through the receiving Party’s unauthorized disclosure); (b) is under the
obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or
orders of the court or other government authorities; or (c) is required to be disclosed by any Party to its
shareholders, directors, employees, legal counsels or financial advisors regarding the transaction
contemplated hereunder, provided that such shareholders, directors, employees, legal counsels or financial
advisors shall be bound by the confidentiality obligations similar to those set forth in this Section.
Disclosure of any confidential information by the shareholders, director, employees of or agencies engaged
by any Party shall be deemed disclosure of such confidential information by such Party and such Party
shall be held liable for breach of this Agreement.
4.
Representations and Warranties
4.1
Party A hereby represents, warrants and covenants as follows:
4.1.1
4.1.2
Party A is a wholly foreign owned enterprise legally established and validly existing in
accordance with the laws of the PRC. Party A or the service providers designated by Party A
will obtain all government permits and licenses for providing the service under this Agreement
before providing such services.
Party A has taken all necessary corporate actions, obtained all necessary authorizations as well
as all consents and approvals from third parties and government authorities (if required) for the
execution, delivery and performance of this Agreement. Party A’s execution, delivery and
performance of this Agreement do not violate any explicit requirements under any law or
regulation.
4.1.3
This Agreement constitutes Party A’s legal, valid and binding obligations, and shall be
enforceable against it in accordance with its terms.
4
4.2
Party B hereby represents, warrants and covenants as follows:
4.2.1
4.2.2
Party B is a company legally established and validly existing in accordance with the laws of the
PRC and has obtained and will maintain all permits and licenses for engaging in the Main
Business.
Party B has taken all necessary corporate actions, obtained all necessary authorizations as well
as all consents and approvals from third parties and government agencies (if required) for the
execution, delivery and performance of this Agreement. Party B’s execution, delivery and
performance of this Agreement do not violate any explicit requirements under any law or
regulation.
4.2.3
This Agreement constitutes Party B’s legal, valid and binding obligations, and shall be
enforceable against it in accordance with its terms.
5.
Term of Agreement
5.1
5.2
5.3
This Agreement shall become effective upon execution by the Parties. Unless terminated in accordance
with the provisions of this Agreement or terminated in writing by Party A, this Agreement shall remain
effective.
During the term of this Agreement, each Party shall renew its operation term in a timely manner prior to
the expiration thereof so as to enable this Agreement to remain effective. This Agreement shall be
terminated upon the expiration of the operation term of a Party if the application for renewal of its
operation term is not approved by relevant government authorities.
The rights and obligations of the Parties under Sections 3, 6, 7 and this Section 5.3 shall survive the
termination of this Agreement.
6.
Governing Law and Disputes Resolution
6.1
6.2
The execution, effectiveness, construction, performance, amendment and termination of this Agreement
and the resolution of disputes hereunder shall be governed by the laws of the PRC.
In the event of any dispute with respect to the construction and performance of this Agreement, the Parties
shall first resolve the dispute through friendly negotiations. In the event the Parties fail to reach an
agreement on the dispute within 30 days after either Party's written request to the other Party for resolution
of the dispute through negotiations, either Party may submit the relevant dispute to China International
Economic and Trade Arbitration Commission for
5
6.3
6.4
6.5
arbitration, in accordance with its arbitration rules. The arbitration shall be conducted in Beijing, and the
arbitration award shall be final and binding to all Parties. Each Party has the right to apply for enforcement
of an arbitral award to a court of competent jurisdiction (including a Chinese court).
To the extent permitted by PRC laws and where appropriate, the arbitration tribunal may grant any
remedies in accordance with the provisions of this Agreement and applicable PRC laws, including
preliminary and permanent injunctive relief (such as injunction against carrying out business activities, or
mandating the transfer of assets), specific performance of contractual obligations, remedies concerning the
equity interest or assets of Party B and awards directing Party B to conduct liquidation.
To the extent permitted by PRC laws, when awaiting the formation of the arbitration tribunal or otherwise
under appropriate conditions, either Party may seek preliminary injunctive relief or other interlocutory
remedies from a court with competent jurisdiction to facilitate the arbitration. Without violating the
applicable governing laws, the Parties agree that the courts of Hong Kong, Cayman Islands, China and the
place where the main assets of Party Aare located shall all be deemed to have competent jurisdiction.
Upon the occurrence of any disputes arising from the construction and performance of this Agreement or
during the pending arbitration of any dispute, except for the matters under dispute, the Parties shall
continue to exercise their respective rights under this Agreement and perform their respective obligations
under this Agreement.
7.
Breach of Agreement and Indemnification
7.1
7.2
7.3
If Party B conducts any material breach of any term of this Agreement, Party A shall have right to
terminate this Agreement and/or require Party B to indemnify all damages. This Section 7.1 shall not
prejudice any other rights of Party A herein.
Unless otherwise required by applicable laws, Party B shall not have any right to terminate this Agreement
in any event.
Party B shall indemnify and hold harmless Party A from any losses, injuries, obligations or expenses
caused by any lawsuit, claims or other demands against Party A arising from or caused by the services
provided by Party A to Party B pursuant this Agreement, except where such losses, injuries, obligations or
expenses arise from the gross negligence or willful misconduct of Party A.
6
8.
Force Majeure
8.1
8.2
In the case of any force majeure events (“Force Majeure”) such as earthquake, typhoon, flood, fire, flu,
war, strikes or any other events that cannot be predicted and are unpreventable and unavoidable by the
affected Party, which directly causes the failure of either Party to perform or completely perform this
Agreement, then the Party affected by such Force Majeure shall not take any responsibility for such failure,
however it shall give the other Party written notices without any delay, and shall provide details of such
event within 15 days after sending out such notice, explaining the reasons for such failure of, partial or
delay of performance.
If such Party claiming Force Majeure fails to notify the other Party and furnish it with proof pursuant to the
above provision, such Party shall not be excused from the non-performance of its obligations hereunder.
The Party so affected by the event of Force Majeure shall use reasonable efforts to minimize the
consequences of such Force Majeure and to promptly resume performance hereunder whenever the causes
of such excuse are cured. Should the Party so affected by the event of Force Majeure fail to resume
performance hereunder when the causes of such excuse are cured, such Party shall be liable to the other
Party.
8.3
In the event of Force Majeure, the Parties shall immediately consult with each other to find an equitable
solution and shall use all reasonable efforts to reduce the consequences of such Force Majeure.
9.
Notices
9.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall
be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by
facsimile transmission to the address of such Party set forth below. A confirmation copy of each notice
shall also be sent by email. The dates on which notices shall be deemed to have been effectively given
shall be determined as follows:
9.1.1
9.1.2
Notices given by personal delivery, by courier service or by registered mail, postage prepaid,
shall be deemed effectively given on the date of receipt or refusal at the address specified for
notices.
Notices given by facsimile transmission shall be deemed effectively given on the date of
successful transmission (as evidenced by an automatically generated confirmation of
transmission).
7
9.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A:
Address:
Attn:
Phone:
Email:
Party B:
Address:
Attn:
Phone:
Email(cid:0)
Tencent Music (Beijng) Co., Ltd.
5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East
Road, Chaoyang District, Beijing
Zhao Xiang
[ ]
[ ]
Niannian Youyu Culture Media (Wuhan) Co., Ltd.
18 F, Songri Dingsheng Building, Nanshan District, Shenzhen
Liu Weiguang
[ ]
[ ]
9.3
Any Party may at any time change its address for notices by delivering notice to the other Party in
accordance with the terms hereof.
10.
Assignment
10.1
10.2
Without Party A's prior written consent, Party B shall not assign its rights and obligations under this
Agreement to any third party.
Party B agrees that Party A may assign its obligations and rights under this Agreement to any third party
and in case of such assignment, Party A is only required to give written notice to Party B and does not need
any consent from Party B for such assignment.
11.
Taxes and Fees
All taxes and fees incurred by each Party as a result of the execution and performance of this Agreement shall be
borne by each Party respectively.
12.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in
any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining
provisions of this Agreement shall not be affected or compromised in any aspect. The Parties shall negotiate in good
faith to replace such invalid, illegal or unenforceable provisions with effective provisions that accomplish to the
greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective provisions
shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.
8
13.
Amendments and Supplements
Any amendments and supplements to this Agreement shall be in writing. The amendment agreements and
supplementary agreements that have been signed by the Parties and relate to this Agreement shall be an integral part
of this Agreement and shall have the same legal validity as this Agreement.
14.
Language and Counterparts
This Agreement is written in Chinese with each Party having one copy.
[The remainder of this page is intentionally left blank]
9
IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Exclusive Business
Cooperation Agreement as of the date first above written.
Party A:
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Tencent Music (Beijing) Co., Ltd.
By:
Name:
Title:
/s/ Yang Qihu
Yang Qihu
Legal Representative
Party B:
/s/ Seal of Niannian Youyu Culture Media (Wuhan) Co., Ltd.
Niannian Youyu Culture Media (Wuhan) Co., Ltd.
By:
Name:
Title:
/s/ Ji Mingzhong
Ji Mingzhong
Legal Representative
Loan Agreement
Exhibit 4.64
This Loan Agreement (the “Agreement”) is entered into by and between the following Parties on August 28, 2019 in
Shenzhen, People’s Republic of China (the “PRC”):
(1)
Tencent Music (Beijing) Co., Ltd. (the “Lender”), a wholly foreign-owned enterprise incorporated and existing
under the laws of the PRC, with its registered address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East
Tianchen Road, Chaoyang District, Beijing;
(2)
Ji Mingzhong (the “Borrower”), a Chinese citizen with Identification No. [
].
The Lender and the Borrower shall hereinafter be referred to as a “Party” respectively and as the “Parties” collectively.
Whereas:
1.
2.
As of the date of this Agreement, the Borrower holds 50% equity interests in Niannian Youyu Culture Media Co., Ltd. (the
“Borrower’s Company”). All the existing and future equity rights and interests the Borrower holds in the Borrower’s
Company are referred to as the “Borrower’s Equity Interest”;
The Lender agrees to provide a loan in the amount of RMB 500,000 to the Borrower for the purposes as specified in this
Agreement.
Upon friendly negotiation, the Parties have reached the following agreements for their mutual compliance:
1
Loan
1.1
The Lender agrees to provide a loan in the amount of RMB 500,000 to the Borrower in accordance with the terms
hereof (the “Loan”). During the term of this Agreement, the Lender shall provide to the Borrower the respective
amounts within one (1) month upon receipt of the notice by the Borrower requesting the provision of all or part of
the Loan. The Loan shall be a long-term loan. During the term of the Loan, if any of the following events occurs,
the Lender shall repay the Loan immediately in advance:
1.1.1
30 days after the Borrower’s receipt of the written notice by the Lender requesting the repayment of the
Loan;
1
1.1.2
the Borrower dies or becomes a person without capacity or with limited capacity for civil acts;
1.1.3
the Borrower is no longer the shareholder of the Borrower’s Company or its affiliates, or resigns from
the Lender, the Borrower’s Company or its affiliates, regardless of the reasons thereof;
1.1.4
the Borrower commits a crime or is involved in a crime;
1.1.5
according to the applicable PRC laws, the foreigners may invest in the existing major business of the
Borrower’s Company in a manner of controlling or wholly owned shareholding and the relevant
authorities in PRC begin to approve such business, and the Lender decides to exercise its right of
exclusive option in accordance with the Exclusive Option Agreement (together with its amendments
from time to time, the “Exclusive Option Agreement”) to which it is a party.
1.2
1.3
1.4
1.5
The Loan by the Lender under this Agreement only applies to the Borrower himself, not his successors or
assignees.
The Borrower agrees to accept the aforesaid loan provided by the Lender, and hereby agrees and warranties to use
the Loan to pay for its investment or increase in the registered capital of the Borrower’s Company or the working
capital of the Borrower’s Company. Unless with prior written consent of the Lender, the Borrower will not use the
Loan for any other purpose.
The Lender and the Borrower hereby agree and confirm that the Borrower may repay the loan only by the
following methods as required by the Lender: according to the Lender’s right to purchase the Borrower’s Equity
Interest under the Exclusive Option Agreement, transfer all the equity interest in the Borrower’s Company to the
Lender or any person (legal person or individual) as designated by the Lender, and use any proceeds obtained
through the transfer of equity interests in the Borrower’s Company (to the extent as permitted) to repay the Loan
in accordance with this Agreement to the Lender in the method as designated by the Lender.
The Lender and the Borrower hereby agree and confirm that, to the extent as permitted by the applicable laws, the
Lender shall be entitled to, but not be obliged to, purchase or designate any person (legal person or individual) to
purchase all or part of the Borrower’s Equity Interest at any time, at a price as specified in the Exclusive Option
Agreement.
2
1.6
1.7
The Borrower also warranties to execute an irrevocable power of attorney (together with its amendments from
time to time, the “Power of Attorney”), which authorizes the Lender or a legal person or an individual as
designated by the Lender to exercise all his or her rights as a shareholder in the Borrower’s Company.
The Loan under this Agreement will be deemed as an interest-free loan if the price to transfer the Borrower’s
Equity Interest from the Borrower to the Lender or any person as designated by the Lender is equal to or less than
the amount of the Loan under this Agreement. However, if such transfer price exceeds the amount of the Loan
under this Agreement, the exceeding amount will be deemed as the interest upon the Loan under this Agreement
and repaid to the Lender from the Borrower.
2
Representations and Warranties
2.1
The Lender represents and warrants to the Borrower that from the date of this Agreement until termination hereof:
2.1.1
it is a company duly incorporated and validly existing under the PRC laws;
2.1.2
it has the power to execute and perform this Agreement. Its execution and performance of this
Agreement are in compliance with its business scope, articles of association or other organizational
documents, and it has received all approvals and authorities necessary and appropriate to execute and
perform this Agreement; and
2.1.3
this Agreement, once executed, becomes legal, valid and enforceable obligations upon the Lender.
2.2
The Borrower represents and warrants that from the date of this Agreement until termination hereof:
2.2.1
the Borrower has the power to execute and perform this Agreement, and has received all approvals and
authorities necessary and appropriate to execute and perform this Agreement;
2.2.2
this Agreement, once executed, becomes legal, valid and enforceable obligations upon the Borrower; and
2.2.3
there is no existing or potential dispute, suit, arbitration, administrative proceeding or any other legal
proceeding in which the Borrower is involved.
3
3
Covenants from the Borrower
3.1
The Borrower covenants in his capacity as the shareholder of the Borrower’s Company that during the term of this
Agreement he will procure the Borrower’s Company:
3.1.1
3.1.2
3.1.3
3.1.4
to strictly comply with the provisions of the Exclusive Option Agreement and the exclusive business
cooperation agreement (together with its amendments from time to time, the “Exclusive Business
Cooperation Agreement”) to which it is a party, and to refrain from any action/omission that may affect
the effectiveness and enforceability thereof;
to execute any contract or agreement regarding the business cooperation with the Lender (or any party as
designated by the Lender) upon the request of the Lender (or any party as designated by the Lender), and
to ensure the strict performance of such contract agreement;
to provide to the Lender any and all information regarding its operations and financial conditions upon
the request of the Lender;
to immediately notify the Lender of any actual or potential litigation, arbitration or administrative
proceeding regarding its assets, business and income;
3.1.5
to appoint any person as nominated by the Lender to its board upon the request of the Lender.
3.2
The Borrower covenants during the term of this Agreement:
3.2.1
3.2.2
to procure, at his best efforts, the Borrower’s Company to conduct its major business, the specific scope
of which shall be subject to the business license;
to strictly comply with the provisions of this Agreement, the Power of Attorney, the Equity Interest
Pledge Agreement (together with its amendments from time to time, the “Equity Interest Pledge
Agreement”) and the Exclusive Option Agreement to which he as a party, perform the obligations
thereunder, and to refrain from any action/omission that may affect the effectiveness and enforceability
thereof;
4
3.2.3
3.2.4
3.2.5
3.2.6
3.2.7
3.2.8
3.2.9
except as provided under the Equity Interest Pledge Agreement, not to sell, transfer, pledge or otherwise
dispose any legal or beneficial interest of the Borrower’s Equity Interest, or allow creation of any other
security interests thereupon;
to procure the shareholders and/or the board of directors of the Borrower’s Company not to approve any
sale, transfer, pledge or otherwise disposal of any legal or beneficial interest of the Borrower’s Equity
Interest, or creation of any other security interests thereupon without prior written consent from the
Lender, except to the Lender or its designated person;
to procure the shareholders and/or the board of the directors of the Borrower’s Company not to approve
its merger or association with, or acquisition of or investment in any person without prior written consent
from the Lender;
to immediately notify the Lender of any actual or potential litigation, arbitration or administrative
proceeding regarding the Borrower’s Equity Interest;
to execute any document, conduct any action, and make any claim or defense, necessary or appropriate to
maintain his or her ownership of the Borrower’s Equity Interest;
not to make any act and/or omission which may affect any asset, business or liability of the Borrower’s
Company without prior written consent from the Lender;
to appoint any person as nominated by the Lender to the board of the Borrower’s Company upon the
request of the Lender;
3.2.10 to the extent as permitted under the PRC laws and upon the request of the Lender at any time, to transfer
unconditionally and immediately the Borrower’s Equity Interest to the Lender or any person as
designated by it, and procure any other shareholder of the Borrower’s Company to waive the right of first
refusal regarding such transfer of equity interest under this Section;
5
3.2.11
to the extent permitted under the PRC laws and upon the request of the Lender at any time, to procure
any other shareholder of the Borrower’s Company to transfer unconditionally and immediately all the
equity interests owned by such shareholder to the Lender or any person as designated by it, and the
Borrower hereby waives his or her right of first refusal regarding such transfer of equity interest under
this Section;
3.2.12 if the Lender purchases the Borrower’s Equity Interest from the Borrower pursuant to the Exclusive
Option Agreement, to use the consideration of such purchase to repay the Loan to the Lender on priority;
and
3.2.13 not to supplement, revise or amend its articles of association in any way, increase or decrease its
registered capital, or change its shareholding structure in any way without prior written consent from the
Lender.
4
Default Liabilities
4.1
4.2
4.3
In the event that the Borrower materially breaches any provision under this Agreement, the Lender is entitled to
terminate this Agreement and claim damages from the Borrower; this Section 4.1 shall not preclude any other
rights entitled to the Lender as provided under this Agreement.
The Borrower may not terminate or cancel this Agreement in any event unless otherwise provided under the laws.
If the Borrower fails to repay the Loan pursuant to the terms under this Agreement, he will be liable for a penalty
interest accrued upon the amount due and payable at a daily interest rate of 1‱ until the Loan as well as any
penalty interest and any other amount accrued thereupon are fully repaid by the Borrower.
6
5
Notices
5.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile
transmission to the designated address of such party as listed below. A confirmation copy of each notice shall also
be sent by E-mail. The dates on which notices shall be deemed to have been effectively delivered shall be
determined as follows:
5.1.1
5.1.2
Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be
deemed effectively delivered upon the delivery.
Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful
transmission (as evidenced by an automatically generated confirmation of transmission).
5.2
For the purpose of notification, the addresses of the Parties are as follows:
The Lender: Tencent Music (Beijing) Co., Ltd.
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Attention: Zhao Xiang
Tel: [
]
The Borrower: Ji Mingzhong
Address: Feiyada High-tech Building, Gaoxinnan 1st Road, Nanshan District, Shenzhen, Guangdong Province
Tel: [
]
5.3
Each Party may at any time change its address for notices by delivering a notice to the other Party in accordance
with this Section.
6
Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written
consent of the other Party, disclose any confidential information to any third parties, except for information: (a) that is or
will be available to the public (other than through the unauthorized disclosure to the public by the Party receiving
confidential information); (b) that is required to
7
be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or other
government authorities; or (c) that is disclosed by any Party to its shareholders, directors, employees, legal counsels or
financial advisors regarding the transaction contemplated hereunder, provided that such shareholders, directors, employees,
legal counsels or financial advisors shall be bound by the confidentiality obligations similar to the terms set forth in this
Section. Disclosure of any confidential information by the shareholders, directors, employees or entities engaged by any
Party shall be deemed as disclosure of such confidential information by such Party, which Party shall be held liable for
breach of contract.
7
Governing Law and Disputes Resolution
7.1
7.2
7.3
The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
Any disputes arising in connection with the implementation and performance of this Agreement shall be settled
through friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30)
days upon issuance of the written notice by one Party to the other Party for consultations, such disputes shall be
submitted by either Party to the China International Economic and Trade Arbitration Commission for arbitration
in accordance with its then effective arbitration rules. The arbitration shall take place in Beijing. The arbitration
award shall be final and binding upon all the Parties.
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall
continue to exercise their respective rights and perform their respective obligations hereunder.
8
Miscellaneous
8.1
8.2
This Agreement shall be effective as of the date of its execution and expire until the Parties have performed their
respective obligations under this Agreement.
This Agreement is written in Chinese in two (2) originals, with each of the Lender and the Borrower holding one
original.
8
8.3
8.4
8.5
8.6
The Parties may amend and supplement this Agreement in writing. Any amendment and/or supplement to this
Agreement by the Parties is an integral part of and has the same effect with this Agreement.
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of
the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties shall
strive in good faith to replace such invalid, illegal or unenforceable provisions with effective provisions that
accomplish to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of
such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or
unenforceable provisions.
The attachments to this Agreement (if any) is an integral part of and has the same effect with this Agreement.
Any obligation that occurs or becomes due under this Agreement prior to the expiry of this Agreement or early
termination shall survive the expiration or early termination of this Agreement. The provisions under Section 4,
Section 6, Section 7 and this Section 8.6 shall survive the termination of this Agreement.
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9
IN WITNESS HEREOF, the Parties have caused this Loan Agreement to be executed by their respective authorized
representative on the date first above written.
The Lender: Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal Representative
The Borrower: Ji Mingzhong
Signature: /s/ Ji Mingzhong
Loan Agreement
This Loan Agreement (the “Agreement”) is entered into by and between the following Parties on August 28, 2019 in
Shenzhen, People’s Republic of China (the “PRC”):
(3)
Tencent Music (Beijing) Co., Ltd. (the “Lender”), a wholly foreign-owned enterprise incorporated and existing
under the laws of the PRC, with its registered address at Room 303, 3rd Floor of 101, -2nd to 8th Floor, No.7 Building, East
Tianchen Road, Chaoyang District, Beijing;
(4)
Zhou Wenjiang (the “Borrower”), a Chinese citizen with Identification No. [
].
The Lender and the Borrower shall hereinafter be referred to as a “Party” respectively and as the “Parties” collectively.
Whereas:
3.
4.
As of the date of this Agreement, the Borrower holds 50% equity interests in Niannian Youyu Culture Media Co., Ltd. (the
“Borrower’s Company”). All the existing and future equity rights and interests the Borrower holds in the Borrower’s
Company are referred to as the “Borrower’s Equity Interest”;
The Lender agrees to provide a loan in the amount of RMB 500,000 to the Borrower for the purposes as specified in this
Agreement.
Upon friendly negotiation, the Parties have reached the following agreements for their mutual compliance:
9
Loan
9.1
The Lender agrees to provide a loan in the amount of RMB 500,000 to the Borrower in accordance with the terms
hereof (the “Loan”). During the term of this Agreement, the Lender shall provide to the Borrower the respective
amounts within one (1) month upon receipt of the notice by the Borrower requesting the provision of all or part of
the Loan. The Loan shall be a long-term loan. During the term of the Loan, if any of the following events occurs,
the Lender shall repay the Loan immediately in advance:
9.1.1
30 days after the Borrower’s receipt of the written notice by the Lender requesting the repayment of the
Loan;
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9.1.2
the Borrower dies or becomes a person without capacity or with limited capacity for civil acts;
9.1.3
the Borrower is no longer the shareholder of the Borrower’s Company or its affiliates, or resigns from the
Lender, the Borrower’s Company or its affiliates, regardless of the reasons thereof;
9.1.4
the Borrower commits a crime or is involved in a crime;
9.1.5
according to the applicable PRC laws, the foreigners may invest in the existing major business of the
Borrower’s Company in a manner of controlling or wholly owned shareholding and the relevant
authorities in PRC begin to approve such business, and the Lender decides to exercise its right of
exclusive option in accordance with the Exclusive Option Agreement (together with its amendments
from time to time, the “Exclusive Option Agreement”) to which it is a party.
9.2
9.3
9.4
9.5
The Loan by the Lender under this Agreement only applies to the Borrower himself, not his successors or
assignees.
The Borrower agrees to accept the aforesaid loan provided by the Lender, and hereby agrees and warranties to use
the Loan to pay for its investment or increase in the registered capital of the Borrower’s Company or the working
capital of the Borrower’s Company. Unless with prior written consent of the Lender, the Borrower will not use the
Loan for any other purpose.
The Lender and the Borrower hereby agree and confirm that the Borrower may repay the loan only by the
following methods as required by the Lender: according to the Lender’s right to purchase the Borrower’s Equity
Interest under the Exclusive Option Agreement, transfer all the equity interest in the Borrower’s Company to the
Lender or any person (legal person or individual) as designated by the Lender, and use any proceeds obtained
through the transfer of equity interests in the Borrower’s Company (to the extent as permitted) to repay the Loan
in accordance with this Agreement to the Lender in the method as designated by the Lender.
The Lender and the Borrower hereby agree and confirm that, to the extent as permitted by the applicable laws, the
Lender shall be entitled to, but not be obliged to, purchase or designate any person (legal person or individual) to
purchase all or part of the Borrower’s Equity Interest at any time, at a price as specified in the Exclusive Option
Agreement.
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9.6
9.7
The Borrower also warranties to execute an irrevocable power of attorney (together with its amendments from
time to time, the “Power of Attorney”), which authorizes the Lender or a legal person or an individual as
designated by the Lender to exercise all his or her rights as a shareholder in the Borrower’s Company.
The Loan under this Agreement will be deemed as an interest-free loan if the price to transfer the Borrower’s
Equity Interest from the Borrower to the Lender or any person as designated by the Lender is equal to or less than
the amount of the Loan under this Agreement. However, if such transfer price exceeds the amount of the Loan
under this Agreement, the exceeding amount will be deemed as the interest upon the Loan under this Agreement
and repaid to the Lender from the Borrower.
10
Representations and Warranties
10.1
The Lender represents and warrants to the Borrower that from the date of this Agreement until termination hereof:
10.1.1 it is a company duly incorporated and validly existing under the PRC laws;
10.1.2 it has the power to execute and perform this Agreement. Its execution and performance of this
Agreement are in compliance with its business scope, articles of association or other organizational
documents, and it has received all approvals and authorities necessary and appropriate to execute and
perform this Agreement; and
10.1.3 this Agreement, once executed, becomes legal, valid and enforceable obligations upon the Lender.
10.2
The Borrower represents and warrants that from the date of this Agreement until termination hereof:
10.2.1 the Borrower has the power to execute and perform this Agreement, and has received all approvals and
authorities necessary and appropriate to execute and perform this Agreement;
10.2.2 this Agreement, once executed, becomes legal, valid and enforceable obligations upon the Borrower; and
10.2.3 there is no existing or potential dispute, suit, arbitration, administrative proceeding or any other legal
proceeding in which the Borrower is involved.
13
11
Covenants from the Borrower
11.1
The Borrower covenants in his capacity as the shareholder of the Borrower’s Company that during the term of this
Agreement he will procure the Borrower’s Company:
11.1.1
to strictly comply with the provisions of the Exclusive Option Agreement and the exclusive business
cooperation agreement (together with its amendments from time to time, the “Exclusive Business
Cooperation Agreement”) to which it is a party, and to refrain from any action/omission that may affect
the effectiveness and enforceability thereof;
11.1.2
to execute any contract or agreement regarding the business cooperation with the Lender (or any party as
designated by the Lender) upon the request of the Lender (or any party as designated by the Lender), and
to ensure the strict performance of such contract agreement;
11.1.3
to provide to the Lender any and all information regarding its operations and financial conditions upon
the request of the Lender;
11.1.4
to immediately notify the Lender of any actual or potential litigation, arbitration or administrative
proceeding regarding its assets, business and income;
11.1.5
to appoint any person as nominated by the Lender to its board upon the request of the Lender.
11.2
The Borrower covenants during the term of this Agreement:
11.2.1
to procure, at his best efforts, the Borrower’s Company to conduct its major business, the specific scope
of which shall be subject to the business license;
11.2.2
to strictly comply with the provisions of this Agreement, the Power of Attorney, the Equity Interest
Pledge Agreement (together with its amendments from time to time, the “Equity Interest Pledge
Agreement”) and the Exclusive Option Agreement to which he as a party, perform the obligations
thereunder, and to refrain from any action/omission that may affect the effectiveness and enforceability
thereof;
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11.2.3
11.2.4
except as provided under the Equity Interest Pledge Agreement, not to sell, transfer, pledge or otherwise
dispose any legal or beneficial interest of the Borrower’s Equity Interest, or allow creation of any other
security interests thereupon;
to procure the shareholders and/or the board of directors of the Borrower’s Company not to approve any
sale, transfer, pledge or otherwise disposal of any legal or beneficial interest of the Borrower’s Equity
Interest, or creation of any other security interests thereupon without prior written consent from the
Lender, except to the Lender or its designated person;
11.2.5
to procure the shareholders and/or the board of the directors of the Borrower’s Company not to approve
its merger or association with, or acquisition of or investment in any person without prior written consent
from the Lender;
11.2.6
to immediately notify the Lender of any actual or potential litigation, arbitration or administrative
proceeding regarding the Borrower’s Equity Interest;
11.2.7
to execute any document, conduct any action, and make any claim or defense, necessary or appropriate to
maintain his or her ownership of the Borrower’s Equity Interest;
11.2.8
not to make any act and/or omission which may affect any asset, business or liability of the Borrower’s
Company without prior written consent from the Lender;
11.2.9
to appoint any person as nominated by the Lender to the board of the Borrower’s Company upon the
request of the Lender;
11.2.10 to the extent as permitted under the PRC laws and upon the request of the Lender at any time, to transfer
unconditionally and immediately the Borrower’s Equity Interest to the Lender or any person as
designated by it, and procure any other shareholder of the Borrower’s Company to waive the right of first
refusal regarding such transfer of equity interest under this Section;
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11.2.11 to the extent permitted under the PRC laws and upon the request of the Lender at any time, to procure
any other shareholder of the Borrower’s Company to transfer unconditionally and immediately all the
equity interests owned by such shareholder to the Lender or any person as designated by it, and the
Borrower hereby waives his or her right of first refusal regarding such transfer of equity interest under
this Section;
11.2.12 if the Lender purchases the Borrower’s Equity Interest from the Borrower pursuant to the Exclusive
Option Agreement, to use the consideration of such purchase to repay the Loan to the Lender on priority;
and
11.2.13 not to supplement, revise or amend its articles of association in any way, increase or decrease its
registered capital, or change its shareholding structure in any way without prior written consent from the
Lender.
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Default Liabilities
12.1
In the event that the Borrower materially breaches any provision under this Agreement, the Lender is entitled to
terminate this Agreement and claim damages from the Borrower; this Section 4.1 shall not preclude any other
rights entitled to the Lender as provided under this Agreement.
12.2
The Borrower may not terminate or cancel this Agreement in any event unless otherwise provided under the laws.
12.3
If the Borrower fails to repay the Loan pursuant to the terms under this Agreement, he will be liable for a penalty
interest accrued upon the amount due and payable at a daily interest rate of 1‱ until the Loan as well as any
penalty interest and any other amount accrued thereupon are fully repaid by the Borrower.
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13
Notices
13.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile
transmission to the designated address of such party as listed below. A confirmation copy of each notice shall also
be sent by E-mail. The dates on which notices shall be deemed to have been effectively delivered shall be
determined as follows:
13.1.1 Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be
deemed effectively delivered upon the delivery.
13.1.2 Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful
transmission (as evidenced by an automatically generated confirmation of transmission).
13.2
For the purpose of notification, the addresses of the Parties are as follows:
The Lender: Tencent Music (Beijing) Co., Ltd.
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Attention: Zhao Xiang
Tel: [
]
The Borrower: Zhou Wenjiang
Address: [
]
]
Tel: [
13.3
Each Party may at any time change its address for notices by delivering a notice to the other Party in accordance
with this Section.
14
Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written
consent of the other Party, disclose any confidential information to any third parties, except for information: (a) that is or
will be available to the public (other than through the unauthorized disclosure to the public by the Party receiving
confidential information); (b) that is required to be disclosed pursuant to the applicable laws or regulations, rules of any
stock
17
exchange, or orders of the court or other government authorities; or (c) that is disclosed by any Party to its shareholders,
directors, employees, legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that
such shareholders, directors, employees, legal counsels or financial advisors shall be bound by the confidentiality
obligations similar to the terms set forth in this Section. Disclosure of any confidential information by the shareholders,
directors, employees or entities engaged by any Party shall be deemed as disclosure of such confidential information by
such Party, which Party shall be held liable for breach of contract.
15
Governing Law and Disputes Resolution
15.1
15.2
The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
Any disputes arising in connection with the implementation and performance of this Agreement shall be settled
through friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30)
days upon issuance of the written notice by one Party to the other Party for consultations, such disputes shall be
submitted by either Party to the China International Economic and Trade Arbitration Commission for arbitration
in accordance with its then effective arbitration rules. The arbitration shall take place in Beijing. The arbitration
award shall be final and binding upon all the Parties.
15.3
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall
continue to exercise their respective rights and perform their respective obligations hereunder.
16 Miscellaneous
16.1
16.2
16.3
This Agreement shall be effective as of the date of its execution and expire until the Parties have performed their
respective obligations under this Agreement.
This Agreement is written in Chinese in two (2) originals, with each of the Lender and the Borrower holding one
original.
The Parties may amend and supplement this Agreement in writing. Any amendment and/or supplement to this
Agreement by the Parties is an integral part of and has the same effect with this Agreement.
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16.4
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of
the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties shall
strive in good faith to replace such invalid, illegal or unenforceable provisions with effective provisions that
accomplish to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of
such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or
unenforceable provisions.
16.5
The attachments to this Agreement (if any) is an integral part of and has the same effect with this Agreement.
16.6
Any obligation that occurs or becomes due under this Agreement prior to the expiry of this Agreement or early
termination shall survive the expiration or early termination of this Agreement. The provisions under Section 4,
Section 6, Section 7 and this Section 8.6 shall survive the termination of this Agreement.
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IN WITNESS HEREOF, the Parties have caused this Loan Agreement to be executed by their respective authorized
representative on the date first above written.
The Lender: Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal Representative
The Borrower: Zhou Wenjiang
Signature: /s/ Zhou Wenjiang
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Power of Attorney
Exhibit 4.65
I, Ji Mingzhong, a Chinese citizen with the Chinese Identification No. [
], holds 50% of the equity interest in
Niannian Youyu Culture Media Co., Ltd. (the “Niannian Youyu Culture Media”) as of the date of this Power of Attorney
(representing RMB 500,000 registered capital of Niannian Youyu Culture Media), hereby irrevocably authorize Tencent Music
(Beijing) Co., Ltd. (the “WFOE”) to exercise the following rights with respect to the existing and future equity interests held by
myself in Niannian Youyu Culture Media (the “Owned Equity Interest”) during the effective term of this Power of Attorney:
Authorizing WFOE as my sole and exclusive proxy, to exercise, including without limitation, the following rights on
my behalf with full authority with respect to the Owned Equity Interest: 1) to attend the shareholders’ meetings of Niannian
Youyu Culture Media; 2) to exercise all shareholder’s rights and shareholder’s voting rights which I am entitled with under the
laws and the articles of association of Niannian Youyu Culture Media, including without limitation, rights to sell, transfer, pledge
or otherwise dispose of all or any part of the Owned Equity Interest; and 3) as my authorized representative, to appoint and elect
the legal representative, directors, supervisors, managers and other senior management of Niannian Youyu Culture Media.
WFOE shall be authorized to execute, on my behalf, any and all agreements to which I shall be a party as specified in
the Exclusive Option Agreement entered into as of August 28, 2019 by and among me, WFOE and Niannian Youyu Culture
Media, the Equity Interest Pledge Agreement entered into as of August 28 , 2019 by and among me, WFOE and Niannian Youyu
Culture Media, the Loan Agreement entered into as of August 28, 2019 by and between me and WFOE (together with any
amendments, revisions or restatements, the “Transaction Documents”), and duly perform the Transaction Documents. The
authority granted under this Power of Attorney shall not be limited by the exercise of such right in any way.
Any act conducted or any documents executed by WFOE with respect to the Owned Equity Interest shall be deemed
conducted or executed by myself which I shall acknowledge.
WFOE shall be entitled to assign the authority to any other individual or entity for conducting of the abovementioned
matters without the necessity to inform me or obtain my prior consent. WFOE shall appoint a Chinese citizen to exercise the
abovementioned rights as required by the PRC laws (if any).
As long as I am a shareholder of Niannian Youyu Culture Media, this Power of Attorney shall be irrevocable and remain
valid and effective from the date of this Power of Attorney.
1
During the effective term of this Power of Attorney, I hereby waive all rights in connection with the Owned Equity
Interest that have been granted to WFOE under this Power of Attorney, and will refrain from exercising such rights on my own.
[The remainder of this page is intentionally left blank]
2
Signature: /s/ Ji Mingzhong
Name: Ji Mingzhong
August 28, 2019
This Page is the signature page to the Power of Attorney.
Accepted by:
Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal representative
Accepted by:
Niannian Youyu Culture Media Co. Ltd.
/s/ Seal of Niannian Youyu Culture Media Co. Ltd.
Signature: /s/ Ji Mingzhong
Name: Ji Mingzhong
Title: Legal Representative
Power of Attorney
I, Zhou Wenjiang, a Chinese citizen with the Chinese Identification No. [ ], holds 50% of the equity interest in
Niannian Youyu Culture Media Co., Ltd. (the “Niannian Youyu Culture Media”) as of the date of this Power of Attorney
(representing RMB 500,000 registered capital of Niannian Youyu Culture Media), hereby irrevocably authorize Tencent Music
(Beijing) Co., Ltd. (the “WFOE”) to exercise the following rights with respect to the existing and future equity interests held by
myself in Niannian Youyu Culture Media (the “Owned Equity Interest”) during the effective term of this Power of Attorney:
Authorizing WFOE as my sole and exclusive proxy, to exercise, including without limitation, the following rights on
my behalf with full authority with respect to the Owned Equity Interest: 1) to attend the shareholders’ meetings of Niannian
Youyu Culture Media; 2) to exercise all shareholder’s rights and shareholder’s voting rights which I am entitled with under the
laws and the articles of association of Niannian Youyu Culture Media, including without limitation, rights to sell, transfer, pledge
or otherwise dispose of all or any part of the Owned Equity Interest; and 3) as my authorized representative, to appoint and elect
the legal representative, directors, supervisors, managers and other senior management of Niannian Youyu Culture Media.
WFOE shall be authorized to execute, on my behalf, any and all agreements to which I shall be a party as specified in
the Exclusive Option Agreement entered into as of August 28, 2019 by and among me, WFOE and Niannian Youyu Culture
Media, the Equity Interest Pledge Agreement entered into as of August 28, 2019 by and among me, WFOE and Niannian Youyu
Culture Media, the Loan Agreement entered in as of August 28, 2019 by and between me and WFOE (together with any
amendments, revisions or restatements, the “Transaction Documents”), and duly perform the Transaction Documents. The
authority granted under this Power of Attorney shall not be limited by the exercise of such right in any way.
Any act conducted or any documents executed by WFOE with respect to the Owned Equity Interest shall be deemed
conducted or executed by myself which I shall acknowledge.
4
WFOE shall be entitled to assign the authority to any other individual or entity for conducting the abovementioned
matters without the necessity to inform me or obtain my prior consent. WFOE shall appoint a Chinese citizen to exercise the
abovementioned rights as required by the PRC laws (if any).
As long as I am a shareholder of Niannian Youyu Culture Media, this Power of Attorney shall be irrevocable and remain
valid and effective from the date of this Power of Attorney.
During the effective term of this Power of Attorney, I hereby waive all rights in connection with the Owned Equity
Interest that have been granted to WFOE under this Power of Attorney, and will refrain from exercising such rights on my own.
[The remainder of this page is intentionally left blank]
5
Signature: /s/ Zhou Wenjiang
Name: Zhou Wenjiang
August 28, 2019
This Page is the signature page to the Power of Attorney.
Accepted by:
Tencent Music (Beijing) Co., Ltd.
/s/ Seal of Tencent Music (Beijing) Co., Ltd.
Signature: /s/ Yang Qihu
Name: Yang Qihu
Title: Legal representative
Acknowledged by:
Niannian Youyu Culture Media Co. Ltd.
/s/ Seal of Niannian Youyu Culture Media Co. Ltd.
Signature: /s/ Ji Mingzhong
Name: Ji Mingzhong
Title: Legal Representative
6
Spousal Consent
Exhibit 4.66
The undersigned, Yang Xingzhu, (Identification No.:[ ]), is the lawful spouse of Ji Mingzhong (Identification No.:
[ ]). I hereby unconditionally and irrevocably agree to the execution of the following documents by Ji Mingzhong as of
August 28, 2019 (the “Transaction Documents”) and the disposal of the equity interest of Niannian Youyu Culture Media Co.,
Ltd. (the “Domestic Company”) held by Ji Mingzhong and registered under his name pursuant to the provisions of the following
documents:
(1)
(2)
(3)
(4)
the equity interest pledge agreement by and among Ji Mingzhong, Tencent Music (Beijing) Co., Ltd. (the
“WFOE”), the Domestic Company and other parties;
the exclusive option agreement by and among Ji Mingzhong, the WFOE, the Domestic Company and other parties;
the loan agreement by and between Ji Mingzhong and the WFOE; and
the power of attorney by Ji Mingzhong to the WFOE.
I hereby confirm that I do not enjoy any interests or rights in the Domestic Company and hereby undertake not to make
any assertions in respect of the equity interest of the Domestic Company. I further confirm that, Ji Mingzhong can perform the
Transaction Documents and further amend or terminate the Transaction Documents or execute other agreements to replace the
Transaction Documents absent any authorization or consent from me.
I hereby undertake to execute all necessary documents, and take all necessary actions, to ensure appropriate performance
of the Transaction Documents (as amended from time to time).
I hereby agree and undertake that, if I acquire any equity interests in the Domestic Company for whatever reasons, I shall
be bound by the Transaction Documents (as amended from time to time) and shall comply with the obligations of a shareholder
of the Domestic Company thereunder. For this purpose, upon the WFOE’s request, I shall execute a series of written documents
in substantially the same format and content as the Transaction Documents (as amended from time to time).
Signature:
Date:
/s/ Yang Xingzhu
August 28, 2019
Equity Interest Pledge Agreement
Exhibit 4.67
This Equity Interest Pledge Agreement (the “Agreement”) is entered into by and among the following Parties on July 26,
2019 in Shenzhen, People’s Republic of China (the “PRC”):
Party A:
Registered Address:1st Floor, Building 195, No.1 District, Xijiao Beiwa Road, Haidian District, Beijing;
Simo Music (Beijing) Co., Ltd. (the “Pledgee”)
Legal Representative:Wang Lei
Party B:
Gu Dejun, Identification No.: [ ];
Yang Qihu, Identification No.: [ ]
(Hereinafter referred to as a “Pledgor” respectively and as the “Pledgors” collectively)
Party C:
Registered Address:Room 201, Building A, No.1 Qianwan First Road, Qianhai Shenzhen-Hongkong Cooperation Zone,
Lianhe Wenyu (Shenzhen) Co., Ltd.
Shenzhen (premise of Shenzhen Qianhai Commerce Secretariat Co., Ltd.)
Legal Representative:Wang Lei
In this Agreement, each of the Pledgee, the Pledgors and Party C shall be referred to as a “Party” respectively or as the
“Parties” collectively.
Whereas:
1.
2.
3.
The Pledgors are Chinese nature persons. As of the date of this Agreement, the Pledgors collectively hold 100% equity
interests of Party C. Gu Dejun holds 50% equity interests of Party C, representing RMB 2,500,000 in the registered
capital thereof and Yang Qihu holds 50% equity interests of Party C, representing RMB 2,500,000 in the registered
capital thereof.
Party C is a limited liability company registered in China. Party C hereby acknowledges the rights and obligations of the
Pledgors and the Pledgee under this Agreement and intends to provide any necessary assistance in registering the Pledge.
The Pledgee is a limited liability company registered in China. The Pledgee and Party C have entered into an Exclusive
Business Cooperation Agreement on July 26, 2019; the Pledgee, the Pledgors and Party C have entered into an Exclusive
Option Agreement and a Voting Trust Agreement on July 26, 2019; the Pledgee and the Pledgors have entered into a Loan
Agreement on July 26, 2019 (together with the Exclusive Business Cooperation Agreement, the Exclusive Option
Agreement, the Voting Trust Agreement and this Agreement are collectively referred to as the “Controlling
Agreement”).
1
4.
To ensure that the Pledgee receives all the due payments (including but not limited to the consulting service fee) from
Party C, guarantee the loan provided by the Pledgee to the Pledgors, and ensure Party C and the Pledgors’ fully
performance of its or their other obligations under the Controlling Agreement, the Pledgors pledge to the Pledgee the
100% equity interests of Party C held by them.
To perform the terms of the Controlling Agreement, the Parties have mutually agreed to execute this Agreement upon the
following terms.
1.
Definitions
Unless otherwise provided in this Agreement, the terms below shall have the following meanings:
1.1.
Pledge: means the security interest granted by the Pledgors to the Pledgee pursuant to Section 2 of this
Agreement, i.e., the right of the Pledgee to be compensated on a preferential basis with any proceeds received
from conversion, auction or sale of the Pledged Equity Interest.
1.2.
Pledged Equity Interest: means 100% of the equity interests in Party C in collectively held by the Pledgors now,
and all the future equity rights and interests in Party C held by the Pledgors.
1.3.
Term of Pledge: means the term set forth in Section 3 of this Agreement.
1.4.
Event of Default: means any circumstances as set forth in Section 7 of this Agreement.
1.5.
Notice of Default: means the notice issued by the Pledgee in accordance with this Agreement declaring an Event
of Default.
2.
The Pledge
2.1.
As the guaranty of all obligations performed by Party C and the Pledgors under the Controlling Agreement,
including but not limited to the consulting service fee under the Exclusive Business Cooperation Agreement, the
loan under the Loan Agreement, the payment obligations of relevant fees resulted from the enforcement of the
performance of the contractual obligations of Party C and/or the Pledgors, and other obligations of Party C and the
Pledgors under the Controlling Agreement, the Pledgee shall have the pledge right and interests of the Pledged
Equity Interest and shall have the priority of compensation, whether these payments are due, required to pay in
advance or for other reasons.
2
2.2.
2.3.
During the Term of Pledge, the Pledgee is entitled to receive any dividends or distributions in respect of the
Pledged Equity Interest. With the prior written consent of the Pledgee, the Pledgors may collect such dividends or
distributions in respect of the Pledged Equity Interest. Any dividends or distributions received by the Pledgee in
respect of the Pledged Equity Interest after deduction of income tax paid by Pledgors shall, upon the Pledgee’s
request, (1) be deposited into a bank account designated by the Pledgee, be placed under the custody of the
Pledgee, and be used as security for the contractual obligations; or (2) to the extent permitted by PRC laws, be
unconditionally donated to the Pledgee or any person designated by the Pledgee.
In the event that Party C is to be dissolved or liquidated as required by any mandatory rules of PRC laws, upon the
lawful completion of such dissolution or liquidation procedure, any proceeds distributed by Party C to the
Pledgors by laws shall, upon the Pledgee’s request, (1) be deposited into a bank account designated by the
Pledgee, be placed under the custody of the Pledgee, and be used as security for the Contractual Obligations; or
(2) to the extent permitted by PRC laws, be unconditionally donated to the Pledgee or any person designated by
the Pledgee.
3.
Term of Pledge
3.1.
The Pledge shall become effective on such date when the pledge of the Pledged Equity Interest contemplated
herein has been registered with the relevant administration for industry and commerce. The Pledge shall be
continuously valid until there is no more payment obligations of all the Pledgors, Party C and its branches to the
Pledgee under the Controlling Agreement. The Pledgors and Party C shall, (1) register the Pledge in the
shareholders’ register of Party C within 10 business days following the execution of this Agreement, and (2)
submit this Agreement or other agreement form required by the relevant administration of industry and commerce
for the registration of the Pledge contemplated herein within 15 business days following the execution of this
Agreement. The Pledgors and Party C shall submit all necessary documents and complete all necessary
procedures, as required by the PRC laws and regulations and the relevant administration of industry and
commerce, to ensure that the Pledge shall be registered as soon as possible after filing.
3.2.
During the Term of Pledge, in the event the Pledgors and/or Party C fail to pay the consulting service fee, the loan
or other fees under the Controlling Agreement, the Pledgee shall be entitled to, but not be obliged to, exercise the
Pledge in accordance with this Agreement.
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4.
Custody for Certificates of the Pledge
4.1.
During the Term of Pledge, the Pledgors shall deliver to the Pledgee within one (1) week following the execution
of this Agreement the certificate of capital contributions to Party C (if any) and the register of shareholders which
records the Pledge (if any) for its custody. The Pledgee will place such documents in custody throughout the entire
Term of Pledge specified in this Agreement.
5.
Representations and Warranties of the Pledgors and Party C
The Pledgors and Party C hereby severally and jointly represent and warrant to the Pledgee as of the date hereof as
follows:
5.1.
The Pledgee is entitled to dispose of and transfer the Pledged Equity Interest in accordance with this Agreement.
5.2.
5.3.
5.4.
Except for the Pledge, the Pledgors have not created any other pledges or other security interest on the Pledged
Equity Interest.
The Pledgors and Party C have obtained all necessary approvals and consents from government authorities and
third parties (if any) in connection with the execution, delivery and performance of this Agreement.
The execution, delivery and performance of this Agreement do not (i) result in any violation of any relevant PRC
laws; (ii) result in any conflict with the articles of association or other constituent documents of Party C; (iii)
result in any breach of any agreement to which it is a party or by which it is bound, or constitute any default under
any agreement to which it is a party or by which it is bound; (iv) result in any breach of any permit or license
issued or granted to it and/or any condition of the validity thereof; or (v) result in the revocation or suspension of,
or imposition of conditions on, any permit or license issued to it.
6.
Undertakings by the Pledgors and Party C
6.1.
During the Term of Pledge, the Pledgors and Party C severally and jointly undertake to the Pledgee that:
4
6.1.1. Without the prior written consent of the Pledgee, shall not transfer the Pledged Equity Interest, create or
permit to be created any security interest or other encumbrances on the Pledged Equity Interest, except for
the performance of the Exclusive Option Agreement signed by the Pledgee, the Pledgors and Party C.
6.1.2. The Pledgors and Party C shall comply with the provisions of all the laws and regulations relating to the
pledge of rights, and shall, within five (5) days upon receipt of any notice, order or recommendation
issued or promulgated by the relevant competent authorities regarding the Pledge, present such notice,
order or recommendation to the Pledgee, and concurrently comply with such notice, order or
recommendation, or object thereto upon the reasonable request or consent of the Pledgee;
6.2.
6.3.
6.1.3. The Pledgors and Party C shall promptly notify the Pledgee of any event or notice received by the
Pledgors that may have an impact on the Pledged Equity Interest or any portion thereof, and that may
change any undertakings and obligations of the Pledgors hereunder or may have an impact on the
fulfillment of any obligations by the Pledgors hereunder.
The Pledgors agree that the rights granted to the Pledgee in respect of the Pledge hereunder shall not be
interrupted or harmed by any legal procedure initiated by the Pledgors, any successors of the Pledgors or their
entrusting party or any other persons.
The Pledgors undertake to the Pledgee that in order to protect or perfect the security in this Agreement for the
consulting service fee, loan and other fees provided under the Controlling Agreement, the Pledgors shall execute
in good faith and cause other parties who have interests in the Pledge to execute all the certificates of rights,
agreements, and/or perform and procure other parties who have interests in the Pledge to perform acts as required
by the Pledgee, facilitate the exercise of the Pledgee’s rights granted hereunder and enter into all relevant
documents regarding ownership of the Pledged Equity Interest with the Pledgee or any person (individuals or
legal persons) designated by the Pledgee, as well as provide the Pledgee with all notices, orders and decisions
regarding the Pledge as required by the Pledgee within a reasonable period of time.
6.4.
The Pledgors hereby undertake to the Pledgee that the Pledgors will comply with and perform all the
undertakings, representations and warranties and terms hereunder. In the event that the Pledgors fail to perform or
fail to fully perform such undertakings, representations and warranties and terms hereunder, the Pledgors shall
indemnify the Pledgee against all the losses resulting therefrom.
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6.5.
Subject to relevant laws and regulations in China, the Pledge under this Agreement is a continuing guarantee, and
during the term of this Agreement it will remain completely effective and valid. The Pledge under this Agreement
shall not be affected even if the Pledgors change the organization or position, or offset occurs among the Parties,
or due to occurrence of any other events.
6.6. Without the prior written consent of the Pledgee, the Pledgors and Party C shall not by themselves or assist others
to increase, decrease, or transfer the registered capital of Party C or its subsidiaries (or the Pledgors’ capital
contribution to Party C), set encumbrances over them, change or terminate the existing business of Party C and/or
its subsidiaries and branches, and sell or dispose of all or most of the goodwill or assets of Party C and/or its
subsidiaries and branches.
6.7.
Unless there is a prior written contrary instruction of the Pledgee, the Pledgors and Party C agree to ensure the
transferee of the Pledged Equity Interest should acknowledge the Pledge and perform necessary registration
procedures of the Pledge change (including but not limited to sign relevant documents) in order to make sure the
existence of the Pledge, given that all or part of the Pledged Equity Interest has been transferred to any third party
by violation of this Agreement (including division and inheritance).
7.
Exercise of the Pledge
7.1. Without the written consent of the Pledgee, the Pledgors shall not give up, transfer or dispose of their equity
interest in Party C by other means, until the consulting service fee, loan and other expenses mentioned in the
Controlling Agreement have been paid off.
7.2.
The Pledgee may issue a Notice of Default to the Pledgors for the exercise of the Pledge.
7.3.
7.4.
Subject to the provisions of Section 8.3, the Pledgee may exercise its right to dispose of the Pledge at the same
time of or at any time after the issuance of the Notice of Default in accordance with Section 7.2.
In any Event of Default, the Pledgee shall, within the scope permitted by law and in accordance with provisions of
relevant laws, be entitled to dispose the Pledged Equity Interest as per the legal procedures. With respect to the
proceeds of such disposal, the Pledgee is not required to pay to the Pledgors. The Pledgors hereby waives the right
they may have to claim for any proceeds from the disposal of the Pledged Equity Interest.
6
7.5. When the Pledgee disposes of the Pledge in accordance with this Agreement, the Pledgors and Party C shall
provide necessary assistance to the Pledgee for its exercise of the Pledge.
8.
Event of Default
8.1.
Unless waived by the Pledgee, each of the following circumstances shall constitute an Event of Default:
8.1.1. The Pledgors and Party C fail to pay off the consulting service fee, the loan and other expenses under the
Controlling Agreement, or breach any of the obligations under the Controlling Agreement.
8.1.2. Any representation and warranty of the Pledgors in Section 5 of this Agreement is materially misleading
or false, and/or the Pledgors breach any of the representations and warranties provided in Section 5 of this
Agreement.
8.1.3. The Pledgors and Party C fail to register the Pledge in the shareholders’ register of Party C or complete the
registration of the Pledge in accordance with Section 3.1 of this Agreement.
8.1.4. The Pledgors or Party C breach any clauses of this Agreement.
8.1.5. Except as provided in Section 6.1.1 of this Agreement, the Pledgors give up the Pledged Equity Interest,
transfer or intend to transfer the Pledged Equity Interest without the written consent of the Pledgee.
8.1.6. The Pledgors’ ability to perform the obligations under this Agreement has been materially affected, given
that any loan, guarantee, indemnity, commitment or other repayment liability made by the Pledgors: (1)
has been required to repay or perform in advance due to the breach; or (2) is due but cannot be repaid or
performed.
8.1.7. All required governmental consent, license, approval or authorization which makes this Agreement
executed, lawful, or effective has been revoked, suspended, invalidated or substantially modified.
8.1.8. The issuance of applicable laws makes this Agreement illegal or makes the Pledgors could not continue to
perform its obligations under this Agreement.
8.1.9. The heirs or administrators of the Pledgors and Party C are only able to perform part of or refuse to
perform the payment obligations under the Controlling Agreement.
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8.1.10. Other circumstances in which the Pledgee is unable or may not be able to exercise the Pledge right
according to relevant laws.
8.2.
8.3.
Should there arises any event set forth in Section 8.1 or any circumstance that may result in the foregoing events,
the Pledgors and Party C shall immediately notify the Pledgee in writing.
Unless an Event of Default set forth in this Section 8.1 has been resolved to the satisfaction of the Pledgee, the
Pledgee may issue a Notice of Default to the Pledgors and/or Party C in writing at the same time or at any time
thereafter when any Event of Default arises, to require the Pledgors and/or Party C to immediately pay all loan
and payments under the Controlling Agreement, and/or require the exercise of the Pledge in accordance with
Section 7 hereof.
9.
Default Liabilities
9.1.
In the event that the Pledgors or Party C materially breach any provision under this Agreement, the Pledgee is
entitled to terminate this Agreement and/or claim damages from the Pledgors or Party C; this Section 9 shall not
preclude any other rights entitled to the Pledgee as provided under this Agreement.
9.2.
The Pledgors or Party C may not terminate or cancel this Agreement in any event unless otherwise provided under
the laws.
10.
Assignment
10.1. The Pledgors and Party C shall not donate, or transfer their rights and obligations under this Agreement without
prior written consent of the Pledgee.
10.2. This Agreement shall be binding upon the Pledgors and its successors and any permitted assignees, and effective
upon the Pledgee and each of its successors and assignees.
10.3. The Pledgee may assign any or all of its rights and obligations under the Transaction Documents and this
Agreement to any person (natural person/corporation) designated by it at any time. In this case, the assignee shall
enjoy and assume the rights and obligations of the Pledgee under the Transaction Documents and this Agreement
as if the assignee were a party hereto. When the Pledgee transfers the rights and obligations under the Controlling
Agreement, the Pledgors shall, at the request of the Pledgee, sign relevant agreements and/or documents for the
transfer.
8
10.4.
In the event of a change of Pledgee due to assignment, the Pledgors shall, at the request of the Pledgee, execute a
new pledge agreement with the new pledgee with the same terms and conditions as this Agreement.
10.5. The Pledgors shall strictly comply with the provisions of this Agreement and other relevant agreements to which
any Party is a party, including the Exclusive Option Agreement and Power of Attorney, and perform the
obligations thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability
thereof.
11.
Termination
This agreement shall terminate after all payments have been paid off, and there is no longer any obligations of the
Pledgors and Party C under the Controlling Agreement. The Pledgee shall release the Pledge of the Pledged Equity Interest
hereunder and cooperate with the Pledgors in relation to both the de-registration of the Pledge of the Pledged Equity Interest in
the shareholders’ register of Party C and the deregistration of the Pledge of the Pledged Equity Interest with the relevant
administration of industry and commerce.
12.
Costs and Other Expenses
All costs and actual expenses arising in connection with this Agreement, including without limitation the legal fees,
processing fees, stamp duty, any other taxes and expenses, shall be borne by Party C. The Pledgee and the Pledgors shall not bear
any costs or taxes arising out of or in connection with this Agreement.
9
13. Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written consent of
the other Party, disclose any confidential information to any third parties, except for information: (a) that is or will be available to
the public (other than through the unauthorized disclosure to the public by the Party receiving confidential information); (b) that
is required to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange, or orders of the court or
other government authorities; or (c) that is disclosed by any Party to its shareholders, investors, legal counsels or financial
advisors regarding the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels or financial
advisors shall be bound by the confidentiality obligations similar to the terms set forth in this Section. Disclosure of any
confidential information by the employees or entities engaged by any Party shall be deemed as disclosure of such confidential
information by such Party, which Party shall be held liable for breach of contract. Notwithstanding this Agreement has been
terminated for any reason, this Section shall remain in force.
14.
Governing Law and Disputes Resolution
14.1. The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
14.2. Any disputes arising in connection with the implementation and performance of this Agreement shall be settled
through friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30)
days upon issuance of the written notice by one Party to the other Parties for consultations, such disputes shall be
submitted by either Party to the China International Economic and Trade Arbitration Commission for arbitration
in accordance with its arbitration rules. The arbitration shall take place in Shenzhen, and the language of
arbitration shall be Chinese. The arbitration award shall be final and binding upon all the Parties.
14.3. Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall
continue to exercise their respective rights and perform their respective obligations hereunder.
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15.
Notices
15.1. All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile
transmission to the designated address of such party as listed below. A confirmation copy of each notice shall also
be sent by E-mail. The dates on which notices shall be deemed to have been effectively delivered shall be
determined as follows:
15.1.1. Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be
deemed effectively delivered on the date of receipt or refusal at the address specified for notices.
15.1.2. Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful
transmission (as evidenced by an automatically generated confirmation of transmission).
15.2. For the purpose of notification, the addresses of the Parties are as follows:
Party A:
Address:
Attn:
Email(cid:0)
Party B:
Name(cid:0)
Address:
Attn:
Email(cid:0)
Name(cid:0)
Address:
Attn:
Email(cid:0)
Party C:
Address:
Attn:
Email(cid:0)
Simo Music (Beijing) Co., Ltd.
5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Gu Dejun
5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Yang Qihu
5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Lianhe Wenyu (Shenzhen) Co., Ltd.
Room 2606, Building 2, Huamao Center, No.79 Jianguo Road, Chaoyang District, Beijing
Kang Sihan
[ ]
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15.3. Each Party may at any time change its address for notices by delivering a notice to the other Parties in accordance
with this Section.
16.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any
aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this
Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such invalid,
illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by law and the
intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to the economic effect
of those invalid, illegal or unenforceable provisions.
17.
Exhibits
The exhibits listed in this Agreement are integral parts of this Agreement and have the same legal effect as the text of this
Agreement.
18.
Effectiveness
18.1. Any amendments, supplements and changes to this Agreement shall require the execution of a written agreement
by all of the Parties, and shall come into force upon required governmental registrations.
18.2.
If it is required to execute another agreement by using the format of the governmental authorities for this
transaction provided in this Agreement in order to request the governmental authorities to conduct certain
behaviors, this Agreement shall prevail. And the other agreement shall be used only for the purpose of requesting
the governmental authorities to conduct certain behaviors, but shall not be used to set up or certify the rights and
obligations with respect to the matters set forth in this Agreement.
18.3. This Agreement is written in Chinese in five (5) originals, with each of the Pledgee, the Pledgors and Party C
holding one original, and the other one original will be submitted for registration. Each original has the same legal
effect.
18.4. This Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the
subject matter hereof, and shall supersede all prior consultations, representations, and contracts reached with
respect to the subject matter of this Agreement.
[The remainder of this page is intentionally left blank]
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IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party A:
/s/ Seal of Simo Music (Beijing) Co., Ltd.
Simo Music (Beijing) Co., Ltd.
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party B:
By:
Name:
By:
Name:
/s/ Gu Dejun
Gu Dejun
/s/ Yang Qihu
Yang Qihu
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party C:
/s/ Seal of Lianhe Wenyu (Shenzhen) Co., Ltd.
Lianhe Wenyu (Shenzhen) Co., Ltd.
Exhibits:
1.
2.
3.
4.
5.
Register of Shareholders
Exclusive Business Cooperation Agreement
Exclusive Option Agreement
Voting Trust Agreement
Loan Agreement
Lianhe Wenyu (Shenzhen) Co., Ltd.
Register of Shareholders
Name of Shareholder
Gu Dejun
Yang Qihu
Total
Contribution Form
Cash
Cash
Amount
RMB 2,500,000
RMB 2,500,000
Percentage of Contributions
50%
50%
RMB 5,000,000100%
Lianhe Wenyu (Shenzhen) Co., Ltd.
/s/ Seal of Lianhe Wenyu (Shenzhen) Co., Ltd.
2019
Exclusive Option Agreement
Exhibit 4.68
This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of July 26, 2019
in Shenzhen, China:
Party A:
Registered Address:1st Floor, Building 195, No.1 District, Xijiao Beiwa Road, Haidian District, Beijing;
Legal Representative:Wang Lei
Simo Music (Beijing) Co., Ltd.
Party B:
Gu Dejun, Identification No.: [ ];
Yang Qihu, Identification No.: [ ]
Party C:
Registered Address:Room 201, Building A, No.1 Qianwan First Road, QianhaiShenzhen-Hongkong Cooperation Zone,
Lianhe Wenyu (Shenzhen) Co., Ltd.
Shenzhen (premise of Shenzhen Qianhai Commerce Secretariat Co., Ltd.)
Legal Representative: Wang Lei
In this Agreement, Party A, Party B, and Party C shall each be referred to as a “Party” respectively, and shall be
collectively referred to as the “Parties”.
Whereas:
1.
2.
3.
Party B holds 100% of the equity interests of Party C. Gu Dejun holds 50% of the equity interests of Party C, representing
RMB 2,500,000 in the registered capital thereof, Yang Qihu holds 50% of the equity interests of Party C, representing
RMB 2,500,000 in the registered capital thereof.
Party B intends to grant Party A an irrevocable, exclusive option to purchase its entire equity interest in Party C without
prejudice of PRC laws, and Party A intends to accept such equity interest purchase option (defined as below).
Party C intends to grant Party A an irrevocable exclusive option to purchase its entire assets without prejudice to PRC
laws, and Party A intends to accept such asset purchase option (defined as below).
After mutual discussions and negotiations, the Parties have now reached the following agreement:
1.
Sale and Purchase of Equity Interest
1.1
Option Granted
Party B hereby irrevocably grants Party A an irrevocable and exclusive right to purchase, or designate one or
more persons (each, a “Designee”) to purchase the equity interests in Party C then held by Party B once or at
multiple times at any time in part or in whole at Party A’s sole and absolute
1
discretion to the extent permitted by PRC laws and at the price described in Section 1.3 herein (the “Equity
Interest Purchase Option”). Except for Party A and the Designee(s), no other person shall be entitled to the
Equity Interest Purchase Option or other rights with respect to the equity interests of Party B. Party C hereby
agrees to the grant by Party B of the Equity Interest Purchase Option to Party A. The term “person” as used
herein shall refer to individuals, corporations, partnerships, partners, enterprises, trusts, or non-corporate
organizations.
1.2
Steps for Exercise
The exercise of the Equity Interest Purchase Option by Party A shall be subject to the provisions of PRC laws
and regulations. When Party A exercises the Equity Interest Purchase Option, a written notice shall be issued to
Party B (the “Equity Interest Purchase Option Notice”), specifying:(a) Party A’s decision to exercise the
Equity Interest Purchase Option; (b) the portion of equity interests to be purchased by Party A or the Designee
from Party B (the “Optioned Interests”); and (c) the date for purchasing the Optioned Interests or the date for
the transfer of the Optioned Interests.
1.3
Purchase Price and Payment
Excluding that the evaluation is required by PRC laws when Party A exercises the Equity Interest Purchase
Option, the purchase price of the Optioned Interests (the “Equity Interest Purchase Price”) shall be the lowest
price allowed by PRC law. After the tax withholding of the Equity Interest Purchase Price in accordance with
PRC laws, the Equity Interest Purchase Price shall be paid by Party A to the account designated by Party B
within seven (7) days from the date of formal transfer of the Optioned Interests to Party A.
1.4
Transfer of Optioned Interests
For each exercise of the Equity Interest Purchase Option by Party A:
1.4.1
1.4.2
1.4.3
Party B shall cause Party C to promptly convene a shareholders’ meeting, at which a resolution shall
be adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s);
Party B shall obtain written statements from the other shareholders of Party C giving consent to the
transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first refusal
related thereto;
Party B shall execute an equity interest transfer contract with respect to each transfer with Party A
and/or each Designee (whichever is applicable), in accordance with the provisions of this Agreement
and the Equity Interest Purchase Option Notice regarding the Optioned Interests;
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1.4.4
The relevant Parties shall execute all other necessary contracts, agreements, or documents (including
but not limited to the amendment to articles of association), obtain all necessary government licenses
and permits (including but not limited to the business license), and take all necessary actions to
transfer the valid ownership of the Optioned Interests to Party A and/or the Designee(s),
unencumbered by any security interests, and cause Party A and/or the Designee(s) to become the
registered owner(s) of the Optioned Interests. For the purpose of this Section and this Agreement,
“security interests” shall include securities, mortgages, third party’s rights or interests, any stock
options, acquisition right, right of first refusal, right to offset, ownership retention, or other security
arrangements, but shall be deemed to exclude any security interest created by this Agreement, Party
B’s Equity Interest Pledge Agreement, and Party B’s Power of Attorney. “Party B’s Equity Interest
Pledge Agreement” as used in this Agreement and this Section shall refer to the Interest Pledge
Agreement executed by and among Party A, Party B and Party C on the date hereof and any
modifications, amendments, and restatements thereto (the “Party B’s Equity Interest Pledge
Agreement”). According to the Party B’s Equity Interest Pledge Agreement, Party B pledge all of
their equity interest in Party C to Party A for the purpose of guaranteeing Party C’s performance of its
obligations under the Exclusive Business Cooperation Agreement entered into by Party C and Party
A on the date hereof (the “Exclusive Business Cooperation Agreement”). “Party B’s Voting Trust
Agreement” as used in this Agreement and this Section shall refer to the Voting Trust Agreement
executed by Party A, Party B and Party C on the date hereof and any modifications, amendments, and
restatements thereto.
1.5
Transfer of Optioned Assets and Business
Party C hereby grants Party A an irrevocable and exclusive right of purchase, pursuant to which Party A or the
Designee may, to the extent permitted by PRC laws and regulations, at Party A’s option, purchase any or all of
Party C’s assets and business from Party C at any time according to the steps determined by Party A with the
lowest price permitted by PRC laws. Party A or the Designee and Party C will enter into a separate asset and
business transfer agreement to stipulate the terms and conditions of the asset and business transferring.
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2.
Covenants
2.1
Covenants regarding Party C
Party B (as shareholders of Party C) and Party C hereby covenant on the following:
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
2.1.8
Without the prior written consent of Party A, they shall not in any manner supplement, change, or
amend the articles of association of Party C, increase or decrease its registered capital, or change its
structure of registered capital in other manners.
They shall maintain Party C’s corporate existence in accordance with good financial and business
standards and practices and prudently and effectively operating its business and handling its affairs,
and procure Party C to fulfill its obligations under the Exclusive Business Cooperation Agreement.
Without the prior written consent of Party A, they shall not at any time following the date hereof, sell,
transfer, mortgage, or dispose of in any manner any assets or legal or beneficial interest in the business
or revenues of Party C or permit the encumbrance thereon of any security interests.
After the liquidation as described in Section 3.7, Party B will pay Party A the full amount of any
residual value obtained by Party B or cause such payment to occur. If such payment is prohibited by
PRC laws, Party B will pay such income to Party A or any party designated by Party A under the
circumstances permitted by PRC laws.
Without the prior written consent of Party A, they shall not incur, inherit, guarantee, or suffer the
existence of any debt, except for (i) debts incurred in the ordinary course of business other than
through loans; and (ii) debts disclosed to Party A which Party A’s written consent has been obtained.
They shall always operate all of Party C’s businesses within the normal business scope to maintain the
asset value of Party C and refrain from any action/omission that may affect Party C’s operating status
and asset value.
Without the prior written consent of Party A, they shall not cause Party C to execute any material
contract, except the contracts in the ordinary course of business (for the purpose of this subsection, a
contract with a price exceeding RMB 100,000 shall be deemed a material contract).
Without the prior written consent of Party A, they shall not cause Party C to provide any person with a
loan or credit or any form of guarantee.
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2.1.9
Without the prior written consent of Party A, they shall not cause Party C to invest in, acquire any
entity or increase or reduce the shares or equities held by Party C in any entity.
2.1.10 Without the prior written consent of Party A, they shall not change or terminate the business or change
its existing business of Party C and/or any other subsidiary or branch, and shall not sell or dispose of
all or most of the goodwill or assets of Party C and/or any other subsidiary or branch.
2.1.11
2.1.12
They shall provide Party A with information on Party C’s business operations and financial condition
upon Party A’s request.
If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and
business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for
companies that operate similar businesses and own similar assets in the same area.
2.1.13 Without the prior written consent of Party A, they shall not cause or permit Party C to merge,
consolidate with, acquire, or invest in any person, or procure or allow Party C to sell assets with a
value more than RMB100,000.
2.1.14
2.1.15
They shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to Party C’s assets, business, or revenue.
To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate
documents, take all necessary or appropriate actions, file all necessary or appropriate complaints, and
raise necessary or appropriate defenses against all claims.
2.1.16 Without the prior written consent of Party A, they shall ensure that Party C shall not in any manner
distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall
immediately distribute all distributable profits to its shareholders.
2.1.17
2.1.18
At the request of Party A, they shall appoint any person designated by Party A as the director of Party
C or remove any director of Party C designated by Party A.
Unless otherwise required by PRC laws, Party C shall not be dissolved or liquated without prior
written consent by Party A.
5
2.2
Covenants of Party B
Party B hereby covenants to the following:
2.2.1
2.2.2
2.2.3
2.2.4
2.2.5
2.2.6
2.2.7
Without the prior written consent of Party A, Party B shall not sell, transfer, mortgage, or dispose of in
any other manner any legal or beneficial interest in the equity interests in Party C held by Party B, or
allow the encumbrance thereon, except for the interest placed in accordance with Party B’s Equity
Interest Pledge Agreement.
Party B shall not require Party C to make dividends or other forms of profit distribution in respect of
the equity of Party C held by Party B, nor shall Party B refer to or endorse the resolutions of
shareholders in relation thereto, nor vote for approval of such resolutions of shareholders. In any case,
if Party B receives any income, profit distribution and dividend from Party C, Party B shall, within the
scope permitted by PRC laws, immediately pay or transfer such profit, profit distribution and dividend
to Party A or the party designated by Party A for the benefit of Party C, as the service fees payable by
Party C to Party A under the Exclusive Business Cooperation Agreement.
Party B shall cause the shareholders’ meeting and/or the board of directors of Party C not to approve
the sell, transfer, mortgage, or dispose of in any other manner any legal or beneficial interest in the
equity interests in Party C held by Party B, or allow the encumbrance thereon, except for the interest
placed in accordance with Party B’s Equity Interest Pledge Agreement.
Party B shall cause the shareholders' meeting or the board of directors of Party C not to approve the
merger or association with any person, or the acquisition or investment of any person without the prior
written consent of Party A.
Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to the equity interests in Party C held by Party B.
Party B shall cause the shareholders’ meeting or the board of directors of Party C to vote to approve
the transfer of the Optioned Interests under this Agreement and take any and all other actions that Party
A may require.
To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary
or appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate
complaints, and raise necessary or appropriate defenses against all claims.
2.2.8
Upon Party A’s request, Party B shall appoint any designee of Party A as the director of Party C.
6
2.2.9
2.2.10
2.2.11
Upon Party A’s request at any time, Party B shall immediately and unconditionally transfer its equity in
Party C to the designated person of Party A in accordance with the Equity Interest Purchase Option
under this Agreement, and Party B hereby waives its right of first refusal in regards to the transfer of
equity interest by any other shareholder of Party C to Party A (if any).
Party B shall strictly abide by the provisions of this Agreement and other agreements jointly or
separately entered into by and among Party B, Party C, and Party A, perform the obligations hereunder
and thereunder, and refrain from any action/omission that may affect the effectiveness and
enforceability thereof. To the extent that Party B has any remaining rights with respect to the equity
interests subject to this Agreement hereunder or under Party B’s Equity Interest Pledge Agreement or
under Party B’s Power of Attorney, Party B shall not exercise such rights except in accordance with the
written instructions of Party A. And
To the maximum extent permitted by PRC laws, any equity held by Party B in Party C now or in the
future shall not belong to the community property or inheritable property of Party B, which shall not be
divided or inherited, and Party B shall not bear the liability for debt or guarantee with his equity in
Party C. If such equity is divided, transferred or inherited for any reason, the successor or assignee
shall sign all documents required by Party A (including but not limited to this Agreement, Equity
Interest Pledge Agreement Agreement and Voting Trust Agreement).
3.
Representations and Warranties
Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and
each date of transfer of the Optioned Interests, that:
3.1
They have the power, capacity, and authority to execute and deliver this Agreement and any equity interest
transfer contracts to which they are parties concerning each transfer of the Optioned Interests as described
thereunder (each, a “Transfer Contract”), and to perform their obligations under this Agreement and any
Transfer Contracts. Party B and Party C agree to enter into Transfer Contracts substantially consistent with the
terms of this Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the
Transfer Contracts to which they are parties constitute or will constitute their legal, valid, and binding obligations,
and shall be enforceable against them in accordance with the provisions thereof.
3.2
Party B and Party C have obtained any and all approvals and consents from the relevant government authorities
and third parties (if required) for the execution, delivery, and performance of this Agreement.
7
3.3
3.4
3.5
3.6
3.7
3.8
3.9
The execution and delivery of this Agreement or any Transfer Contracts and the obligations under this Agreement
or any Transfer Contracts shall not: (i) cause any violations of any applicable PRC laws; (ii) be inconsistent with
the articles of association, bylaws, or other organizational documents of Party C; (iii) cause the violation of any
contracts or instruments to which they are a party or which are binding on them, or constitute any breach under
any contracts or instruments to which they are a party or which are binding on them; (iv) cause any violation of
any condition for the grant and/or continued effectiveness of any licenses or permits issued to either of them; or
(v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued
to either of them.
Party B has a good and merchantable title to the equity interests held by Party B in Party C. Except for Party B’s
Equity Interest Pledge Agreement, Party B has not placed any security interest on such equity interests.
Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the
aforementioned assets.
Party C does not have any outstanding debts, except for (i) debt incurred within its normal business scope; and (ii)
debts disclosed to Party A for which Party A’s written consent has been obtained.
If Party C is dissolved or liquidated as required by PRC law, Party C shall sell all its assets to Party A or other
eligible entities designated by Party A to the extent permitted by PRC laws and at the lowest price permitted by
PRC laws. Party C shall, to the extent permitted by PRC laws, exempt Party A or its designated eligible party
from any payment obligation arising therefrom; or the proceeds arising from any such transaction which shall, to
the extent permitted by PRC laws, be paid to Party A or its designated eligible party as part of the service fees
under the Exclusive Business Cooperation Agreement.
Party C has complied with all PRC laws and regulations applicable to asset and business acquisitions. And
There is no pending or threatened litigation, arbitration, or administrative proceedings relating to the equity
interests in Party C, assets of Party C, or Party C itself.
4.
Effective Date
This Agreement shall become effective upon execution by the Parties, and remain in effect until all equity interests held by
Party B in Party C have been transferred or assigned to Party A and/or any other person designated by Party A in
accordance with this Agreement.
8
5.
Governing Law and Disputes Resolution
5.1
Governing Law
The execution, effectiveness, interpretation, performance, amendment, and termination of this Agreement as well
as the settlement of any dispute resolution hereunder shall be governed by the laws officially published and
publicly available in China. Matters not covered by laws officially published and publicly available in China shall
be governed by international legal principles and practices.
5.2
Methods of Disputes Resolution
In the event of any dispute arising with respect to the construction and performance of this Agreement, the Parties
shall first attempt to resolve the dispute through friendly negotiations. In the event that the Parties fail to reach an
agreement on the dispute within 30 days after either Party's written request to the other Parties for dispute
resolution through negotiations, either Party may submit the relevant dispute to the China International Economic
and Trade Arbitration Commission for arbitration, in accordance with its arbitration rules. And the arbitration
language is Chines. The arbitration shall be conducted in Shenzhen, and the arbitration award shall be final and
binding to all Parties.
6.
Taxes and Fees
Each Party shall pay any and all transfer and registration taxes, expenses, and fees incurred thereby or levied thereon in
accordance with PRC laws in connection with the preparation and execution of this Agreement and the Transfer Contracts,
as well as the consummation of the transactions contemplated under this Agreement and the Transfer Contracts.
7.
Notices
7.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, prepaid postage, commercial courier services, or facsimile
transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by
email. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
7.1.1
Notices given by personal delivery, courier services, registered mail, or prepaid postage shall be deemed
effectively given on the date of receipt or refusal at the address specified for such notices;
7.1.2
Notices given by facsimile transmission shall be deemed effectively given on the date of successful
transmission (as evidenced by an automatically generated confirmation of the transmission).
9
7.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A:
Address:
Attn:
Email(cid:0)
Party B:
Name(cid:0)
Address:
Attn:
Email(cid:0)
Name(cid:0)
Address:
Attn:
Email(cid:0)
Party C:
Address:
Attn:
Email(cid:0)
Simo Music (Beijing) Co., Ltd.
5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Gu Dejun
5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Yang Qihu
5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Lianhe Wenyu (Shenzhen) Co., Ltd.
Room 2606, Building 2, Huamao Center, No.79 Jianguo Road, Chaoyang District, Beijing
Kang Sihan
[ ]
7.3
Any Party may at any time change its address for notices by having a notice delivered to the other Parties in
accordance with the terms hereof.
8.
Confidentiality
The Parties acknowledge that any oral or written information exchanged between the Parties in connection with this
Agreement are regarded as confidential information. Each Party shall maintain the confidentiality of all such confidential
information, and without obtaining the written consent of other Parties, it shall not disclose any relevant confidential
information to any third parties, except for the information that: (a) is or will be featured in the public domain (other than
through the receiving Party’s unauthorized disclosure); (b) is under the obligation to be disclosed pursuant to the
applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities; or (c) is
required to be disclosed by any Party to its shareholders, directors, employees, legal counsels, or financial advisors
regarding the transaction contemplated hereunder, provided that such shareholders, directors, employees, legal counsels, or
financial advisors shall be bound by the confidential obligations similar to those set forth in this Section. Disclosure of any
confidential information by the shareholders, director, employees of, or agencies engaged by any Party shall be deemed
10
disclosure of such confidential information by such Party and that Party shall be held liable for breach of this
Agreement. This Section shall remain in force regardless of the reasons for termination of the Agreement.
9.
Further Warranties
The Parties agree to promptly execute the documents that are reasonably required for or are conducive to the
implementation of the provisions and purposes of this Agreement and to take further actions that are reasonably required
for or are conducive to the implementation of the provisions and purposes of this Agreement.
10.
Breach of Agreement
10.1
10.2
10.3
Subject to the Section 10.3 hereunder, if Party B or Party C conducts any material breach of any term of this
Agreement, Party A shall have right to terminate this Agreement and/or require Party B or Party C to
compensate all damages; this Section 10 shall not prejudice any other rights of Party A herein.
Party B or Party C shall not have any right to terminate this Agreement in any event unless otherwise required
by the applicable laws.
Even if there are provisions to the contrary under this Agreement, Party B’s Equity Interest Pledge Agreement
or any other transaction document (as defined in Party B’s Equity Interest Pledge Agreement) or any laws,
when Party B violates any guarantee, commitment, agreement, statement or condition under this Agreement,
Party B’s Equity Interest Pledge Agreement or any other transaction document, the only right for Party A is that
Party A may exercise the pledge right over Party C’s equity held by Party B pursuant to Article 8 of Party B’s
Equity Interest Pledge Agreement, but Party B shall not be liable for any compensation or other liability to
Party A or any other person.
11. Miscellaneous
11.1
Amendments, changes, and supplements
Any amendments, changes, and supplements to this Agreement shall require the execution of a written
agreement by all of the Parties.
11.2
Entire agreement
Except for the amendments, supplements, or changes in writing executed after the execution of this Agreement,
this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the
subject matter hereof, and shall supersede all prior oral and written consultations, representations, and contracts
reached with respect to the subject matter of this Agreement.
11
11.3
Headings
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain, or
otherwise affect the meanings of the provisions of this Agreement.
11.4
Language
This Agreement is written in Chinese in four copies, with each Party having one copy with the same legal
effect.
11.5
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal, or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality, or enforceability
of the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties
shall strive in good faith to replace such invalid, illegal, or unenforceable provisions with effective provisions
that accomplish to the greatest extent permitted by the relevant laws and the intentions of the Parties, and the
economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid,
illegal, or unenforceable provisions.
11.6
Successors
This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and
the permitted assigns of such Parties.
11.7
Survival
11.7.1
11.7.2
11.8
Waivers
Any obligations that occur or are due as a result of this Agreement upon the expiration or early
termination of this Agreement shall survive the expiration or early termination thereof.
The provisions of Sections 5, 8, 10 and this Section 11.7 shall survive the termination of this
Agreement.
Any Party may waive the terms and conditions of this Agreement, provided that such waiver must be provided
in writing and shall require the signatures of the Parties. No waiver by any Party in certain circumstances with
respect to a breach by other Parties shall be deemed as a waiver by such Party with respect to any similar breach
in other circumstances.
[The remainder of this page is intentionally left blank]
12
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Party A:
Simo Music (Beijing) Co., Ltd.
/s/ Seal of Simo Music (Beijing) Co., Ltd.
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Party B:
By:
Name:
By:
Name:
/s/ Gu Dejun
Gu Dejun
/s/ Yang Qihu
Yang Qihu
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as
of the date first above written.
Party C:
/s/ Seal of Lianhe Wenyu (Shenzhen) Co., Ltd.
Lianhe Wenyu (Shenzhen) Co., Ltd.
Exclusive Business Cooperation Agreement
Exhibit 4.69
This Exclusive Business Cooperation Agreement (this “Agreement”) is entered into by and between the following parties
on July 26, 2019 in Shenzhen, the People’s Republic of China (“China” or the “PRC”).
Party A:
Registered Address:
Simo Music (Beijing) Co., Ltd.
1st Floor, Building 195, No.1 District, Xijiao Beiwa Road, Haidian District, Beijing;
Party B:
Registered Address:
Lianhe Wenyu (Shenzhen) Co., Ltd.
Room 201, Building A, No.1 Qianwan First Road, Qianhai Shenzhen-Hongkong Cooperation Zone,
Shenzhen (premise of Shenzhen Qianhai Commerce Secretariat Co., Ltd.)
Each of Party A and Party B shall be hereinafter referred to as a “Party” respectively, and as the “Parties” collectively.
Whereas,
1.
2.
3.
Party A is a wholly foreign owned enterprise established in the People’s Republic of China (the “China”), and has the
necessary resources to provide technical services and business consulting services.
Party B is a company established in China, which needs technical services and business consulting services during its
operation.
Party A agrees to provide Party B with exclusive technology services, consulting services and other services (as defined in
detail hereunder) during the term of this Agreement, and Party B agrees to accept such services provided by Party A or
Party A’s designee(s), each on the terms set forth herein.
Now, therefore, through mutual discussion, the Parties have reached the following agreements:
1.
Services Provided by Party A
1.1
Party B hereby appoints Party A as Party B’s exclusive services provider to provide Party B with
comprehensive business support, technology services and consulting services during the term of this
Agreement with the specific contents of all or part of the services determined by Party A from time to time
within the business scope of Party B, including but not limited to: development and technical service of
computer network technology; research and development and sales of computer software products;
business information consultation; information technology service; design, production, agency and release
of advertisements; import and export of goods and technology; organization of cultural and artistic
activities; public relations services; organize exhibition activities; planning, design and prepare services
related to literature, music and
1
1.2
1.3
1.4
film and television activities; human resource management and internal information management; and
other services provided by Party A from time to time according to business needs and the ability of service
provider (the “Services”).
Party B agrees to accept all the consults and services provided by Party A. Party B further agrees that
unless with Party A’s prior written consent, during the term of this Agreement, with respect to matters
prescribed under this Agreement, Party B shall not accept any services provided by any third party and
shall not establish corporation relationship with any third party. Party A may designate other parties, who
may enter into certain agreements described in Section 1.3 with Party B, to provide Party B with the
consults and services as set forth in this Agreement.
In order to meet Party B’s daily operational needs and assist Party B to obtain and maintain the relevant
qualifications required for its business, Party A may provide financial support to Party B according to
Party B’s request (only to the extent permitted by PRC laws).
Ways of Service Provision
1.4.1
1.4.2
1.4.3
Party A and Party B agree that during the term of this Agreement, the Parties may directly, or
through their related parties, enter into other technology service agreements and consulting
service agreements, which shall provide the specific contents, manner, personnel, and fees for
the specific technology and consults services.
To fulfill this Agreement, Party A and Party B agree that during the term of this Agreement, the
Parties may directly, or through their related parties, enter into intellectual property (including
but not limited to copyrights, software, trademarks, patents and know-hows) license
agreements, which shall permit Party B to use Party A’s relevant intellectual property based on
the needs of the business of Party B.
To fulfill this Agreement, Party A and Party B agree that during the term of this Agreement, the
Parties may directly, or through their related parties, enter into equipment lease agreements,
which shall permit Party B to use Party A’s relevant equipment based on the needs of the
business of Party B.
1.4.4
Party A may, at its own discretion, subcontract part of the services to be provided to Party B
under this Agreement to a third party.
2
1.4.5
To fulfill this Agreement, Party B agrees that: (a) Party B will accept Party A’s suggestions on
personnel arrangement and transfer, daily operation, dividend distribution and financial
management system of Party B and its subsidiaries during the term of this agreement, and Party
B will procure itself and its subsidiaries to strictly abide by and perform accordingly; (b) Party
A will elect the person designated by Party A to be the director of Party B in accordance with
the procedures prescribed by laws, regulations and the articles of association of Party B and
appoint the person designated by Party A as the manager of Party B; (c) Party B will operate the
company’s business and affairs carefully and effectively and maintain the existence of Party B
and its subsidiaries in accordance with sound financial and commercial standards and practices;
(d) Party B will provide its business and financial materials to Party A as requested by Party A;
(e) In order to maintain Party B’s ownership of all its assets, Party B shall sign all or
appropriate documents, take all necessary or appropriate actions, submit all or appropriate
complaints, or raise necessary and appropriate defenses against all claims.
2.
Service Fees and Payment, Financial Statement, Audit and Tax
2.1
2.2
The Parties hereby agree that for the Services provided by Party A, Party B shall pay 100% of its net
income to Party A as the service fees (the “Service Fees”). Party B shall pay Service Fees to Party A
monthly. Party A is entitled to adjust the Service Fess at its sole discretion without consent of Party B
during the term of the Agreement. Within 30 days after the last day of each month, Party B shall, (a)
provide Party A management statement and operation data of the current month of Party B, which shall
specify Party B’s net income of the current month (the “Monthly Net Income”); (b) pay 100% of the
Monthly Net Income to Party A (the “Monthly Payment”). After receiving the management statement and
operation data, Party A shall issue the invoice of corresponding Services Fees to Party B with seven (7)
working days. Party B shall pay the amount of the Service Fees stated in the invoice within seven (7) days
after receipt of the invoice. All the payments shall be made to the bank account designated by Party A via
remittance or the ways agreed by both Parties. The Parties agree that Party A may, from time to time, give
notice to Party B to change the payment instruction.
Party B shall, within 90 days after the end of each fiscal year, (a) provide Party A with the audited financial
statements of Party B for the current fiscal year, which shall be audited and certified by an independent
certified public accountant approved by Party A; (b) if it is shown in accordance with the audited financial
statements that there is any deficiency in the total amount of Monthly Payment paid by Party B to Party A
for the current fiscal year, Party B shall pay Party A the difference
3
2.3
2.4
2.5
Party B shall prepare the financial statements in accordance with the requirements of laws and commercial
practice.
Party B shall allow Party A and / or its designated auditors to audit Party B’s relevant account books and
records at Party B’s main office and copy the required account books and records, so as to verify the
accuracy of Party B’s incomes and financial statements.
Each Party shall bear its own taxes arising from the performance of this Agreement in accordance with the
applicable laws and regulations.
3.
Intellectual Property Rights, Confidentiality Clauses and Anti-Competition
3.1
3.2
Party A shall have exclusive and proprietary ownership, rights and interests in any and all rights,
proprietorship, proprietary ownership, intellectual properties arising out of or created during the
performance of this Agreement, including but not limited to copyrights, patents, patent applications,
trademarks, software, technical secrets, trade secrets and others, which are developed whether by Party A
or Party B. Party B shall execute all appropriate documents, take all appropriate actions, submit all filings
and/or applications, render all appropriate assistance and otherwise conduct whatever is necessary as
deemed by Party A at its sole discretion for the purposes of vesting any ownership, right or interest of any
such intellectual property rights in Party A, and/or perfecting the protections for any such intellectual
property rights in Party A.
The Parties acknowledge that any oral or written information exchanged between the Parties in connection
with this Agreement are regarded as confidential information. Each Party shall maintain confidentiality of
all such confidential information, and without obtaining the written consent of the other Party, it shall not
disclose any relevant confidential information to any third party, except for the information that: (a) is or
will be in the public domain (other than through the receiving Party’s disclosure); (b) is under the
obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange; or (c)
is required to be disclosed by any Party to its shareholders, directors, employees, legal counsels or
financial advisors regarding the transaction contemplated hereunder, provided that such shareholders,
directors, employees, legal counsels or financial advisors shall be bound by the confidentiality obligations
similar to those set forth in this Section. Disclosure of any confidential information by the employees of or
agencies engaged by any Party shall be deemed disclosure of such confidential information by such Party
and such Party shall be held liable for breach of this Agreement. This Section shall survive termination of
this Agreement for any reason.
4
3.3
Without the consent of Party A, Party B shall not (directly or indirectly) engage in any business other than
that permitted by Party B’s business license and business certificates, or directly or indirectly engage in
any business competing with Party A’s business within the territory of China, including investing in any
entities that conducting business in competition with Party A’s business, or any other business beyond the
written consent of Party A.
3.4
Each Party agrees that this Section 3 survives the change, abolishment or termination of this Agreement.
4.
Representations and Warranties
4.1
Party A hereby represents, warrants and covenants as follows:
4.1.1
4.1.2
Party A is a wholly foreign owned enterprise legally established and validly existing in
accordance with the laws of the PRC. Party A or the service providers designated by Party A
will obtain all government permits and licenses for providing the service under this Agreement
before providing such services (if required).
Party A’s execution and performance of this Agreement is within its legal personality and
business scope. Party A has taken all necessary corporate actions and obtained all necessary
authorizations as well as all consents and approvals from third parties and government
authorities for the execution, delivery and performance of this Agreement and do not violate
any binding requirements under any law or regulation.
4.1.3
This Agreement constitutes Party A’s legal, valid and binding obligations, and shall be
enforceable against it in accordance with its terms.
4.2
Party B hereby represents, warrants and covenants as follows:
4.2.1
4.2.2
Party B is a company legally established and validly existing in accordance with the laws of the
PRC and has obtained and will maintain all permits and licenses for engaging in the main
business.
Party B’s execution and performance of this Agreement is within its legal personality and
business scope. Party B has taken all necessary corporate actions and obtained all necessary
authorizations as well as all consents and approvals from third parties and government
authorities for the execution, delivery and performance of this Agreement and do not violate
any binding requirements under any law or regulation.
5
4.2.3
This Agreement constitutes Party B’s legal, valid and binding obligations, and shall be
enforceable against it in accordance with its terms.
5.
Effectiveness and Term of Agreement
5.1
5.2
This Agreement is executed on the date first above written and shall take effect from such date. Unless
terminated in accordance with the provisions of this Agreement or terminated in writing by Party A, this
Agreement shall remain effective.
During the term of this Agreement, each Party shall renew its operation term in a timely manner prior to
the expiration thereof so as to enable this Agreement to remain effective. This Agreement shall be
terminated upon the expiration of the operation term of a Party if the application for renewal of its
operation term is not approved by relevant government authorities.
6.
Termination
6.1
6.2
The rights and obligations under Section 3, 7, 8 and this Section 6 shall survive the termination of this
Agreement.
The early termination or expiration of this agreement for any reason shall not relieve either Party of all
payment obligations (including but not limited to Service Fees) under this Agreement that are due on or
prior to the termination of this Agreement, nor shall it relieve either Party of any liability for breach of this
Agreement prior to the termination of this Agreement. The Service Fees payable prior to the termination of
this Agreement shall be paid to Party A within fifteen (15) working days from the date of termination of
this Agreement.
7.
Governing Law and Disputes Resolution
7.1
7.2
The execution, effectiveness, construction, performance, amendment and termination of this Agreement
and the resolution of disputes hereunder shall be governed by the laws of the PRC.
In the event of any dispute with respect to the construction and performance of this Agreement, the Parties
shall first resolve the dispute through friendly negotiations. In the event the Parties fail to reach an
agreement on the dispute within 30 days, either Party may submit the relevant dispute to the China
International Economic and Trade Arbitration Commission for arbitration, in accordance with its
arbitration rules. The arbitration shall be conducted in Shenzhen and the language is Chinese. The
arbitration award shall be final and binding to all Parties.
6
7.3
7.4
Upon the occurrence of any disputes arising from the construction and performance of this Agreement or
during the pending arbitration of any dispute, except for the matters under dispute, the Parties shall
continue to exercise their respective rights under this Agreement and perform their respective obligations
under this Agreement.
After the signature date of this agreement, if at any time, as a result of the enactment or change of any PRC
law, regulation or regulation, or due to the change in the interpretation or application of such law,
regulation or rules, the following provisions shall apply: (a) If the change of laws or newly issued
regulations is more favorable for either Party than the relevant laws, regulations, decrees or regulations in
effect on the effective date of this Agreement (and the other Party is not affected adversely), both Parties
shall timely apply for the benefits brought by such change or new regulations. The parties shall use their
best efforts to obtain the approval of the application; and (b) this Agreement shall continue to be executed
in accordance with the original terms if the economic interests of either Party under this Agreement are
directly or indirectly adversely affected as a result of the above changes in laws or newly promulgated
provisions. The Parties shall use all lawful means to obtain an exemption from compliance with such
change or regulations. If the adverse effects on the economic interests of either Party cannot be solved in
accordance with the provisions of this Agreement, upon notice to the other Party by the affected Party, both
Parties shall timely negotiate and make all necessary modifications to this Agreement to maintain the
economic interests of the affected Party under this Agreement.
8.
Breach of Agreement and Indemnification
8.1
8.2
8.3
If Party B conducts any material breach of any term of this Agreement, Party A shall have right to
terminate this Agreement and/or require Party B to indemnify all damages. This Section 8.1 shall not
prejudice any other rights of Party A herein.
Unless otherwise required by applicable laws, Party B shall not have any right to terminate this Agreement
in any event.
Party B shall indemnify and hold harmless Party A from any losses, injuries, obligations or expenses
caused by any lawsuit, claims or other demands against Party A arising from or caused by the consults and
services provided by Party A to Party B pursuant this Agreement, except where such losses, injuries,
obligations or expenses arise from the gross negligence or willful misconduct of Party A.
7
9.
Force Majeure
9.1
9.2
In the case of any force majeure events (the “Force Majeure”) such as earthquake, typhoon, flood, fire,
flu, war, strikes or any other events that cannot be predicted and are unpreventable and unavoidable by the
affected Party, which directly causes the failure of either Party to perform or completely perform this
Agreement, then the Party affected by such Force Majeure shall not take any responsibility for such failure,
however it shall give the other Party written notices without any delay, and shall provide details of such
event within 15 days after sending out such notice, explaining the reasons for such failure of, partial or
delay of performance.
If such Party claiming Force Majeure fails to notify the other Party and furnish it with proof pursuant to the
above provision, such Party shall not be excused from the non-performance of its obligations hereunder.
The Party so affected by the event of Force Majeure shall use reasonable efforts to minimize the
consequences of such Force Majeure and to promptly resume performance hereunder whenever the causes
of such excuse are cured. Should the Party so affected by the event of Force Majeure fail to resume
performance hereunder when the causes of such excuse are cured, such Party shall be liable to the other
Party.
9.3
In the event of Force Majeure, the Parties shall immediately consult with each other to find an equitable
solution and shall use all reasonable efforts to reduce the consequences of such Force Majeure.
10.
Notices
10.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall
be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by
facsimile transmission to the address of such Party set forth below. A confirmation copy of each notice
shall also be sent by email. The dates on which notices shall be deemed to have been effectively given
shall be determined as follows:
10.1.1
10.1.2
Notices given by personal delivery, by courier service or by registered mail, postage prepaid,
shall be deemed effectively given on the date of receipt or refusal at the address specified for
notices.
Notices given by facsimile transmission shall be deemed effectively given on the date of
successful transmission (as evidenced by an automatically generated confirmation of
transmission).
8
10.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A:
Address:
Simo Music (Beijing) Co., Ltd.
5th Floor (Gate C7), South District, National Convention Center, No. 7,
Tianchen East Road, Chaoyang District, Beijing
Attn:
Email(cid:0)
Legal Management Department-Investment and M&A Legal
[ ]
Party B:
Address:
Lianhe Wenyu (Shenzhen) Co., Ltd.
Room 2606, Building 2, Huamao Center, No.79 Jianguo Road, Chaoyang
Attn:
Email(cid:0)
District, Beijing
Kang Sihan
[ ]
10.3
Any Party may at any time change its address for notices by delivering notice to the other Party in
accordance with the terms hereof.
11.
Assignment
11.1
11.2
Without Party A’s prior written consent, Party B shall not assign its rights and obligations under this
Agreement to any third party.
Party B agrees that Party A may assign its obligations and rights under this Agreement to any third party
and Party A is only required to give written notice to Party B and does not need any consent from Party B
for such assignment.
12.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in
any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining
provisions of this Agreement shall not be affected or compromised in any aspect. The Parties shall negotiate in good
faith to replace such invalid, illegal or unenforceable provisions with effective provisions that accomplish to the
greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective provisions
shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.
13.
Amendments and Supplements
Any amendments and supplements to this Agreement shall be in writing. The amendment agreements and
supplementary agreements that have been signed by the Parties and relate to this Agreement shall be an integral part
of this Agreement and shall have the same legal validity as this Agreement.
14.
Language and Counterparts
This Agreement is written in Chinese with each Party having one copy with the same legal effect.
[The remainder of this page is intentionally left blank]
9
IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Exclusive Business
Cooperation Agreement as of the date first above written.
Party A:Simo Music (Beijing) Co., Ltd.
/s/ Seal of Simo Music (Beijing) Co., Ltd.
Party B:Lianhe Wenyu (Shenzhen) Co., Ltd.
/s/ Seal of Lianhe Wenyu (Shenzhen) Co., Ltd.
This Loan Agreement (the “Agreement”) is entered into by and among the following Parties on July 26, 2019 in
Loan Agreement
Exhibit 4.70
Shenzhen, People’s Republic of China (the “PRC”):
Party A:
Gu Dejun, Identification No.: [ ];
Yang Qihu, Identification No.: [ ]
(collectively the “Borrowers” and each a “Borrower”)
Party B:
Simo Music (Beijing) Co., Ltd. (the “Lender”)
Registered Address:1st Floor, Building 195, No.1 District, Xijiao Beiwa Road, Haidian District, Beijing;
Legal Representative: Wang Lei
In this Agreement, each party shall hereinafter be referred to as a “Party” respectively and as the “Parties” collectively.
Whereas:
1.
2.
Lianhe Wenyu (Shenzhen) Co., Ltd. (the “Lianhe Wenyu”), a limited liability company, organized and existing under the
laws of the PRC. Party A collectively hold 100% equity interests in Lianhe Wenyu, among which Gu Dejun holds 50% of
the equity interests, representing RMB 2,500,000 in the registered capital thereof, Yang Qihu holds 50% of the equity
interests, representing RMB 2,500,000 in the registered capital thereof.
The Borrowers intend to obtain necessary financial support from the Lender to increase its investment in Lianhe Wenyu
and develop the business of Lianhe Wenyu.
In order to clarify the rights and obligations of the Parties under this Agreement, the Parties have reached the following
agreements for their mutual compliance:
1
Definitions
1.1
Unless otherwise specified in this Agreement, the following words shall have the meanings:
“Outstanding Payments”: means the outstanding amount of the Loan.
“Effective Date”: means the date on which this agreement is duly executed by the Parties.
1
“Loan”: means the loan provided by the Lender to the Borrowers.
“Repayment Notice”: has the meaning set forth in Article 3.1 of this Agreement.
“Repayment Application”: has the meaning set forth in Article 3.2 of this Agreement.
“Such Rights”: has the meaning set forth in Article 8.5 of this Agreement.
1.2
The meanings of the related terms mentioned in this Agreement are as follows:
“Articles”: shall be construed as articles in this Agreement unless the context of this Agreement provides
otherwise.
“Tax Fees”: shall be construed as including any taxes, fees, duties or other charges of the same nature (including
but not limited to, any penalties or interest in respect of non-payment or delay in payment of such taxes);
“Borrowers” and “Lender” shall be construed as including the successors and assignees of the Parties in
accordance with their respective interests.
2
The Amount, Interest Rate and Use of the Loan
2.1
2.2
2.3
The Parties confirm that the principal amount of the Loan is RMB 2.5 million. As agreed by the Parties, the
Lender can pay the Loan to the Borrower in one time or in stages.
The interest rate of the Loan under this Agreement is zero, i.e. no interest will be charged.
The Borrower shall only use the Loan under this Agreement to invest in Lianhe Wenyu for its business
development.
3
Repayment of the Loan
3.1
At any time, the Lender may, at its absolute discretion, serve a repayment notice (hereinafter referred to as the
“Repayment Notice”) thirty (30) days in advance to the Borrowers to require the Borrowers to repay part or all of
its Outstanding Payments. In the event that the Lender requires the Borrowers to repay in accordance with the
foregoing provisions, the Borrowers shall repay the corresponding amount of Loan timely in accordance with this
2
Agreement. If the borrower is unable to repay the Loan and with the written consent of the Lender, the Lender
shall have the right to purchase or designate a third party to purchase the corresponding equity held by the
Borrowers to Lianhe Wenyu at the equity transfer price equal to the Outstanding Payments to be repaid, provided
that the proportion of the purchased equity to the equity of Lianhe Wenyu held by such Borrower shall be the
same as the proportion of the Outstanding Payments to be repaid to the principal of the amount of Loan borrowed
by such Borrower under this Agreement, and the amount of the Outstanding Payments to be repaid shall be offset
against the equity transfer price of the purchased equity.
Upon the expiration of the period of the thirty (30) days specified in the Repayment Notice or Repayment
Application, the Borrower required to repay or apply for repayment shall repay the Outstanding Payments in
accordance with Article 3.1 of this Agreement.
If the Borrower is unable to repay the Loan and the Lender chooses to exercise its right to purchase the equity of
Lianhe Wenyu held by such Borrower, each Party shall complete the equity transfer as specified in Article 3.1
above at the same time. The Lender or the third party designated by the Lender has legally and completely
transferred the corresponding equity of Lianhe Wenyu in accordance with Article 3.1, and there is no pledge or
any other form of encumbrances.
3.2
3.3
3.4
The Borrowers shall not repay the Loan in advance without the written consent of the Lender.
4
Tax Fees
4.1
All fees and actual expenses related to this Agreement, including but not limited to legal fees, cost of production,
stamp duty and any other taxes, and expenses, shall be borne by the Lender.
5
Assignment
5.1
5.2
The Borrower shall not be entitled to assign its rights and obligations under this Agreement except with the prior
written consent of Lender.
This Agreement shall be binding on Borrower ands its successors and permitted assignees and shall be valid for
Lender and each successors and assignees of the Lender.
3
5.3
5.4
5.5
The Lender may at any time assign all or any of its rights and obligations under the exclusive business
cooperation agreement to its designated person (natural person/legal person), in which case, the assignee shall be
entitled with and undertake the rights and obligations of the Lender under this Agreement, as if it were the original
party of this Agreement. At the request of the Lender, the Borrowers shall sign relevant agreements and/or
documents in respect of the assignments.
After the change of the Lender caused by the assignment, the Borrowers shall, at the request of the Lender, enter
into a new loan agreement in consistent with this Agreement with the new lender.
The Lender shall strictly abide by the provisions of this Agreement and other relevant agreements signed by each
Party individually or jointly, including the Exclusive Option Agreement and the Power of Attorney issued to the
Lender, perform its obligations under each agreement without any action/omission that may affect the validity and
enforceability of the Agreement.
6
Confidentiality
6.1
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information
exchanged among the Parties in connection with the preparation and performance of this Agreement are regarded
as confidential information. Each Party shall keep all such confidential information confidential, and shall not,
without prior written consent of the other Party, disclose any confidential information to any third parties, except
for information: (a) that is or will be available to the public (other than through the unauthorized disclosure to the
public by the Party receiving confidential information); (b) that is required to be disclosed pursuant to the
applicable laws or regulations, rules of any stock exchange, or orders of the court or other government authorities;
or (c) that is disclosed by any Party to its shareholders, investors, legal counsels or financial advisors regarding
the transaction contemplated hereunder, provided that such shareholders, investors, legal counsels or financial
advisors shall be bound by the confidentiality obligations similar to the terms set forth in this Article. Disclosure
of any confidential information by the employees or entities engaged by any Party shall be deemed as disclosure
of such confidential information by such Party, which Party shall be held liable for breach of contract. This Article
shall survive the termination of this Agreement.
4
7
Notices
7.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile
transmission to the designated address of such party as listed below. A confirmation copy of each notice shall also
be sent by E-mail. The dates on which notices shall be deemed to have been effectively delivered shall be
determined as follows:
7.1.1
7.1.2
Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be the
date of receipt or rejection at the address set as the notice.
Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful
transmission (as evidenced by an automatically generated confirmation of transmission).
7.2
For the purpose of notification, the addresses of the Parties are as follows:
Party A:
Address: 5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Attention: Legal Management Department-Investment and M&A Legal
Email: [
]
Party B:
Address: 5th Floor (Gate C7), South District, National Convention Center, No. 7, Tianchen East Road,
Chaoyang District, Beijing
Attention: Legal Management Department-Investment and M&A Legal
Email: [
]
7.3
Each Party may at any time change its address for notices by delivering a notice to the other Party in accordance
with this Article.
8
Breach of Agreement
8.1
8.2
If the Borrowers breach any of the provisions in this Agreement, the Lender shall have the right to terminate this
Agreement and claim damages from the Borrowers. This Article shall not prejudice any other rights of the Lender
under this Agreement;
Unless otherwise required by applicable laws, Party B shall not have any right to terminate this Agreement in any
event.
5
9
Governing Law and Disputes Resolution
9.1
9.2
9.3
The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
Any disputes arising in connection with the implementation and performance of this Agreement shall be settled
through friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30)
days upon issuance of the written notice by one Party to the other Party for consultations, such disputes shall be
submitted by either Party to the China International Economic and Trade Arbitration Commission for arbitration
in accordance with its then effective arbitration rules. The arbitration shall take place in Shenzhen and the
arbitration language shall be Chinese. The arbitration award shall be final and binding upon all the Parties.
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall
continue to exercise their respective rights and perform their respective obligations hereunder.
10
Severability
10.1
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of
the remaining provisions of this Agreement shall not be affected or compromised in any aspect. The Parties shall
negotiate in good faith to replace such invalid, illegal or unenforceable provisions with effective provisions that
accomplish to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of
such effective provisions shall be as close as possible to the economic effect of those invalid, illegal or
unenforceable provisions.
6
11 Miscellaneous
11.1
11.2
11.3
The Parties may amend, supplement or change this Agreement in writing and shall come into force upon being
signed and sealed by the Parties.
This Agreement is written in Chinese in three (3) originals, with each of the Lender and the Borrowers holding
one copy with the same legal effect.
This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and
supersedes all prior discussions, negotiations and agreements between the Parties with respect to the subject
matter hereof.
[The remainder of this page is intentionally left blank]
7
IN WITNESS HEREOF, the Parties have caused this Loan Agreement to be executed by their respective authorized
representative on the date first above written.
Party A:
By:
Name: Gu Dejun
/s/ Gu Dejun
By:
Name: Yang Qihu
/s/ Yang Qihu
IN WITNESS HEREOF, the Parties have caused this Loan Agreement to be executed by their respective authorized
representative on the date first above written.
Party B:
/s/ Seal of Simo Music (Beijing) Co., Ltd.
Simo Music (Beijing) Co., Ltd.
This Voting Trust Agreement (the “Agreement”) is entered into on July 26, 2019 by and among the following Parties in
Shenzhen, People’s Republic of China (the “PRC”):
Voting Trust Agreement
Exhibit 4.71
Party A:
Gu Dejun, Identification No.: [ ];
Yang Qihu, Identification No.: [ ]
(collectively the “Trustor”)
Party B:
Registered Address:1st Floor, Building 195, No.1 District, Xijiao Beiwa Road, Haidian District, Beijing;
Legal Representative:Wang Lei
Simo Music (Beijing) Co., Ltd. (the “Trustee”)
Party C:
Registered Address:Room 201, Building A, No.1 Qianwan First Road, Qianhai Shenzhen-Hongkong Cooperation Zone,
Lianhe Wenyu (Shenzhen) Co., Ltd.
Shenzhen (premise of Shenzhen Qianhai Commerce Secretariat Co., Ltd.)
Legal Representative:Wang Lei
In this Agreement, each party shall be referred to as a “Party” respectively or as the “Parties” collectively.
Whereas:
1.
2.
Party C is a limited liability company established under the laws of the PRC and Party A collectively hold 100% equity
interests of Party C.
Party A agrees to grant Party B to exercise their shareholders rights with respect to the equity interest held by Party A in
Party C.
The Parties agree as follows through friendly negotiation:
1.
Voting Rights Entrustment
1.1 The Trustors hereby irrevocably undertake to entrust the Trustee to fully exercise the following rights entitled to the
Trustors respevtively as the shareholders of Party C (the “Entrusted Rights”):
1.1.1
convening or attending shareholders’ meetings of Party C as the proxy of the Trustors;
1
1.1.2
exercising the voting rights on behalf of the each of shareholders of Party C in respect of all matters subject
to discussion and resolution at the shareholders’ meetings (including but not limited to the appointment and
election of directors, manager, chief financial officer and other senior management members who should be
appointed by the shareholders);
1.1.3
proposing to convene an interim shareholders’ meeting;
1.1.4
signing the minutes, resolutions of the shareholders' meeting to be signed by the Trustors as the
shareholders of Party C or other legal documents;
1.1.5
instructing Party C’s directors, legal representative etc. to act according to the Trustee’s instructions;
1.1.6
conducting company registration and alteration registration with the industrial and commercial
administration department or other company registration authorities;
1.1.7
deciding to transfer or otherwise dispose of the equity of Party C held by each shareholders of Party C;
1.1.8
receiving dividends in respect of the sale, transfer, pledge or disposal of all or part of the equity interests of
Party C or being entitled with the right to receiving any distribution after liquidation of Party C;
1.1.9
any voting rights vested in shareholders as required by laws; and
1.1.10
other voting rights vested in shareholders under the articles of association of Party C (including any other
voting rights of shareholders conferred after the amendment of the Article of Association).
1.2 The Trustee shall perform the entrusted obligations lawfully with diligence and duty of care within the authorization
scope provided in this Agreement. The Trustors shall accept and assume relevant liabilities for any legal
consequences arising out of the exercise of the Entrusted Rights.
1.3 The Trustors hereby acknowledge that the Trustee is not required to solicit the opinions of the Trustors before
exercising the Entrusted Rights. Nevertheless, the Trustee shall immediately notify Trustors after any resolution or
proposal for convening an interim shareholder meeting is made.
1.4 The Trustors hereby acknowledges that the Trustee has the right to appoint any entity or person to exercise the
Entrusted Rights under Article 1.1 of this Agreement without the consent of the Trustors.
2
2.
Information Right
2.1
For the purpose of exercising the Entrusted Rights under this Agreement, the Trustee shall have the right to know
the information of the operation, businesses, clients, financial affairs, employees of Party C (including but not
limited to finance, business, operation related books, statements, contracts, internal communication of Party C,
meeting minutes of the shareholders’ meeting and broad of directors and other documents) and have access to
relevant materials, and Party C shall provide sufficient cooperation in this regard.
3.
Exercise of Entrusted Rights
3.1
3.2
The Trustors shall provide sufficient assistance to the Trustee for its exercise of the Entrusted Rights, including
prompt execution of the resolutions of the shareholders’ meeting made by the Trustee or other relevant legal
documents when necessary (e.g., to satisfy the document submission requirements for the approval of, registration
or filing with governmental authorities).
If at any time within the term of this Agreement, the entrustment or exercise of the Entrusted Rights hereunder is
unenforceable for any reason (except for the default by the Trustors or Party C), the Parties shall immediately seek
the alternative plan which is most similar to the unenforceable provision and, if necessary, enter into supplementary
agreement to amend or adjust the provisions herein, so as to ensure the fulfilment of the purposes hereof.
4.
Exemption and Indemnification
4.1
4.2
The Parties acknowledge that if any entity/individual designated by the Trustee exercises its Entrusted Rights under
this Agreement, the Trustee shall not be liable to or be required to compensate financially any other party or any
third party for exercising the Entrusted Rights by such entity/individual designated by the Trustee.
Party C agrees to hold the Trustee harmless and compensate the Trustee for all losses suffered or likely to suffered in
connection with designating the Trustee to exercise the Entrusted Rights, including but not limited to, any loss
resulting from any litigation, demand, arbitration or claim initiated by any third party, and any loss resulting from
administrative investigation or penalty by governmental authorities. Nevertheless, losses suffered as a result of the
intentional misconduct or gross negligence of the Trustee shall not be indemnified.
3
5.
Representations and Warranties
5.1
The Trustors represent and warrant that:
5.1.1
5.1.2
5.1.3
5.1.4
The Trustors are PRC citizens with full capacity, have full and independent legal status and is an
independently legal subject of litigation.
Each of them has full power and authority to execute and deliver this Agreement and all the other documents
to be entered into by them which are related to the transaction contemplated hereunder, as well as to
consummate the transaction hereunder.
This Agreement shall be duly and lawfully executed and delivered by the Trustors and shall constitute their
legal, valid obligations, and shall be enforceable against them in accordance with the provisions hereof.
Each of them is a legitimate shareholder of Party C recorded in the register of members at the time when this
Agreement came into effect and the Entrusted Rights are not subject to any third party encumbrance, other
than the encumbrance created under this Agreement as well as the Loan Agreement entered by the Trustors
and the Trustee, the Exclusive Option Agreement and the Equity Interest Pledge Agreement concluded by and
among the Trustors, the Trustee and Party C. In accordance with this Agreement, the Trustee may completely
and fully exercise the Entrusted Rights according to the articles of association of the Company then in effect.
5.2
The Trustors and Party C severally represent and warrant as follows:
5.2.1
5.2.2
Party C is a limited liability company duly registered and legally existing under the laws of PRC and has
independent legal personality. Party C has complete and independent legal status and legal capacity to
execute, deliver and perform this Agreement, and is an independently legal subject of litigation.
Party C has complete power and authorization to execute and deliver this Agreement and all other documents
that it will execute in relation to the transaction contemplated hereunder, and each of them has full power and
authorization to complete the transaction contemplated hereunder.
4
5.2.3
5.2.4
The execution and performance of this Agreement by the Trustors or Party C do not be violate any PRC laws
and regulations, court judgment or arbitral award, decision, approval, license, or any other agreement in
which it is party and is binding on the equity or other assets of Party C held by the Trustors.
There is no litigation, arbitration or other judicial proceeding that has occurred and is pending that will affect
the performance of the Trustors or Party C under this Agreement, and to the best of its knowledge, there is no
threat to take such action.
6.
Term of Agreement
6.1
6.2
This Agreement shall take effect as of the date upon execution and shall be valid for the duration the Trustors as
shareholders of Party C, unless all the Parties agree in writing on early termination or this Agreement is terminated
pursuant to Article 9.1 hereunder.
If any of the Trustors transfers all equity interests it holds in Party C upon prior consent of the Trustee, such Party
shall cease to act as a party of this Agreement, but the rights and undertakings of the other Parties shall not be
adversely affected thereby.
7.
Confidentiality
7.1
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information
exchanged among the Parties in connection with the preparation and performance of this Agreement are regarded as
confidential information. Each Party shall keep all such confidential information confidential, and shall not, without
prior written consent of the other Party, disclose any confidential information to any third parties, except for
information: (a) that is or will be available to the public (other than through the unauthorized disclosure to the public
by the Party receiving confidential information); (b) that is required to be disclosed pursuant to the applicable laws
or regulations, rules of any stock exchange, or orders of the court or other government authorities; or (c) that is
disclosed by any Party to its shareholders, investors, legal counsels or financial advisors regarding the transaction
contemplated hereunder, provided that such shareholders, investors, legal counsels or financial advisors shall be
bound by the confidentiality obligations similar to the terms set forth in this Article. Disclosure of any confidential
information by the employees or entities engaged by any Party shall be deemed as disclosure of such confidential
information by such Party, which Party shall be held liable for breach of contract. This article survives the
termination of this Agreement regardless of any reason.
5
8.
Notices
8.1 All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile
transmission to the designated address of such party as listed below. A confirmation copy of each notice shall also
be sent by E-mail. The dates on which notices shall be deemed to have been effectively delivered shall be
determined as follows:
8.1.1
8.1.2
Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be the
date of receipt or rejection at the address set as the notice.
Notices given by facsimile transmission shall be deemed effectively delivered on the date of successful
transmission (as evidenced by an automatically generated confirmation of transmission).
8.2
For the purpose of notification, the addresses of the Parties are as follows:
Party A/B:
Address:
Attention:
E-mail:
Party C:
Address:
Attention:
E-mail:
5th Floor (Gate C7), South District, National Convention Center, No.7, Tianchen East Road,
Chaoyang District, Beijing
Legal Management Department-Investment and M&A Legal
[ ]
Room 2606, Building 2, Huamao Center, No.79 Jianguo Road, Chaoyang District, Beijing
Kang Sihan
[ ]
8.3
Each Party may at any time change its address for notices by delivering a notice to the other Party in accordance
with this Article.
9.
Default Liability
9.1
The Parties agree and acknowledge that if any Party substantially breaches any provision hereunder, or fails to
substantially perform or delays in performing any obligations hereunder, such breach, failure or delay shall
constitute a default hereunder and that in such event, the non-defaulting Party/Parties shall have the right to demand
the defaulting party to cure such default or take remedial measures within a reasonable time. If the defaulting party
fails to cure
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such default or take remedial measures with such reasonable time or within ten (10) days of the non-defaulting party
notifying the defaulting party in writing and requesting it to cure such default, if the defaulting party is the Trustors
or Party C, the Trustee may elect, in its discretion, to do the following: (1) to terminate this Agreement and claim the
defaulting party to indemnify the damages; or (2) to request the defaulting party continuing fulfill its obligations
under this Agreement and indemnify the damages. If the defaulting party is the Trustee, the Trustors shall have the
right to request the defaulting party continuing fulfill its obligations under this Agreement and indemnify the
damages.
10. Governing Law and Disputes Resolution
10.1 The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
10.2 Any disputes arising in connection with the implementation and performance of this Agreement shall be settled
through friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30) days
upon issuance of the written notice by one Party to the other Party for consultations, such disputes shall be
submitted by either Party to the China International Economic and Trade Arbitration Commission for arbitration in
accordance with its then effective arbitration rules. The arbitration shall take place in Shenzhen and the arbitration
language shall be Chinese. The arbitration award shall be final and binding upon all the Parties.
10.3 Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during
the pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall
continue to exercise their respective rights and perform their respective obligations hereunder.
11. Severability
11.1 In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable
in any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining
provisions of this Agreement shall not be affected or compromised in any aspect. The Parties shall negotiate in good
faith to replace such invalid, illegal or unenforceable provisions with effective provisions that accomplish to the
greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective
provisions shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.
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12. Miscellaneous
12.1 The Parties may amend, supplement or change this Agreement in writing and shall come in to force upon being
signed and sealed by the Parties.
12.2 This Agreement is written in Chinese in four (4) originals, with each of the Trustors, the Trustee and Party C
holding one copy with the same legal effect.
12.3 This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and
supersedes all prior discussions, negotiations and agreements between the Parties with respect to the subject matter
hereof.
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IN WITNESS WHEREOF, the Parties hereto have executed this Voting Trust Agreement as of the date first above written.
Party A:
By:
Name:
/s/ Gu Dejun
Gu Dejun
By:
Name:
/s/ Yang Qihu
Yang Qihu
IN WITNESS WHEREOF, the Parties hereto have executed this Voting Trust Agreement as of the date first above written.
Party B:
/s/ Seal of Simo Music (Beijing) Co., Ltd.
Simo Music (Beijing) Co., Ltd.
IN WITNESS WHEREOF, the Parties hereto have executed this Voting Trust Agreement as of the date first above written.
Party C:
/s/ Seal of Lianhe Wenyu (Shenzhen) Co., Ltd.
Lianhe Wenyu (Shenzhen) Co., Ltd.
Commitment Letter
Exhibit 4.72
Whereas:
Simo Music (Beijing) Co., Ltd. (the “WFOE”), Lianhe Wenyu (Shenzhen) Co., Ltd. (the “VIE Company”) and Yang Qihu, Gu
Dejun have entered into the Exclusive Option Agreement, Equity Interest Pledge Agreement and other related documents on July
26, 2019.
I hereby undertake the followings:
1.
2.
As requested by the WFOE at any time, I shall immediately and unconditionally transfer my equity interest in the VIE
Company to the WFOE or its designee in accordance with relevant provisions under the Exclusive Option Agreement. And
I shall waive the right of first refusal in case that other shareholders (if any) of the VIE Company transfer the equity interest
to the WFOE or its designee.
I agree that the WFOE may exercise its pledge right on the equity interest of the VIE Company according to the Equity
Interest Pledge Agreement. If the WFOE exercises its pledge right, I shall waive the right of first refusal in case that other
shareholders of the VIE Company transfer the equity interest to the WFOE or its designee.
3. My decision to waive the right of first refusal is unconditional and irrevocable. I hereby undertake that I shall not withdraw
the waiver when the aforesaid transfer of equity interest occurs.
4.
I agree to sign related documents with respect to the aforesaid transfer of equity interest, including but not limited to equity
transfer agreement, resolution of the shareholders and the articles of association of the VIE Company, and agree to go
through relevant modification formalities in the administrative authorities for industry and commerce.
Signature: /s/Yang Qihu
Date: July 26, 2019
Whereas:
Commitment Letter
Simo Music (Beijing) Co., Ltd. (the “WFOE”), Lianhe Wenyu (Shenzhen) Co., Ltd. (the “VIE Company”) and Yang Qihu, Gu
Dejun have entered into the Exclusive Option Agreement, Equity Interest Pledge Agreement and other related documents on July
26, 2019.
I hereby undertake the followings:
1.
2.
As requested by the WFOE at any time, I shall immediately and unconditionally transfer my equity interest in the VIE
Company to the WFOE or its designee in accordance with relevant provisions under the Exclusive Option Agreement. And
I shall waive the right of first refusal in case that other shareholders (if any) of the VIE Company transfer the equity interest
to the WFOE or its designee.
I agree that the WFOE may exercise its pledge right on the equity interest of the VIE Company according to the Equity
Interest Pledge Agreement. If the WFOE exercises its pledge right, I shall waive the right of first refusal in case that other
shareholders of the VIE Company transfer the equity interest to the WFOE or its designee.
3. My decision to waive the right of first refusal is unconditional and irrevocable. I hereby undertake that I shall not withdraw
the waiver when the aforesaid transfer of equity interest occurs.
4.
I agree to sign related documents with respect to the aforesaid transfer of equity interest, including but not limited to equity
transfer agreement, resolution of the shareholders and the articles of association of the VIE Company, and agree to go
through relevant modification formalities in the administrative authorities for industry and commerce.
Signature: /s/ Gu Dejun
Date: July 26, 2019
Spousal Consent
Exhibit 4.73
The undersigned, Guo Jin, (Identification No.: [ ]), is the lawful spouse of Yang Qihu (Identification No.: [ ]). I
hereby unconditionally and irrevocably agree to the execution of the following documents by Yang Qihu as of July 26, 2019 (the
“Transaction Documents”) and the disposal of the equity interest of Lianhe Wenyu Co., Ltd. (the “VIE Company”) held by
Yang Qihu and registered under his name pursuant to the provisions of the following documents:
(1)
(2)
(3)
(4)
the equity interest pledge agreement by and among Yang Qihu, Simo Music (Beijing) Co., Ltd. (the “WFOE”) and
the VIE Company;
the exclusive option agreement by and among Yang Qihu, the WFOE and the VIE Company;
the voting trust agreement by and among Yang Qihu, the WFOE and the VIE Company; and
the loan agreement by and between Yang Qihu and the WFOE.
I hereby confirm that I do not enjoy any interests or rights held by Yang Qihu in the VIE Company and hereby undertake
not to make any assertions in respect of the equity interest of the VIE Company. I further confirm that, Yang Qihu can perform
the Transaction Documents and further amend or terminate the Transaction Documents or execute other agreements to replace the
Transaction Documents absent any authorization or consent from me.
I hereby undertake to execute all necessary documents, and take all necessary actions, to ensure appropriate performance
of the Transaction Documents (as amended from time to time).
I hereby agree and undertake that, if I acquire any equity interests held by Yang Qihu in the VIE Company for whatever
reasons, I shall be bound by the Transaction Documents (as amended from time to time) and the exclusive business corporation
agreement entered by and between the WFOE and the VIE company dated in July 26, 2019 (the “Exclusive Business
Corporation Agreement”) and shall comply with the obligations of a shareholder of the VIE Company and the obligations of
the Transaction Documents and the Exclusive Business Corporation Agreement (as amended from time to time) thereunder. For
this purpose, upon the WFOE’s requests I, then be the shareholder of the VIE company, together with the other shareholders of
the VIE company, the WFOE, the VIE company and other related parties (if any), shall execute a series of written documents in
substantially the same format and content as the Transaction Documents.
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1
(This page is the signature page of the Spousal Consent)
Signature:
Date:
/s/Guo Jin
July 26, 2019
Spousal Consent
The undersigned, Chu Jie, (Identification No.: [ ]), is the lawful spouse of Gu Dejun (Identification No.: [ ]). I
hereby unconditionally and irrevocably agree to the execution of the following documents by Gu Dejun as of July 26, 2019 (the
“Transaction Documents”) and the disposal of the equity interest of Lianhe Wenyu Co., Ltd. (the “VIE Company”) held by Gu
Dejun and registered under his name pursuant to the provisions of the following documents:
(1)
(2)
(3)
(4)
the equity interest pledge agreement by and among Gu Dejun, Simo Music (Beijing) Co., Ltd. (the “WFOE”) and
the VIE Company;
the exclusive option agreement by and among Gu Dejun, the WFOE and the VIE Company;
the voting trust agreement by and among Gu Dejun, the WFOE and the VIE Company; and
the loan agreement by and between Gu Dejun and the WFOE.
I hereby confirm that I do not enjoy any interests or rights held by Gu Dejun in the VIE Company and hereby undertake
not to make any assertions in respect of the equity interest of the VIE Company. I further confirm that, Gu Dejun can perform the
Transaction Documents and further amend or terminate the Transaction Documents or execute other agreements to replace the
Transaction Documents absent any authorization or consent from me.
I hereby undertake to execute all necessary documents, and take all necessary actions, to ensure appropriate performance
of the Transaction Documents (as amended from time to time).
I hereby agree and undertake that, if I acquire any equity interests held by Gu Dejun in the VIE Company for whatever
reasons, I shall be bound by the Transaction Documents (as amended from time to time) and the exclusive business corporation
agreement entered by and between the WFOE and the VIE company dated in July 26, 2019 (the “Exclusive Business
Corporation Agreement”) and shall comply with the obligations of a shareholder of the VIE Company and the obligations of
the Transaction Documents and the Exclusive Business Corporation Agreement (as amended from time to time) thereunder. For
this purpose, upon the WFOE’s request, I, then be the shareholder of the VIE company, together with the other shareholders of
the VIE company, the WFOE, the VIE company and other related parties (if any), shall execute a series of written documents in
substantially the same format and content as the Transaction Documents.
[The remainder of this page is intentionally left blank]
1
(This page is the signature page of the Spousal Consent)
Signature:
Date:
/s/Chu Jie
July 26, 2019
Equity Interest Pledge Agreement
Exhibit 4.74
This Equity Interest Pledge Agreement (the “Agreement”) is entered into by and among the following Parties on May 15, 2019 in
Beijing, People’s Republic of China (“China” or the “PRC”):
Beijing Huateng Xiangfeng Technology Co., Ltd. (the “Pledgee”), a wholly foreign owned enterprise established and existing
under the laws of the PRC, and the address is Unit 02, (14)1702, Floor 17, No.27 Dongsanhuan North Road, Chaoyang District,
Beijing;
Yang Qihu, a Chinese Citizen with Identification No.: [
] (the Pledgor”);
Shengxiang Hudong Music (Beijing) Co., Ltd. (“OpCo”), a limited liability company established and existing under the laws
of the PRC, and the address is Room 3092 Floor 3, No. 10 Jia Chaoyangmenwai Avnenue, Chaoyang District, Beijing.
In this Agreement, each of the Pledgee, the Pledgor and OpCo shall be referred to as a “Party” respectively or as the “Parties”
collectively.
Whereas:
1.
The Pledgor is a Chinese citizen and as of the date of this Agreement holds 50% equity interests of OpCo, representing
RMB 500,000 of OpCo’s registered capital. OpCo is a limited liability company registered in Beijing, China and its
business is to provide services under the Business Cooperation Agreement to the Pledgee. OpCo hereby acknowledges the
rights and obligations of the Pledgor and the Pledgee under this Agreement and intends to provide any necessary assistance
in registering the Pledge;
2.
3.
The Pledgee is a wholly foreign-owned enterprise registered in China, 100% owned by the WT2 Limited (Registration No.
2716810) which registered in Hong Kong. The Pledgee and the Pledgor have executed a Business Cooperation Agreement
(as defined below) in Beijing; the Pledgee, the Pledgor and OpCo have executed an Exclusive Option Agreement (as
defined below); the Pledgor has respectively executed a Power of Attorney in favor of the Pledgee (as defined below);
To ensure that OpCo and the Pledgor fully perform its obligations under the Business Cooperation Agreement, the
Exclusive Option Agreement and the Power of Attorney, the Pledgor pledges to the Pledgee all the equity interests he
holds in OpCo as security for the performance of OpCo’ and the Pledgor’s obligations under the Business Cooperation
Agreement, the Exclusive Option Agreement and the Power of Attorney.
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To perform the terms of the Transaction Documents, the Parties have mutually agreed to execute this Agreement upon the
following terms.
1.
Definitions
Unless otherwise provided in this Agreement, the terms below shall have the following meanings:
1.1.
1.2.
1.3.
1.4.
1.5.
1.6.
Pledge: means the security interest granted by the Pledgor to the Pledgee pursuant to Section 2 of this Agreement, i.e.,
the right of the Pledgee to be compensated on a preferential basis with any proceeds received from conversion, auction
or sale of the Pledged Equity Interest.
Pledged Equity Interest: means 50% of all equity interests in OpCo held by the Pledgor now, representing RMB
500,000 of OpCo’s registered capital, and all the future equity rights and interests in OpCo held by the Pledgor.
Term of Pledge: means the term set forth in Section 3 of this Agreement.
Transaction Documents: means the Business Cooperation Agreement entered into by and between OpCo and the
Pledgee on May 15, 2019 (the “Business Cooperation Agreement”); the Exclusive Option Agreement entered into by
and among the Pledgor, OpCo and the Pledgee on May 15, 2019 (the “Exclusive Option Agreement”); the power of
attorney executed by each of the Pledgor on May 15, 2019 (the “Power of Attorney”), and any amendments, revisions
and/or restatements to the aforesaid documents.
Contractual Obligations: means all the obligations of the Pledgor under the Exclusive Option Agreement, the Power of
Attorney and this Agreement, and all the obligations of OpCo under the Business Cooperation Agreement, the Exclusive
Option Agreement and this Agreement.
Secured Indebtedness: means all direct, indirect, consequential losses and losses of anticipated profits suffered by the
Pledgee as a result of any Event of Default of the Pledgor and/or OpCo, of which the basis for the amount of such losses
includes without limitation reasonable business plans and profit forecasts of the Pledgee, the service fees that OpCo is
obliged to pay under Business Cooperation Agreement, as well as all expenses as incurred by the Pledgee in connection
with its enforcement for the performance of Contractual Obligations against the Pledgor and/or OpCo.
1.7.
Event of Default: means any circumstances as set forth in Section 7 of this Agreement.
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1.8.
1.9.
Notice of Default: means the notice issued by the Pledgee in accordance with this Agreement declaring an Event of
Default.
Joint Venture Agreement: means the Joint Venture Agreement (“Joint Venture Agreement”) entered into between
Tencent Music Entertainment Group (“TME”), Tencent Music Entertainment Hong Kong Limited (“TME HK”),
Warner Music China (HK) Limited (“Warner”) and WT2 on April 16, 2019.
2.
The Pledge
2.1.
2.2.
2.3.
2.4.
The Pledgor hereby agrees to pledge to the Pledgee the Pledged Equity Interest in accordance with this Agreement as
security for the performance of the Contractual Obligations and the repayment of the Secured Indebtedness. OpCo
hereby agrees for the Pledgor to so pledge the Pledged Equity Interest to the Pledgee in accordance with this Agreement.
During the Term of Pledge, the Pledgee is entitled to receive any dividends or distributions in respect of the Pledged
Equity Interest. With the prior written consent of the Pledgee, the Pledgor may collect such dividends or distributions in
respect of the Pledged Equity Interest. Any dividends or distributions received by the Pledgee in respect of the Pledged
Equity Interest after deduction of income tax paid by Pledgor shall, upon the Pledgee’s request, (1) be deposited into a
bank account designated by the Pledgee, be placed under the custody of the Pledgee, be used as security for the
Contractual Obligations and be first applied towards full satisfaction of the Secured Indebtedness; or (2) to the extent
permitted by the PRC laws, be unconditionally donated to the Pledgee or any person designated by the Pledgee.
With the prior written consent of the Pledgee, the Pledgor may subscribe for increased capital in OpCo. Any increase in
the capital contributed by the Pledgor to the registered capital of OpCo as a result of any capital increase shall also be
deemed as the Pledged Equity Interest.
In the event that OpCo is to be dissolved or liquidated as required by any mandatory rules of the PRC laws, upon the
lawful completion of such dissolution or liquidation procedure, any proceeds distributed by OpCo to the Pledgor shall,
upon the Pledgee’s request, (1) be deposited into a bank account designated by the Pledgee, be placed under the custody
of the Pledgee, and be used as security for the Contractual Obligations and be first applied towards full satisfaction of
the Secured Indebtedness; or (2) to the extent permitted by the PRC laws, be unconditionally donated to the Pledgee or
any person designated by the Pledgee.
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3.
Term of Pledge
3.1.
The Pledge shall become effective on such date when the pledge of the Pledged Equity Interest contemplated herein has
been registered with the relevant administration for industry and commerce. The Pledge shall be continuously valid until
(i) full performance of the Contractual Obligations and full satisfaction of the Secured Indebtedness, or (ii) the date
when Warner has received the equity interests of WT2 held by TME HK pursuant to Section 25.9 of the Joint Venture
Agreement. The Pledgor and OpCo shall, (1) register the Pledge in the shareholders’ register of OpCo within 3 business
days following the execution of this Agreement, and (2) submit an application to the relevant administration for industry
and commerce for the registration of the Pledge contemplated herein within 30 business days following the execution of
this Agreement. The Parties covenant that for the purpose of registration of the Pledged Equity Interest, the Parties and
other shareholders of OpCo shall submit to the administration of industry and commerce this Agreement or an equity
interest pledge agreement in the form required by the administration of industry and commerce of where OpCo locates,
which shall truly reflect the information of the Pledge hereunder (the “AIC Pledge Agreement”). For matters not
specified in the AIC Pledge Agreement, the parties shall be bound by the provisions of this Agreement. The Pledgor and
OpCo shall submit all necessary documents and complete all necessary procedures, as required by the PRC laws and
regulations and the relevant administration of industry and commerce, to ensure that the Pledge shall be registered as
soon as possible after filing.
3.2.
During the Term of Pledge, in the event the Pledgor and/or OpCo fail to fulfill the Contractual Obligations or pay the
Secured Indebtedness, the Pledgee shall be entitled to, but not be obliged to, exercise the Pledge in accordance with this
Agreement.
4.
Custody for Certificates of the Pledge
4.1.
During the Term of Pledge, the Pledgor shall deliver to the Pledgee the certificate of capital contributions to OpCo and
the register of shareholders which records the Pledge as soon as possible. The Pledgee will place such documents in
custody throughout the entire Term of Pledge specified in this Agreement.
5.
Representations and Warranties of the Pledgor and OpCo
The Pledgor and OpCo hereby severally and jointly represent and warrant to the Pledgee as of the date hereof as follows:
5.1.
The Pledgor is the only legal and beneficial owner of the Pledged Equity Interest.
4
5.2.
5.3.
5.4.
5.5.
The Pledgor is entitled to dispose of and transfer the Pledged Equity Interest in accordance with this Agreement.
Except for the Pledge hereof, the Pledgor has not created any other pledges or other security interest on the Pledged
Equity Interest.
The Pledgor and OpCo have obtained all necessary approvals and consents from government authorities and third parties
(if any) in connection with the execution, delivery and performance of this Agreement.
The execution, delivery and performance of this Agreement do not (i) result in any violation of any relevant PRC laws;
(ii) result in any conflict with the articles of association or other constitutional documents of OpCo; (iii) result in any
breach of any agreement to which it is a party or by which it is bound, or constitute any default under any agreement to
which it is a party or by which it is bound; (iv) result in any breach of any permit or license issued or granted to it and/or
any condition of the validity thereof; or (v) result in the revocation or suspension of, or imposition of conditions on, any
permit or license issued to it.
6.
Undertakings by the Pledgor and OpCo
6.1.
During the Term of Pledge, the Pledgor and OpCo severally and jointly undertake to the Pledgee that:
6.1.1.
6.1.2.
6.1.3.
Without the prior written consent of the Pledgee, the Pledgor shall not transfer the Pledged Equity Interest,
create or permit to be created any security interest or other encumbrances on the Pledged Equity Interest,
except for the performance of the Transaction Documents.
The Pledgor and OpCo shall comply with the provisions of all the laws and regulations relating to the pledge
of rights, and shall, within five (5) days upon receipt of any notice, order or recommendation issued or
promulgated by the relevant competent authorities regarding the Pledge, present such notice, order or
recommendation to the Pledgee, and concurrently comply with such notice, order or recommendation, or
object thereto upon the reasonable request or consent of the Pledgee.
The Pledgor and OpCo shall promptly notify the Pledgee of any event or notice received by the Pledgor that
may have an impact on the Pledged Equity Interest or any portion thereof, and that may change any
undertakings and obligations of the Pledgor hereunder or may have an impact on the fulfillment of any
obligations by the Pledgor hereunder.
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6.1.4.
OpCo shall complete its business term extension registration formalities three (3) months prior to the expiry
of its business term such that the validity of this Agreement shall be maintained.
6.2.
6.3.
6.4.
The Pledgor agrees that the rights granted to the Pledgee in respect of the Pledge hereunder shall not be interrupted or
harmed by any legal procedure initiated by the Pledgor, any successors of the Pledgor or their entrusting party or any
other persons.
The Pledgor undertakes to the Pledgee that in order to protect or perfect the security for the Contractual Obligations and
the Secured Indebtedness under this Agreement, the Pledgor shall execute in good faith and cause other parties who have
interests in the Pledge to execute all the certificates of rights, agreements, and/or perform and procure other parties who
have interests in the Pledge to perform acts as required by the Pledgee, facilitate the exercise of the Pledgee’s rights
granted hereunder and enter into all relevant documents regarding ownership of the Pledged Equity Interest with the
Pledgee or any person (individuals or legal persons) designated by the Pledgee, as well as provide the Pledgee with all
notices, orders and decisions regarding the Pledge as required by the Pledgee within a reasonable period of time.
The Pledgor hereby undertakes to the Pledgee to comply with and perform all the undertakings, representations and
warranties and terms hereunder. In the event that the Pledgor fails to perform or fail to fully perform such undertakings,
representations and warranties and terms hereunder, the Pledgor shall indemnify the Pledgee against all the losses
resulting therefrom.
7.
Event of Default
7.1.
Each of the following circumstances shall constitute an Event of Default:
7.1.1.
The Pledgor breaches any of its obligations under the Transaction Documents and/or this Agreement.
7.1.2.
OpCo breaches any of its obligations under the Transaction Documents and/or this Agreement.
7.1.3.
OpCo, or its successor or assignee failed to pay any payables under each transaction document in full or on
time, or the pledgor or its successor or assignee failed to perform its obligations under each transaction
document under any circumstances, including but not limited to the secured indebtedness.
6
7.1.4.
7.1.5.
Any statement, guarantee or promise made by the Pledgor in Article 5 and 6 of this Agreement is materially
misleading or inaccurate, and/or the Pledgor or OpCo violates any statement, guarantee or promise.
Any external borrowings, guarantees, compensations, commitments or other debts or responsibilities of the
Pledgor itself are required to be repaid or performed in advance for any reason or have expired but cannot be
repaid or performed as scheduled, which gives the pledgee reason to believe that the pledgee's ability to
perform its obligations under this agreement has been affected, and further affect the interests of the pledgee.
7.1.6.
The Pledgee cannot repay general debts or other debts, and further affects the interests of the pledgee.
7.1.7.
7.1.8.
7.1.9.
This Agreement becomes illegal or the Pledgor cannot continue to fulfil the obligations under this Agreement
due to the promulgation of any laws, regulations or policies.
Any government department's consent, permit, approval or authorization required to make this agreement
legal, effective or enforceable is withdrawn, suspended, invalidated or substantially modified.
Due to adverse changes in the property owned by the pledgor, the pledgee believes that the pledgor's ability to
perform its obligations under this agreement is affected.
7.1.10.
OpCo is or may be undergoing liquidation, dissolution or suspension procedures.
7.1.11.
Other circumstances where the pledgee cannot exercise or dispose of the pledge right in accordance with
applicable laws.
7.2.
Should there arises any event set forth in Section 7.1 or any circumstance that may result in the foregoing events, the
Pledgor and OpCo shall immediately notify the Pledgee in writing.
7
7.3.
Unless an Event of Default set forth in this Section 7.1 has been remedied at the request of the Pledgee within twenty
(20) days upon receipt of the notice of the Pledgee to the Pledgor and/or OpCo requesting the rectification of such Event
of Default, the Pledgee may issue a Notice of Default to the Pledgor in writing at any time thereafter, requesting the
exercise of the Pledge in accordance with Section 8 hereof. If the Pledgor and/or OpCo do not correct its action of
breach or take necessary remedial behaviors after ten (10) days upon issuance of such Notice of Default, the Pledgee is
entitled to exercise the Pledge pursuant Section 8 hereof.
8.
Exercise of the Pledge
8.1.
8.2.
If the Pledgor and/or OpCo violate any obligations under the Transaction Documents, or an event of default occurs as
agreed in this Agreement, or the secured indebtedness expires but the Pledgor fails to fulfil its obligations, the Pledgee is
entitled to sell the Pledged Equity Interests, or to converse, auction or for prior satisfaction of indebtedness under the
PRC laws.
The Pledgee shall be entitled to elect to exercise, simultaneously or successively, any of its breach of contract remedies;
the Pledgee shall not be required to first exercise other breach of contract remedies prior to exercising its right to
converse, auction or sell the Pledged Equity Interest hereunder. The Pledgee shall be entitled to designate in writing its
legal counsel or other agents to exercise on its behalf the Pledge, and neither the Pledgor nor OpCo shall object thereto.
8.3.
When the Pledgee disposes of the Pledge in accordance with this Agreement, the Pledgor and OpCo shall provide
necessary assistance to the Pledgee for its exercise of the Pledge.
9.
Default Liabilities
9.1.
In the event that the Pledgor or OpCo materially breach any provision under this Agreement, the Pledgee is entitled to
(1) claim damages from the Pledgor or OpCo in order that the Pledgee receive all interests obligated if this Agreement is
fully executed and is entitled but not obligated to terminate this Agreement; or (2) request to enforce the obligations of
the Pledgor and/or 0pCo under this agreement, and require the Pledgor and/or OpCo to compensate Party A for direct or
indirect losses. This Section 9 shall not preclude any other rights entitled to the Pledgee as provided under this
Agreement.
9.2.
The Pledgor or OpCo may not terminate or cancel this Agreement in any event unless otherwise provided under the
laws.
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10. Assignment
10.1.
10.2.
The Pledgor and OpCo shall not donate, transfer or dispose of their rights and obligations under this Agreement without
prior written consent of the Pledgee.
This Agreement shall be binding upon the Pledgor and its successors and any permitted assignees, and effective upon the
Pledgee and each of its successors and assignees.
10.3. With prior written consent of the Pledgor, the Pledgee may assign any or all of its rights and obligations under the
Transaction Documents and this Agreement to any person designated by it at any time. In this case, the assignee shall
enjoy and assume the rights and obligations of the Pledgee under the Transaction Documents and this Agreement as if
the assignee were a party hereto or thereto, as applicable.
10.4.
10.5.
In the event of a change of Pledgee due to assignment, the Pledgor shall, at the request of the Pledgee, execute a new
pledge agreement with the new pledgee with the same terms and conditions as this Agreement, and register such new
pledge with the relevant administration for industry and commerce.
The Pledgor and OpCo shall strictly comply with the provisions of this Agreement and other relevant agreements to
which any Party is a party, including the Transaction Documents, and perform the obligations thereunder, and refrain
from any action/omission that may affect the effectiveness and enforceability thereof. Unless with the written
instructions of the Pledgee, the Pledgor shall not exercise their remaining rights in respect of the Pledged Equity Interest.
11.
Termination
11.1.
Upon (i) the full and complete performance by the Pledgor and OpCo of all of their Contractual Obligations and full
satisfaction of the Secured Indebtedness, or (ii) the date when Warner has received the equity interests of WT2 held by
TME HK pursuant to Section 24.4 of the Joint Venture Agreement, or (iii) the termination of the Joint Venture
Agreement (whichever of the above three dates shall prevail), the Pledgee shall, upon the Pledgor’ request, release the
Pledge of the Pledged Equity Interest hereunder and cooperate with the Pledgor in relation to both the deregistration of
the Pledge of the Pledged Equity Interest in the shareholders’ register of OpCo and the deregistration of the Pledge of the
Pledged Equity Interest with the relevant administration of industry and commerce.
11.2.
The provisions under Section 9, Section 13, Section 14 and this Section 11.2 shall survive the termination of this
Agreement.
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12. Costs and Other Expenses
All costs and actual expenses arising in connection with this Agreement, including without limitation the legal fees,
processing fees, stamp duty, any other taxes and expenses, shall be borne by OpCo.
13. Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written
consent of the other Party, disclose any confidential information to any third parties, except for information: (a) that is or
will be available to the public (other than through the unauthorized disclosure to the public by the Party receiving
confidential information); (b) that is required to be disclosed pursuant to the applicable laws or regulations, rules of any
stock exchange, or orders of the court or other government authorities; or (c) that is disclosed by any Party to its
shareholders, directors, employees, legal counsels or financial advisors regarding the transaction contemplated hereunder,
provided that such shareholders, directors, employees, legal counsels or financial advisors shall be bound by the
confidentiality obligations similar to the terms set forth in this Section. Disclosure of any confidential information by the
shareholders, directors, employees or entities engaged by any Party shall be deemed as disclosure of such confidential
information by such Party, which Party shall be held liable for breach of contract.
14. Governing Law and Disputes Resolution
14.1.
14.2.
The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
Any disputes arising in connection with the implementation and performance of this Agreement shall be settled through
friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30) days upon
issuance of the written notice by one Party to the other Parties for consultations, such disputes shall be submitted by
either Party to the Beijing International Arbitration Center for arbitration for arbitration in accordance with its arbitration
rules. The arbitration shall take place in Beijing. The arbitration award shall be final and binding upon all the Parties.
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14.3.
Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during the
pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall continue to
exercise their respective rights and perform their respective obligations hereunder.
15. Notices
15.1.
All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered
personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to
the designated address of such party as listed below. A confirmation copy of each notice shall also be sent by E-mail.
The dates on which notices shall be deemed to have been effectively delivered shall be determined as follows:
15.1.1.Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed
effectively delivered on the date of receipt or refusal at the address specified for notices.
15.2.
For the purpose of notification, the addresses of the Parties are as follows:
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
Address: Unit 02, (14)1702, Floor 17, No. 27 Dongsanhuan North Road, Chaoyang District, Beijing
Attention: Andy Ma
E-mail: [
]
and
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: M&A Department
]
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: Legal Management Department – Investment and M&A
]
11
Party B: Yang Qihu
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: M&A Department
]
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: Legal Management Department – Investment and M&A
]
OpCo: Shengxiang Hudong Music (Beijing) Co., Ltd.
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: M&A Department
]
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: Legal Management Department – Investment and M&A
]
15.3.
Each Party may at any time change its address for notices by delivering a notice to the other Parties in accordance with
this Section.
16.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any
aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this
Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such
invalid, illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by
law and the intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to
the economic effect of those invalid, illegal or unenforceable provisions.
17. Annexes
The annexes listed in this agreement are an integral part of this agreement.
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18.
Effectiveness
18.1.
This Agreement comes into effect upon formal signing or seal by all the Parties.
18.2.
Any amendments, changes and supplements to this Agreement shall be in writing and shall become effective upon
signing or stamping by the Parties and completion of the governmental registration procedures (if applicable) in
accordance with the regulations.
19.
Language and Counterparts
This Agreement is written in Chinese in four (4) originals, with each of the Pledgee, the Pledgor and OpCo holding one
original, and the other one original will be submitted for registration.
[The remainder of this page is intentionally left blank]
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IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd.
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party B: Yang Qihu
Signature: /s/ Yang Qihu
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
OpCo: Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
Exhibits
1.
2.
3.
4.
Register of Shareholders of OpCo
Business Cooperation Agreement
Exclusive Option Agreement
Power of Attorney
Equity Interest Pledge Agreement
Exhibit 4.75
This Equity Interest Pledge Agreement (the “Agreement”) is entered into by and among the following Parties on May 15, 2019 in
Beijing, People’s Republic of China (“China” or the “PRC”):
Beijing Huateng Xiangfeng Technology Co., Ltd. (the “Pledgee”), a wholly foreign owned enterprise established and existing
under the laws of the PRC, and the address is Unit 02, (14)1702, Floor 17, No.27 Dongsanhuan North Road, Chaoyang District,
Beijing;
Gu Dejun, a Chinese Citizen with Identification No.: [
] (the Pledgor”);
Shengxiang Hudong Music (Beijing) Co., Ltd. (“OpCo”), a limited liability company established and existing under the laws
of the PRC, and the address is Room 3092 Floor 3, No. 10 Jia Chaoyangmenwai Avnenue, Chaoyang District, Beijing.
In this Agreement, each of the Pledgee, the Pledgor and OpCo shall be referred to as a “Party” respectively or as the “Parties”
collectively.
Whereas:
1.
2.
3.
The Pledgor is a Chinese citizen and as of the date of this Agreement holds 50% equity interests of OpCo, representing
RMB 500,000 of OpCo’s registered capital. OpCo is a limited liability company registered in Beijing, China and its
business is to provide services under the Business Cooperation Agreement to the Pledgee. OpCo hereby acknowledges
the rights and obligations of the Pledgor and the Pledgee under this Agreement and intends to provide any necessary
assistance in registering the Pledge;
The Pledgee is a wholly foreign-owned enterprise registered in China, 100% owned by the WT2 Limited (Registration
No. 2716810) which registered in Hong Kong. The Pledgee and the Pledgor have executed a Business Cooperation
Agreement (as defined below) in Beijing; the Pledgee, the Pledgor and OpCo have executed an Exclusive Option
Agreement (as defined below); the Pledgor has respectively executed a Power of Attorney in favor of the Pledgee (as
defined below);
To ensure that OpCo and the Pledgor fully perform its obligations under the Business Cooperation Agreement, the
Exclusive Option Agreement and the Power of Attorney, the Pledgor pledges to the Pledgee all the equity interests he
holds in OpCo as security for the performance of OpCo’ and the Pledgor’s obligations under the Business Cooperation
Agreement, the Exclusive Option Agreement and the Power of Attorney.
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To perform the terms of the Transaction Documents, the Parties have mutually agreed to execute this Agreement upon the
following terms.
1.
Definitions
Unless otherwise provided in this Agreement, the terms below shall have the following meanings:
1.1.
Pledge: means the security interest granted by the Pledgor to the Pledgee pursuant to Section 2 of this Agreement, i.e., the
right of the Pledgee to be compensated on a preferential basis with any proceeds received from conversion, auction or sale
of the Pledged Equity Interest.
1.2.
Pledged Equity Interest: means 50% of all equity interests in OpCo held by the Pledgor now, representing RMB 500,000
of OpCo’s registered capital, and all the future equity rights and interests in OpCo held by the Pledgor.
1.3.
Term of Pledge: means the term set forth in Section 3 of this Agreement.
1.4.
1.5.
1.6.
Transaction Documents: means the Business Cooperation Agreement entered into by and between OpCo and the
Pledgee on May 15, 2019 (the “Business Cooperation Agreement”); the Exclusive Option Agreement entered into by and
among the Pledgor, OpCo and the Pledgee on May 15, 2019 (the “Exclusive Option Agreement”); the power of attorney
executed by each of the Pledgor on May 15, 2019 (the “Power of Attorney”), and any amendments, revisions and/or
restatements to the aforesaid documents.
Contractual Obligations: means all the obligations of the Pledgor under the Exclusive Option Agreement, the Power of
Attorney and this Agreement, and all the obligations of OpCo under the Business Cooperation Agreement, the Exclusive
Option Agreement and this Agreement.
Secured Indebtedness: means all direct, indirect, consequential losses and losses of anticipated profits suffered by the
Pledgee as a result of any Event of Default of the Pledgor and/or OpCo, of which the basis for the amount of such losses
includes without limitation reasonable business plans and profit forecasts of the Pledgee, the service fees that OpCo is
obliged to pay under Business Cooperation Agreement, as well as all expenses as incurred by the Pledgee in connection
with its enforcement for the performance of Contractual Obligations against the Pledgor and/or OpCo.
1.7.
Event of Default: means any circumstances as set forth in Section 7 of this Agreement.
1.8.
Notice of Default: means the notice issued by the Pledgee in accordance with this Agreement declaring an Event of
Default.
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1.9.
Joint Venture Agreement: means the Joint Venture Agreement (“Joint Venture Agreement”) entered into between
Tencent Music Entertainment Group (“TME”), Tencent Music Entertainment Hong Kong Limited (“TME HK”), Warner
Music China (HK) Limited (“Warner”) and WT2 on April 16, 2019.
2.
The Pledge
2.1.
2.2.
The Pledgor hereby agrees to pledge to the Pledgee the Pledged Equity Interest in accordance with this Agreement as
security for the performance of the Contractual Obligations and the repayment of the Secured Indebtedness. OpCo hereby
agrees for the Pledgor to so pledge the Pledged Equity Interest to the Pledgee in accordance with this Agreement.
During the Term of Pledge, the Pledgee is entitled to receive any dividends or distributions in respect of the Pledged
Equity Interest. With the prior written consent of the Pledgee, the Pledgor may collect such dividends or distributions in
respect of the Pledged Equity Interest. Any dividends or distributions received by the Pledgee in respect of the Pledged
Equity Interest after deduction of income tax paid by Pledgor shall, upon the Pledgee’s request, (1) be deposited into a
bank account designated by the Pledgee, be placed under the custody of the Pledgee, be used as security for the
Contractual Obligations and be first applied towards full satisfaction of the Secured Indebtedness; or (2) to the extent
permitted by the PRC laws, be unconditionally donated to the Pledgee or any person designated by the Pledgee.
2.3. With the prior written consent of the Pledgee, the Pledgor may subscribe for increased capital in OpCo. Any increase in
the capital contributed by the Pledgor to the registered capital of OpCo as a result of any capital increase shall also be
deemed as the Pledged Equity Interest.
2.4.
In the event that OpCo is to be dissolved or liquidated as required by any mandatory rules of the PRC laws, upon the
lawful completion of such dissolution or liquidation procedure, any proceeds distributed by OpCo to the Pledgor shall,
upon the Pledgee’s request, (1) be deposited into a bank account designated by the Pledgee, be placed under the custody
of the Pledgee, and be used as security for the Contractual Obligations and be first applied towards full satisfaction of the
Secured Indebtedness; or (2) to the extent permitted by the PRC laws, be unconditionally donated to the Pledgee or any
person designated by the Pledgee.
3
3.
Term of Pledge
3.1.
The Pledge shall become effective on such date when the pledge of the Pledged Equity Interest contemplated herein has
been registered with the relevant administration for industry and commerce. The Pledge shall be continuously valid until
(i) full performance of the Contractual Obligations and full satisfaction of the Secured Indebtedness, or (ii) the date when
Warner has received the equity interests of WT2 held by TME HK pursuant to Section 25.9 of the Joint Venture
Agreement. The Pledgor and OpCo shall, (1) register the Pledge in the shareholders’ register of OpCo within 3 business
days following the execution of this Agreement, and (2) submit an application to the relevant administration for industry
and commerce for the registration of the Pledge contemplated herein within 30 business days following the execution of
this Agreement. The Parties covenant that for the purpose of registration of the Pledged Equity Interest, the Parties and
other shareholders of OpCo shall submit to the administration of industry and commerce this Agreement or an equity
interest pledge agreement in the form required by the administration of industry and commerce of where OpCo locates,
which shall truly reflect the information of the Pledge hereunder (the “AIC Pledge Agreement”). For matters not
specified in the AIC Pledge Agreement, the parties shall be bound by the provisions of this Agreement. The Pledgor and
OpCo shall submit all necessary documents and complete all necessary procedures, as required by the PRC laws and
regulations and the relevant administration of industry and commerce, to ensure that the Pledge shall be registered as soon
as possible after filing.
3.2.
During the Term of Pledge, in the event the Pledgor and/or OpCo fail to fulfill the Contractual Obligations or pay the
Secured Indebtedness, the Pledgee shall be entitled to, but not be obliged to, exercise the Pledge in accordance with this
Agreement.
4.
Custody for Certificates of the Pledge
4.1.
During the Term of Pledge, the Pledgor shall deliver to the Pledgee the certificate of capital contributions to OpCo and
the register of shareholders which records the Pledge as soon as possible. The Pledgee will place such documents in
custody throughout the entire Term of Pledge specified in this Agreement.
5.
Representations and Warranties of the Pledgor and OpCo
The Pledgor and OpCo hereby severally and jointly represent and warrant to the Pledgee as of the date hereof as follows:
5.1.
The Pledgor is the only legal and beneficial owner of the Pledged Equity Interest.
5.2.
The Pledgor is entitled to dispose of and transfer the Pledged Equity Interest in accordance with this Agreement.
4
5.3.
5.4.
5.5.
Except for the Pledge hereof, the Pledgor has not created any other pledges or other security interest on the Pledged
Equity Interest.
The Pledgor and OpCo have obtained all necessary approvals and consents from government authorities and third parties
(if any) in connection with the execution, delivery and performance of this Agreement.
The execution, delivery and performance of this Agreement do not (i) result in any violation of any relevant PRC laws;
(ii) result in any conflict with the articles of association or other constitutional documents of OpCo; (iii) result in any
breach of any agreement to which it is a party or by which it is bound, or constitute any default under any agreement to
which it is a party or by which it is bound; (iv) result in any breach of any permit or license issued or granted to it and/or
any condition of the validity thereof; or (v) result in the revocation or suspension of, or imposition of conditions on, any
permit or license issued to it.
6.
Undertakings by the Pledgor and OpCo
6.1.
During the Term of Pledge, the Pledgor and OpCo severally and jointly undertake to the Pledgee that:
6.1.1. Without the prior written consent of the Pledgee, the Pledgor shall not transfer the Pledged Equity Interest, create
or permit to be created any security interest or other encumbrances on the Pledged Equity Interest, except for the
performance of the Transaction Documents.
6.1.2. The Pledgor and OpCo shall comply with the provisions of all the laws and regulations relating to the pledge of
rights, and shall, within five (5) days upon receipt of any notice, order or recommendation issued or promulgated
by the relevant competent authorities regarding the Pledge, present such notice, order or recommendation to the
Pledgee, and concurrently comply with such notice, order or recommendation, or object thereto upon the
reasonable request or consent of the Pledgee.
6.1.3. The Pledgor and OpCo shall promptly notify the Pledgee of any event or notice received by the Pledgor that may
have an impact on the Pledged Equity Interest or any portion thereof, and that may change any undertakings and
obligations of the Pledgor hereunder or may have an impact on the fulfillment of any obligations by the Pledgor
hereunder.
6.1.4. OpCo shall complete its business term extension registration formalities three (3) months prior to the expiry of its
business term such that the validity of this Agreement shall be maintained.
5
6.2.
6.3.
6.4.
The Pledgor agrees that the rights granted to the Pledgee in respect of the Pledge hereunder shall not be interrupted or
harmed by any legal procedure initiated by the Pledgor, any successors of the Pledgor or their entrusting party or any
other persons.
The Pledgor undertakes to the Pledgee that in order to protect or perfect the security for the Contractual Obligations and
the Secured Indebtedness under this Agreement, the Pledgor shall execute in good faith and cause other parties who have
interests in the Pledge to execute all the certificates of rights, agreements, and/or perform and procure other parties who
have interests in the Pledge to perform acts as required by the Pledgee, facilitate the exercise of the Pledgee’s rights
granted hereunder and enter into all relevant documents regarding ownership of the Pledged Equity Interest with the
Pledgee or any person (individuals or legal persons) designated by the Pledgee, as well as provide the Pledgee with all
notices, orders and decisions regarding the Pledge as required by the Pledgee within a reasonable period of time.
The Pledgor hereby undertakes to the Pledgee to comply with and perform all the undertakings, representations and
warranties and terms hereunder. In the event that the Pledgor fails to perform or fail to fully perform such undertakings,
representations and warranties and terms hereunder, the Pledgor shall indemnify the Pledgee against all the losses
resulting therefrom.
7.
Event of Default
7.1.
Each of the following circumstances shall constitute an Event of Default:
7.1.1. The Pledgor breaches any of its obligations under the Transaction Documents and/or this Agreement.
7.1.2. OpCo breaches any of its obligations under the Transaction Documents and/or this Agreement.
7.1.3. OpCo, or its successor or assignee failed to pay any payables under each transaction document in full or on time,
or the pledgor or its successor or assignee failed to perform its obligations under each transaction document under
any circumstances, including but not limited to the secured indebtedness.
7.1.4. Any statement, guarantee or promise made by the Pledgor in Article 5 and 6 of this Agreement is materially
misleading or inaccurate, and/or the Pledgor or OpCo violates any statement, guarantee or promise.
6
7.1.5. Any external borrowings, guarantees, compensations, commitments or other debts or responsibilities of the
Pledgor itself are required to be repaid or performed in advance for any reason or have expired but cannot be
repaid or performed as scheduled, which gives the pledgee reason to believe that the pledgee's ability to perform
its obligations under this agreement has been affected, and further affect the interests of the pledgee.
7.1.6. The Pledgee cannot repay general debts or other debts, and further affects the interests of the pledgee.
7.1.7. This Agreement becomes illegal or the Pledgor cannot continue to fulfil the obligations under this Agreement due
to the promulgation of any laws, regulations or policies.
7.1.8. Any government department's consent, permit, approval or authorization required to make this agreement legal,
effective or enforceable is withdrawn, suspended, invalidated or substantially modified.
7.1.9. Due to adverse changes in the property owned by the pledgor, the pledgee believes that the pledgor's ability to
perform its obligations under this agreement is affected.
7.1.10. OpCo is or may be undergoing liquidation, dissolution or suspension procedures.
7.2.
7.3.
7.1.11. Other circumstances where the pledgee cannot exercise or dispose of the pledge right in accordance with
applicable laws.
Should there arises any event set forth in Section 7.1 or any circumstance that may result in the foregoing events, the
Pledgor and OpCo shall immediately notify the Pledgee in writing.
Unless an Event of Default set forth in this Section 7.1 has been remedied at the request of the Pledgee within twenty (20)
days upon receipt of the notice of the Pledgee to the Pledgor and/or OpCo requesting the rectification of such Event of
Default, the Pledgee may issue a Notice of Default to the Pledgor in writing at any time thereafter, requesting the exercise
of the Pledge in accordance with Section 8 hereof. If the Pledgor and/or OpCo do not correct its action of breach or take
necessary remedial behaviors after ten (10) days upon issuance of such Notice of Default, the Pledgee is entitled to
exercise the Pledge pursuant Section 8 hereof.
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8.
Exercise of the Pledge
8.1.
8.2.
If the Pledgor and/or OpCo violate any obligations under the Transaction Documents, or an event of default occurs as
agreed in this Agreement, or the secured indebtedness expires but the Pledgor fails to fulfil its obligations, the Pledgee is
entitled to sell the Pledged Equity Interests, or to converse, auction or for prior satisfaction of indebtedness under the PRC
laws.
The Pledgee shall be entitled to elect to exercise, simultaneously or successively, any of its breach of contract remedies;
the Pledgee shall not be required to first exercise other breach of contract remedies prior to exercising its right to
converse, auction or sell the Pledged Equity Interest hereunder. The Pledgee shall be entitled to designate in writing its
legal counsel or other agents to exercise on its behalf the Pledge, and neither the Pledgor nor OpCo shall object thereto.
8.3. When the Pledgee disposes of the Pledge in accordance with this Agreement, the Pledgor and OpCo shall provide
necessary assistance to the Pledgee for its exercise of the Pledge.
9.
Default Liabilities
9.1.
In the event that the Pledgor or OpCo materially breach any provision under this Agreement, the Pledgee is entitled to (1)
claim damages from the Pledgor or OpCo in order that the Pledgee receive all interests obligated if this Agreement is
fully executed and is entitled but not obligated to terminate this Agreement; or (2) request to enforce the obligations of the
Pledgor and/or 0pCo under this agreement, and require the Pledgor and/or OpCo to compensate Party A for direct or
indirect losses. This Section 9 shall not preclude any other rights entitled to the Pledgee as provided under this
Agreement.
9.2.
The Pledgor or OpCo may not terminate or cancel this Agreement in any event unless otherwise provided under the laws.
10.
Assignment
10.1. The Pledgor and OpCo shall not donate, transfer or dispose of their rights and obligations under this Agreement without
prior written consent of the Pledgee.
10.2. This Agreement shall be binding upon the Pledgor and its successors and any permitted assignees, and effective upon the
Pledgee and each of its successors and assignees.
8
10.3. With prior written consent of the Pledgor, the Pledgee may assign any or all of its rights and obligations under the
Transaction Documents and this Agreement to any person designated by it at any time. In this case, the assignee shall
enjoy and assume the rights and obligations of the Pledgee under the Transaction Documents and this Agreement as if the
assignee were a party hereto or thereto, as applicable.
10.4.
In the event of a change of Pledgee due to assignment, the Pledgor shall, at the request of the Pledgee, execute a new
pledge agreement with the new pledgee with the same terms and conditions as this Agreement, and register such new
pledge with the relevant administration for industry and commerce.
10.5. The Pledgor and OpCo shall strictly comply with the provisions of this Agreement and other relevant agreements to
which any Party is a party, including the Transaction Documents, and perform the obligations thereunder, and refrain
from any action/omission that may affect the effectiveness and enforceability thereof. Unless with the written instructions
of the Pledgee, the Pledgor shall not exercise their remaining rights in respect of the Pledged Equity Interest.
11.
Termination
11.1. Upon (i) the full and complete performance by the Pledgor and OpCo of all of their Contractual Obligations and full
satisfaction of the Secured Indebtedness, or (ii) the date when Warner has received the equity interests of WT2 held by
TME HK pursuant to Section 24.4 of the Joint Venture Agreement, or (iii) the termination of the Joint Venture Agreement
(whichever of the above three dates shall prevail), the Pledgee shall, upon the Pledgor’ request, release the Pledge of the
Pledged Equity Interest hereunder and cooperate with the Pledgor in relation to both the deregistration of the Pledge of
the Pledged Equity Interest in the shareholders’ register of OpCo and the deregistration of the Pledge of the Pledged
Equity Interest with the relevant administration of industry and commerce.
11.2. The provisions under Section 9, Section 13, Section 14 and this Section 11.2 shall survive the termination of this
Agreement.
12.
Costs and Other Expenses
All costs and actual expenses arising in connection with this Agreement, including without limitation the legal fees,
processing fees, stamp duty, any other taxes and expenses, shall be borne by OpCo.
9
13.
Confidentiality
The Parties acknowledge and confirm that the terms of this Agreement and any oral or written information exchanged
among the Parties in connection with the preparation and performance of this Agreement are regarded as confidential
information. Each Party shall keep all such confidential information confidential, and shall not, without prior written
consent of the other Party, disclose any confidential information to any third parties, except for information: (a) that is or
will be available to the public (other than through the unauthorized disclosure to the public by the Party receiving
confidential information); (b) that is required to be disclosed pursuant to the applicable laws or regulations, rules of any
stock exchange, or orders of the court or other government authorities; or (c) that is disclosed by any Party to its
shareholders, directors, employees, legal counsels or financial advisors regarding the transaction contemplated hereunder,
provided that such shareholders, directors, employees, legal counsels or financial advisors shall be bound by the
confidentiality obligations similar to the terms set forth in this Section. Disclosure of any confidential information by the
shareholders, directors, employees or entities engaged by any Party shall be deemed as disclosure of such confidential
information by such Party, which Party shall be held liable for breach of contract.
14.
Governing Law and Disputes Resolution
14.1. The execution, effectiveness, interpretation, performance, amendment and termination of this Agreement and the
resolution of any disputes hereunder shall be governed by the PRC laws.
14.2. Any disputes arising in connection with the implementation and performance of this Agreement shall be settled through
friendly consultations among the Parties, and where such disputes are still unsolved within thirty (30) days upon issuance
of the written notice by one Party to the other Parties for consultations, such disputes shall be submitted by either Party to
the Beijing International Arbitration Center for arbitration for arbitration in accordance with its arbitration rules. The
arbitration shall take place in Beijing. The arbitration award shall be final and binding upon all the Parties.
14.3. Upon the occurrence of any disputes arising from the interpretation and performance of this Agreement or during the
pending arbitration of any disputes, except for the matters under dispute, the Parties to this Agreement shall continue to
exercise their respective rights and perform their respective obligations hereunder.
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15.
Notices
15.1. All notices and other communications required or permitted to be given pursuant to this Agreement shall be delivered
personally or sent by registered mail, postage prepaid, by a commercial courier service or by facsimile transmission to the
designated address of such party as listed below. A confirmation copy of each notice shall also be sent by E-mail. The
dates on which notices shall be deemed to have been effectively delivered shall be determined as follows:
15.1.1. Notices given by personal delivery, by courier service or by registered mail, postage prepaid, shall be deemed
effectively delivered on the date of receipt or refusal at the address specified for notices.
15.2. For the purpose of notification, the addresses of the Parties are as follows:
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
Address: Unit 02, (14)1702, Floor 17, No. 27 Dongsanhuan North Road, Chaoyang District, Beijing
Attention: Andy Ma
E-mail: [
]
and
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
]
Email: [
Attention: M&A Department
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: Legal Management Department – Investment and M&A
]
Party B: Gu Dejun
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
]
Attention: M&A Department
with a Copy to:
11
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: Legal Management Department – Investment and M&A
]
OpCo: Shengxiang Hudong Music (Beijing) Co., Ltd.
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
]
Attention: M&A Department
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang District,
Beijing
Email: [
Attention: Legal Management Department – Investment and M&A
]
15.3. Each Party may at any time change its address for notices by delivering a notice to the other Parties in accordance with
this Section.
16.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any
aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of
this Agreement shall not be affected or compromised in any respect. The Parties shall strive in good faith to replace such
invalid, illegal or unenforceable provisions with effective provisions that accomplish to the greatest extent permitted by
law and the intentions of the Parties, and the economic effect of such effective provisions shall be as close as possible to
the economic effect of those invalid, illegal or unenforceable provisions.
17.
Annexes
The annexes listed in this agreement are an integral part of this agreement.
18.
Effectiveness
18.1. This Agreement comes into effect upon formal signing by all the Parties.
12
18.2. Any amendments, changes and supplements to this Agreement shall be in writing and shall become effective upon
signing or stamping by the Parties and completion of the governmental registration procedures (if applicable) in
accordance with the regulations.
19.
Language and Counterparts
This Agreement is written in Chinese in four (4) originals, with each of the Pledgee, the Pledgor and OpCo holding one
original, and the other one original will be submitted for registration.
[The remainder of this page is intentionally left blank]
13
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd.
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
Party B: Gu Dejun
Signature: /s/ Gu Dejun
IN WITNESS HEREOF, the Parties have caused this Equity Interest Pledge Agreement to be executed by their respective
authorized representative on the date first above written.
OpCo: Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
Exhibits
1.
2.
3.
4.
Register of Shareholders of OpCo
Business Cooperation Agreement
Exclusive Option Agreement
Power of Attorney
Exclusive Option Agreement
Exhibit 4.76
This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of May 15, 2019 in
Beijing, the People’s Republic of China (“China” or the “PRC”):
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd., a wholly foreign owned enterprise established and existing under
the laws of the PRC, and the address is Unit 02, (14)1702, Floor 17, No.27 Dongsanhuan North Road, Chaoyang District,
Beijing;
Party B: Yang Qihu, a Chinese citizen with Identification No.: [
] (“Yang Qihu”); and
Party C: Shengxiang Hudong Music (Beijing) Co., Ltd., a limited liability company established and existing under the laws of
the PRC, and the address is Room 3092 Floor 3, No. 10 Jia Chaoyangmenwai Avnenue, Chaoyang District, Beijing.
In this Agreement, Party A, Party B, and Party C shall each be referred to as a “Party” respectively, and shall be collectively
referred to as the “Parties”.
Whereas:
11.7.10Party B is the shareholder of Party C and as of the date hereof holds 50 % of the equity interests of Party C, representing
RMB 500,000 in the registered capital of Party C.
After mutual discussions and negotiations, the Parties have now reached the following agreement:
1.
Sale and Purchase of Equity Interest
1.1
Option Granted
Party B agrees that as of the date hereof, Party B hereby irrevocably grants Party A an irrevocable and exclusive
right to purchase, or designate one or more persons (each, a “Designee”) to purchase the equity interests in Party
C then held by Party B once or at multiple times at any time in part or in whole at Party A’s sole and absolute
discretion to the extent permitted by PRC laws (including any laws, regulations, rules, notices, interpretation or
other legally binding documents promulgated by any central or local legislative executive or judicial branch
before or after the signing of this agreement, collectively referred to as “PRC laws”) and at the price described in
Section 1.3 herein (“Equity Interest Purchase Option”). Except for Party A, no other person shall be entitled to
the Equity Interest Purchase Option or other rights with respect to the equity interests of Party B. Party C hereby
agrees to the grant by Party B of the Equity Interest Purchase Option to Party A. The term “person” as used
herein shall refer to individuals, corporations, partnerships, partners, enterprises, trusts, or non-corporate
organizations.
1
1.2
Steps for Exercise
The exercise of the Equity Interest Purchase Option and the Asset Purchase Option by Party A shall be subject to
the provisions of the laws and regulations of China. When Party A exercises the Equity Interest Purchase Option,
a written notice shall be issued to Party B (the “Equity Interest Purchase Option Notice”), specifying:(a) Party
A’s or the Designee’s decision to exercise the Equity Interest Purchase Option; (b) the portion of equity interests
to be purchased by Party A or the Designee from Party B (the “Optioned Interests”); and (c) the date for
purchasing the Optioned Interests or the date for the transfer of the Optioned Interests.
1.3
Purchase Price
The purchase price (“Benchmark Purchase Price”) of all equity interests shall be RMB 10. If PRC law requires
a minimum price higher than the Benchmark Purchase Price when Party A exercises the Equity Interest Purchase
Option, the minimum price regulated by PRC law shall be the purchase price (collectively, the “Equity Interest
Purchase Price”).
1.4
Transfer of Optioned Interests
For each Party A’s exercise of the Equity Interest Purchase Option:
1.4.1
1.4.2
1.4.3
1.4.4
Party B shall cause Party C to promptly convene a shareholders’ meeting, at which a resolution shall be
adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s);
Party B shall obtain written statements from the other shareholders (if any) of Party C giving consent
to the transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first
refusal related thereto;
Party B shall execute an equity interest transfer contract with respect to each transfer with Party A
and/or each Designee (whichever is applicable), in accordance with the provisions of this Agreement
and the Equity Interest Purchase Option Notice regarding the Optioned Interests;
The relevant Parties shall execute all other necessary contracts, agreements, or documents, obtain all
necessary government licenses and permits, and take all necessary actions to transfer the valid
ownership of the Optioned Interests to Party A and/or the Designee(s), unencumbered by any security
interests, and cause Party A and/or the Designee(s) to become the registered owner(s) of the Optioned
Interests. For the purpose of this Section and this Agreement, “security interests” shall include
securities, mortgages, third party’s rights or interests, any stock options, acquisition right, right of first
refusal, right to offset, ownership retention, or other
2
security arrangements, but shall be deemed to exclude any security interest created by this Agreement,
Party B’s Equity Interest Pledge Agreement, and Party B’s Power of Attorney. “Party B’s Equity
Interest Pledge Agreement” as used in this Agreement shall refer to the Equity Interest Pledge
Agreement executed by and among Party A, Party B and Party C on the date hereof and any
modifications, amendments, and restatements thereto. “Party B’s Power of Attorney” as used in this
Agreement shall refer to the Power of Attorney executed by Party B on the date hereof granting Party
A with a power of attorney and any modifications, amendments, and restatements thereto.
2.
Covenants
2.1
Covenants regarding Party C
Party B (as the shareholder of Party C) and Party C hereby covenant on the following:
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
Without the prior written consent of Party A, they shall not in any manner supplement, change, or
amend the articles of association of Party C, increase or decrease its registered capital, or change its
structure of registered capital in other manners.
They shall maintain Party C’s corporate existence in accordance with good financial and business
standards and practices, as well as obtain and maintain all necessary government licenses and permits
by prudently and effectively operating its business and handling its affairs.
Without the prior written consent of Party A, they shall not at any time following the date hereof, sell,
transfer, mortgage, or dispose of in any manner any material assets of Party C or legal or beneficial
interest in the material business or revenues of Party C of more than US$ 150,000, or allow the
encumbrance thereon of any security interests.
Without the prior written consent of Party A, they shall not incur, inherit, guarantee, or suffer the
existence of any debt, except for payables incurred in the ordinary course of business other than
through loans.
They shall always operate all of Party C’s businesses within the normal business scope to maintain the
asset value of Party C and refrain from any action/omission that may affect Party C’s operating status
and asset value.
3
2.1.6
2.1.7
2.1.8
2.1.9
Without the prior written consent of Party A, they shall not cause Party C to execute any material
contract, except the contracts in the ordinary course of business (for the purpose of this subsection, a
contract with a price exceeding US$ 150,000 shall be deemed a material contract). Under the same
conditions and if practicable, Party A or its other affiliates has the right to cooperate with the other
party first.
Without the prior written consent of Party A, they shall not cause Party C to provide any person with a
loan or credit.
They shall provide Party A with information on Party C’s business operations and financial condition
upon Party A’s request.
If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and
business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for
companies that operate similar businesses and own similar assets in the same area.
2.1.10 Without the prior written consent of Party A, they shall not cause or permit Party C to merge,
consolidate with, acquire, or invest in any person.
2.1.11
2.1.12
They shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to Party C’s assets, business, or revenue.
To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate
documents, take all necessary or appropriate actions, file all necessary or appropriate complaints, and
raise necessary or appropriate defenses against all claims.
2.1.13 Without the prior written consent of Party A, they shall ensure that Party C shall not in any manner
distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall
immediately distribute all distributable profits to its shareholders.
2.1.14
2.1.15
At the request of Party A, they shall appoint any person designated by Party A as the director or
executive director of Party C.
Unless otherwise required by PRC law, Party C shall not be dissolved or liquated without prior written
consent by Party A.
4
2.2
Covenants of Party B
Party B and Party C hereby jointly and severally covenant to the following:
2.2.1
2.2.2
2.2.3
2.2.4
2.2.5
2.2.6
2.2.7
2.2.8
Without the prior written consent of Party A, at any time from the date of execution of this Agreement,
Party B shall not sell, transfer, mortgage, or dispose of in any other manner any legal or beneficial
interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon, except for
the interest placed in accordance with Party B’s Equity Interest Pledge Agreement and Party B’s Power
of Attorney.
Party B shall cause the shareholders’ meeting and/or the directors (or the executive director) of Party C
not to approve any sale, transfer, mortgage, or disposition in any other manner of any legal or
beneficial interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon
of any other security interest without the prior written consent of Party A, except for the interest placed
in accordance with Party B’s Equity Interest Pledge Agreement and Party B’s Power of Attorney.
Without the prior written consent of Party A, Party B shall cause the shareholders’ meeting or the
directors (or the executive director) of Party C not to approve the merger or consolidation with any
person, or the acquisition of or investment in any person.
Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to the equity interests in Party C held by Party B.
Party B shall cause the shareholders’ meeting or the directors (or the executive director) of Party C to
vote their approval of the transfer of the Optioned Interests as set forth in this Agreement and to take
any and all other actions that may be requested by Party A.
To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary
or appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate
complaints, and raise necessary or appropriate defenses against all claims.
Party B shall appoint any designee of Party A as the director or the executive director of Party C, at the
request of Party A.
Party B hereby waives its right of first refusal in regards to the transfer of equity interest by any other
shareholder of Party C to Party A (if any), and gives consent to the execution by each other shareholder
of Party C with Party A and Party C the exclusive option agreement, the equity interest pledge
agreement and the
5
2.2.9
2.2.10
power of attorney similar to this Agreement, Party B’s Equity Interest Pledge Agreement, and Party
B’s Power of Attorney, and accepts not to take any actions in conflict with such documents executed by
the other shareholders;
Party B shall promptly donate any profits, interests, dividends, or proceeds of liquidation to Party A or
any other person designated by Party A to the extent permitted under the applicable PRC laws. And
Party B shall strictly abide by the provisions of this Agreement and other contracts jointly or separately
executed by and among Party B, Party C, and Party A, perform the obligations hereunder and
thereunder, and refrain from any action/omission that may affect the effectiveness and enforceability
thereof. To the extent that Party B has any remaining rights with respect to the equity interests subject
to this Agreement hereunder or under Party B’s Equity Interest Pledge Agreement or under Party B’s
Power of Attorney, Party B shall not exercise such rights excluding in such manner in accordance with
the written instructions of Party A.
3.
Representations and Warranties
Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and
each date of transfer, that:
3.1
3.2
3.3
They have the power, capacity, and authority to execute and deliver this Agreement and any equity interest
transfer contracts to which they are parties concerning each transfer of the Optioned Interests as described
thereunder (each, a “Transfer Contract”), and to perform their obligations under this Agreement and any Transfer
Contracts. Party B and Party C agree to enter into Transfer Contracts substantially consistent with the terms of
this Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the Transfer
Contracts to which they are parties constitute or will constitute their legal, valid, and binding obligations, and
shall be enforceable against them in accordance with the provisions thereof.
Party B and Party C have obtained any and all approvals and consents from the relevant government authorities
and third parties (if required) for the execution, delivery, and performance of this Agreement.
The execution and delivery of this Agreement or any Transfer Contracts and the obligations under this Agreement
or any Transfer Contracts shall not: (i) cause any violations of any applicable PRC laws; (ii) be inconsistent with
the articles of association, bylaws, or other organizational documents of Party C; (iii) cause the violation of any
contracts or instruments to which they are a party or which are binding on them, or constitute any breach under
any contracts or instruments to which they are a party or which are binding on them; (iv) cause any violation of
any condition for the grant and/or continued effectiveness of any licenses or permits issued to either of them; or
(v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued
to either of them.
6
3.4
3.5
3.6
3.7
3.8
Party B has a good and merchantable title to the equity interests held by Party B in Party C. Except for Party B’s
Equity Interest Pledge Agreement and Party B’s Power of Attorney, Party B has not placed any security interest
on such equity interests.
Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the
aforementioned assets.
Party C does not have any outstanding debts, except for (i) debt incurred within its normal business scope; and (ii)
debts disclosed to Party A for which Party A’s written consent has been obtained.
Party C has complied with all laws and regulations of China applicable to asset acquisitions. And
There is no pending or threatened litigation, arbitration, or administrative proceedings relating to the equity
interests in Party C, assets of Party C, or Party C itself.
4.
Effective Date and Term
This Agreement shall become effective upon execution by the Parties. This Agreement shall terminate upon (whichever is
earlier) (i) the date all the equity interests Party B holds in Party C has been transferred to Party A pursuant to this
Agreement, or (ii) the date when Warner Music China (HK) Limited (“Warner”) receive the equity interests of WT2
Limited (“WT2”) held by Tencent Music Entertainment Hong Kong Limited (“TME HK”) pursuant to Section 24.4 of the
Joint Venture Agreement executed by and among Warner, TME HK and WT2, or (iii) the termination date of the Joint
Venture Agreement mentioned above.
5.
Governing Law and Disputes Resolution
5.1
Governing Law
The execution, effectiveness, interpretation, performance, amendment, and termination of this Agreement as well
as any dispute resolution hereunder shall be governed by the laws of the PRC.
5.2
Methods of Disputes Resolution
In the event of any dispute arising with respect to the construction and performance of this Agreement, the Parties
shall first attempt to resolve the dispute through friendly negotiations. In the event that the Parties fail to reach an
agreement on the dispute within 30 days after either Party’s written request to the other Parties for dispute
resolution through negotiations, either Party may submit the relevant dispute to the Beijing International
Arbitration Center for arbitration, in accordance with its arbitration rules. The arbitration shall be conducted in
Beijing, and the arbitration award shall be final and binding to all Parties.
7
6.
Taxes and Fees
Each Party shall pay any and all transfer and registration taxes, expenses, and fees incurred thereby or levied thereon in
accordance with the laws of the PRC in connection with the preparation and execution of this Agreement and the Transfer
Contracts, as well as the consummation of the transactions contemplated under this Agreement and the Transfer Contracts.
7.
Notices
7.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, prepaid postage, commercial courier services, or facsimile
transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by
email. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
7.1.1
Notices given by personal delivery, courier services, registered mail, or prepaid postage shall be deemed
effectively given on the date of receipt or refusal at the address specified for such notices.
7.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
Address: Unit 02, (14)1702, Floor 17, No. 27 Dongsanhuan North Road, Chaoyang District, Beijing
Attention: Andy Ma
E-mail: [ ]
and
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: M&A Department
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: Legal Management Department – Investment and M&A
Party B: Yang Qihu
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: M&A Department
8
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: Legal Management Department – Investment and M&A
Party C: Shengxiang Hudong Music (Beijing) Co., Ltd.
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: M&A Department
wth a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: Legal Management Department – Investment and M&A
7.3
Any Party may at any time change its address for notices by having a notice delivered to the other Parties
in accordance with the terms hereof.
8.
Confidentiality
The Parties acknowledge that the existence and the terms of this Agreement, and any oral or written information
exchanged between the Parties in connection with the preparation and performance of this Agreement are regarded as
confidential information. Each Party shall maintain the confidentiality of all such confidential information, and without
obtaining the written consent of other Parties, it shall not disclose any relevant confidential information to any third
parties, except for the information that: (a) is or will be featured in the public domain (other than through the receiving
Party’s unauthorized disclosure); (b) is under the obligation to be disclosed pursuant to the applicable laws or regulations,
rules of any stock exchange, or orders of the court or other government authorities; or (c) is required to be disclosed by any
Party to its shareholders, directors, employees, legal counsels, or financial advisors regarding the transaction contemplated
hereunder, provided that such shareholders, directors, employees, legal counsels, or financial advisors shall be bound by
the confidential obligations similar to those set forth in this Section. Disclosure of any confidential information by the
shareholders, director, employees of, or agencies engaged by any Party shall be deemed disclosure of such confidential
information by such Party and that Party shall be held liable for breach of this Agreement.
9
9.
Further Warranties
The Parties agree to promptly execute the documents that are reasonably required for or are conducive to the
implementation of the provisions and purposes of this Agreement and to take further actions that are reasonably required
for or are conducive to the implementation of the provisions and purposes of this Agreement.
10.
Breach of Agreement
10.1
If Party B or Party C conducts any material breach of any term of this Agreement, or fails to perform,
incompletely performs or delays in performance of any obligation under this Agreement, Party A shall have
right to (1) requires Party B and/or Party C to compensate in order that Party A receive all its interest due the
performance of this Agreement and the right (but no obligation) to terminate this Agreement, or (2) requires
Party B and/or Party C’s compulsory performance of their obligations under this Agreement and requires Party
B and/or Party C to compensate for any loss of Party A. The validity of this Section 10 is independent of this
Agreement and shall not be invalid due to the termination or rescission of this Agreement.
10.2
Party B or Party C shall not have any right to terminate this Agreement in any event unless otherwise required
by the applicable laws.
11. Miscellaneous
11.1
Amendments, changes, and supplements
Any amendments, changes, and supplements to this Agreement shall require the execution of a written
agreement by all of the Parties.
11.2
Entire agreement
Except for the amendments, supplements, or changes in writing executed after the execution of this Agreement,
this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the
subject matter hereof, and shall supersede all prior oral and written consultations, representations, and contracts
reached with respect to the subject matter of this Agreement.
11.3
Headings
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain, or
otherwise affect the meanings of the provisions of this Agreement.
10
11.4
Language
This Agreement is written in Chinese in three copies, with each Party having one copy.
11.5
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal, or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality, or enforceability
of the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties
shall strive in good faith to replace such invalid, illegal, or unenforceable provisions with effective provisions
that accomplish to the greatest extent permitted by the relevant laws and the intentions of the Parties, and the
economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid,
illegal, or unenforceable provisions.
11.6
Successors
This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and
the permitted assigns of such Parties, as if such person was a party of this Agreement.
11.7
Survival
11.7.1
termination of this Agreement shall survive the expiration or early termination thereof.
Any obligations that occur or are due as a result of this Agreement upon the expiration or early
11.7.2
Agreement.
The provisions of Sections 5, 8, 10 and this Section 12.7 shall survive the termination of this
11.8
Waivers
Any Party may waive the terms and conditions of this Agreement, provided that such a waiver must be
provided in writing and shall require the signatures of the Parties. No waiver by any Party in certain
circumstances with respect to a breach by other Parties shall be deemed as a waiver by such a Party with respect
to any similar breach in other circumstances.
[The remainder of this page is intentionally left blank]
11
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Beijing Huateng Xiangfeng Technology Co., Ltd
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd
.
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Yang Qihu
Signature: /s/ Yang Qihu
.
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
.
Exclusive Option Agreement
Exhibit 4.77
This Exclusive Option Agreement (this “Agreement”) is executed by and among the following Parties as of May 15, 2019 in
Beijing, the People’s Republic of China (“China” or the “PRC”):
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd., a wholly foreign owned enterprise established and existing under
the laws of the PRC, and the address is Unit 02, (14)1702, Floor 17, No.27 Dongsanhuan North Road, Chaoyang District,
Beijing;
Party B: Gu Dejun, a Chinese Citizen with Identification No.: [ ] (“Gu Dejun”); and
Party C: Shengxiang Hudong Music (Beijing) Co., Ltd., a limited liability company established and existing under the laws of
the PRC, and the address is Room 3092 Floor 3, No. 10 Jia Chaoyangmenwai Avnenue, Chaoyang District, Beijing.
In this Agreement, Party A, Party B, and Party C shall each be referred to as a “Party” respectively, and shall be collectively
referred to as the “Parties”.
Whereas:
1.
Party B is the shareholder of Party C and as of the date hereof holds 50 % of the equity interests of Party C, representing
RMB 500,000 in the registered capital of Party C.
After mutual discussions and negotiations, the Parties have now reached the following agreement:
1.
Sale and Purchase of Equity Interest
1.1
Option Granted
Party B agrees that as of the date hereof, Party B hereby irrevocably grants Party A an irrevocable and exclusive
right to purchase, or designate one or more persons (each, a “Designee”) to purchase the equity interests in Party
C then held by Party B once or at multiple times at any time in part or in whole at Party A’s sole and absolute
discretion to the extent permitted by PRC laws (including any laws, regulations, rules, notices, interpretation or
other legally binding documents promulgated by any central or local legislative executive or judicial branch
before or after the signing of this agreement, collectively referred to as “PRC laws”) and at the price described in
Section 1.3 herein (“Equity Interest Purchase Option”). Except for Party A, no other person shall be entitled to
the Equity Interest Purchase Option or other rights with respect to the equity interests of Party B. Party C hereby
agrees to the grant by Party B of the Equity Interest Purchase Option to Party A. The term “person” as used
herein shall refer to individuals, corporations, partnerships, partners, enterprises, trusts, or non-corporate
organizations.
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1.2
Steps for Exercise
The exercise of the Equity Interest Purchase Option and the Asset Purchase Option by Party A shall be subject to
the provisions of the laws and regulations of China. When Party A exercises the Equity Interest Purchase Option,
a written notice shall be issued to Party B (the “Equity Interest Purchase Option Notice”), specifying:(a) Party
A’s or the Designee’s decision to exercise the Equity Interest Purchase Option; (b) the portion of equity interests
to be purchased by Party A or the Designee from Party B (the “Optioned Interests”); and (c) the date for
purchasing the Optioned Interests or the date for the transfer of the Optioned Interests.
1.3
Purchase Price
The purchase price (“Benchmark Purchase Price”) of all equity interests shall be RMB 10. If PRC law requires
a minimum price higher than the Benchmark Purchase Price when Party A exercises the Equity Interest Purchase
Option, the minimum price regulated by PRC law shall be the purchase price (collectively, the “Equity Interest
Purchase Price”).
1.4
Transfer of Optioned Interests
For each Party A’s exercise of the Equity Interest Purchase Option:
1.4.1 Party B shall cause Party C to promptly convene a shareholders’ meeting, at which a resolution shall be
adopted approving Party B’s transfer of the Optioned Interests to Party A and/or the Designee(s);
1.4.2 Party B shall obtain written statements from the other shareholders (if any) of Party C giving consent to
the transfer of the equity interest to Party A and/or the Designee(s) and waiving any right of first refusal
related thereto;
1.4.3 Party B shall execute an equity interest transfer contract with respect to each transfer with Party A and/or
each Designee (whichever is applicable), in accordance with the provisions of this Agreement and the
Equity Interest Purchase Option Notice regarding the Optioned Interests;
1.4.4 The relevant Parties shall execute all other necessary contracts, agreements, or documents, obtain all
necessary government licenses and permits, and take all necessary actions to transfer the valid ownership
of the Optioned Interests to Party A and/or the Designee(s), unencumbered by any security interests, and
cause Party A and/or the Designee(s) to become the registered owner(s) of the Optioned Interests. For the
purpose of this Section and this Agreement, “security interests” shall include securities, mortgages, third
party’s rights or interests, any stock options, acquisition right, right of first refusal, right to offset,
ownership retention, or other security arrangements, but shall be deemed to exclude any security interest
created by this Agreement, Party B’s Equity Interest Pledge Agreement, and Party B’s Power of Attorney.
“Party B’s Equity
2
Interest Pledge Agreement” as used in this Agreement shall refer to the Equity Interest Pledge
Agreement executed by and among Party A, Party B and Party C on the date hereof and any
modifications, amendments, and restatements thereto. “Party B’s Power of Attorney” as used in this
Agreement shall refer to the Power of Attorney executed by Party B on the date hereof granting Party A
with a power of attorney and any modifications, amendments, and restatements thereto.
2.
Covenants
2.1
Covenants regarding Party C
Party B (as the shareholder of Party C) and Party C hereby covenant on the following:
2.1.1 Without the prior written consent of Party A, they shall not in any manner supplement, change, or amend
the articles of association of Party C, increase or decrease its registered capital, or change its structure of
registered capital in other manners.
2.1.2 They shall maintain Party C’s corporate existence in accordance with good financial and business
standards and practices, as well as obtain and maintain all necessary government licenses and permits by
prudently and effectively operating its business and handling its affairs.
2.1.3 Without the prior written consent of Party A, they shall not at any time following the date hereof, sell,
transfer, mortgage, or dispose of in any manner any material assets of Party C or legal or beneficial
interest in the material business or revenues of Party C of more than US$ 150,000, or allow the
encumbrance thereon of any security interests.
2.1.4 Without the prior written consent of Party A, they shall not incur, inherit, guarantee, or suffer the existence
of any debt, except for payables incurred in the ordinary course of business other than through loans.
2.1.5 They shall always operate all of Party C’s businesses within the normal business scope to maintain the
asset value of Party C and refrain from any action/omission that may affect Party C’s operating status and
asset value.
2.1.6 Without the prior written consent of Party A, they shall not cause Party C to execute any material contract,
except the contracts in the ordinary course of business (for the purpose of this subsection, a contract with a
price exceeding US$ 150,000 shall be deemed a material contract). Under the same conditions and if
practicable, Party A or its other affiliates has the right to cooperate with the other party first.
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2.1.7 Without the prior written consent of Party A, they shall not cause Party C to provide any person with a
loan or credit.
2.1.8 They shall provide Party A with information on Party C’s business operations and financial condition upon
Party A’s request.
2.1.9
If requested by Party A, they shall procure and maintain insurance in respect of Party C’s assets and
business from an insurance carrier acceptable to Party A, at an amount and type of coverage typical for
companies that operate similar businesses and own similar assets in the same area.
2.1.10 Without the prior written consent of Party A, they shall not cause or permit Party C to merge, consolidate
with, acquire, or invest in any person.
2.1.11 They shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to Party C’s assets, business, or revenue.
2.1.12 To maintain the ownership by Party C of all of its assets, they shall execute all necessary or appropriate
documents, take all necessary or appropriate actions, file all necessary or appropriate complaints, and raise
necessary or appropriate defenses against all claims.
2.1.13 Without the prior written consent of Party A, they shall ensure that Party C shall not in any manner
distribute dividends to its shareholders, provided that upon Party A’s written request, Party C shall
immediately distribute all distributable profits to its shareholders.
2.1.14 At the request of Party A, they shall appoint any person designated by Party A as the director or executive
director of Party C.
2.1.15 Unless otherwise required by PRC law, Party C shall not be dissolved or liquated without prior written
consent by Party A.
2.2
Covenants of Party B
Party B and Party C hereby jointly and severally covenant to the following:
2.2.1 Without the prior written consent of Party A, at any time from the date of execution of this Agreement,
Party B shall not sell, transfer, mortgage, or dispose of in any other manner any legal or beneficial interest
in the equity interests in Party C held by Party B, or allow the encumbrance thereon, except for the interest
placed in accordance with Party B’s Equity Interest Pledge Agreement and Party B’s Power of Attorney.
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2.2.2 Party B shall cause the shareholders’ meeting and/or the directors (or the executive director) of Party C not
to approve any sale, transfer, mortgage, or disposition in any other manner of any legal or beneficial
interest in the equity interests in Party C held by Party B, or allow the encumbrance thereon of any other
security interest without the prior written consent of Party A, except for the interest placed in accordance
with Party B’s Equity Interest Pledge Agreement and Party B’s Power of Attorney.
2.2.3 Without the prior written consent of Party A, Party B shall cause the shareholders’ meeting or the directors
(or the executive director) of Party C not to approve the merger or consolidation with any person, or the
acquisition of or investment in any person.
2.2.4 Party B shall immediately notify Party A of the occurrence or possible occurrence of any litigation,
arbitration, or administrative proceedings relating to the equity interests in Party C held by Party B.
2.2.5 Party B shall cause the shareholders’ meeting or the directors (or the executive director) of Party C to vote
their approval of the transfer of the Optioned Interests as set forth in this Agreement and to take any and
all other actions that may be requested by Party A.
2.2.6 To the extent necessary to maintain Party B’s ownership in Party C, Party B shall execute all necessary or
appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate
complaints, and raise necessary or appropriate defenses against all claims.
2.2.7 Party B shall appoint any designee of Party A as the director or the executive director of Party C, at the
request of Party A.
2.2.8 Party B hereby waives its right of first refusal in regards to the transfer of equity interest by any other
shareholder of Party C to Party A (if any), and gives consent to the execution by each other shareholder of
Party C with Party A and Party C the exclusive option agreement, the equity interest pledge agreement and
the power of attorney similar to this Agreement, Party B’s Equity Interest Pledge Agreement, and Party
B’s Power of Attorney, and accepts not to take any actions in conflict with such documents executed by
the other shareholders;
2.2.9 Party B shall promptly donate any profits, interests, dividends, or proceeds of liquidation to Party A or any
other person designated by Party A to the extent permitted under the applicable PRC laws. And
5
2.2.10 Party B shall strictly abide by the provisions of this Agreement and other contracts jointly or separately
executed by and among Party B, Party C, and Party A, perform the obligations hereunder and thereunder,
and refrain from any action/omission that may affect the effectiveness and enforceability thereof. To the
extent that Party B has any remaining rights with respect to the equity interests subject to this Agreement
hereunder or under Party B’s Equity Interest Pledge Agreement or under Party B’s Power of Attorney,
Party B shall not exercise such rights excluding in such manner in accordance with the written instructions
of Party A.
3.
Representations and Warranties
Party B and Party C hereby represent and warrant to Party A, jointly and severally, as of the date of this Agreement and
each date of transfer, that:
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3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
They have the power, capacity, and authority to execute and deliver this Agreement and any equity interest
transfer contracts to which they are parties concerning each transfer of the Optioned Interests as described
thereunder (each, a “Transfer Contract”), and to perform their obligations under this Agreement and any Transfer
Contracts. Party B and Party C agree to enter into Transfer Contracts substantially consistent with the terms of this
Agreement upon Party A’s exercise of the Equity Interest Purchase Option. This Agreement and the Transfer
Contracts to which they are parties constitute or will constitute their legal, valid, and binding obligations, and
shall be enforceable against them in accordance with the provisions thereof.
Party B and Party C have obtained any and all approvals and consents from the relevant government authorities
and third parties (if required) for the execution, delivery, and performance of this Agreement.
The execution and delivery of this Agreement or any Transfer Contracts and the obligations under this Agreement
or any Transfer Contracts shall not: (i) cause any violations of any applicable PRC laws; (ii) be inconsistent with
the articles of association, bylaws, or other organizational documents of Party C; (iii) cause the violation of any
contracts or instruments to which they are a party or which are binding on them, or constitute any breach under
any contracts or instruments to which they are a party or which are binding on them; (iv) cause any violation of
any condition for the grant and/or continued effectiveness of any licenses or permits issued to either of them; or
(v) cause the suspension or revocation of or imposition of additional conditions to any licenses or permits issued
to either of them.
Party B has a good and merchantable title to the equity interests held by Party B in Party C. Except for Party B’s
Equity Interest Pledge Agreement and Party B’s Power of Attorney, Party B has not placed any security interest
on such equity interests.
Party C has a good and merchantable title to all of its assets, and has not placed any security interest on the
aforementioned assets.
Party C does not have any outstanding debts, except for (i) debt incurred within its normal business scope; and (ii)
debts disclosed to Party A for which Party A’s written consent has been obtained.
Party C has complied with all laws and regulations of China applicable to asset acquisitions. And
There is no pending or threatened litigation, arbitration, or administrative proceedings relating to the equity
interests in Party C, assets of Party C, or Party C itself.
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4.
Effective Date and Term
This Agreement shall become effective upon execution by the Parties. This Agreement shall terminate upon whichever is
earlier) (i) the date all the equity interests Party B holds in Party C has been transferred to Party A pursuant to this
Agreement, or (ii) the date when Warner Music China (HK) Limited (“Warner”) receive the equity interests of WT2
Limited (“WT2”) held by Tencent Music Entertainment Hong Kong Limited (“TME HK”) pursuant to Section 24.4 of
the Joint Venture Agreement executed by and among Warner, TME HK and WT2, or (iii) the termination date of the Joint
Venture Agreement mentioned above.
5.
Governing Law and Disputes Resolution
5.1
Governing Law
The execution, effectiveness, interpretation, performance, amendment, and termination of this Agreement as well
as any dispute resolution hereunder shall be governed by the laws of the PRC.
5.2
Methods of Disputes Resolution
In the event of any dispute arising with respect to the construction and performance of this Agreement, the Parties
shall first attempt to resolve the dispute through friendly negotiations. In the event that the Parties fail to reach an
agreement on the dispute within 30 days after either Party’s written request to the other Parties for dispute
resolution through negotiations, either Party may submit the relevant dispute to the Beijing International
Arbitration Center for arbitration, in accordance with its arbitration rules. The arbitration shall be conducted in
Beijing, and the arbitration award shall be final and binding to all Parties.
6.
Taxes and Fees
Each Party shall pay any and all transfer and registration taxes, expenses, and fees incurred thereby or levied thereon in
accordance with the laws of the PRC in connection with the preparation and execution of this Agreement and the Transfer
Contracts, as well as the consummation of the transactions contemplated under this Agreement and the Transfer
Contracts.
8
7.
Notices
7.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall be
delivered personally or sent by registered mail, prepaid postage, commercial courier services, or facsimile
transmission to the address of such Party set forth below. A confirmation copy of each notice shall also be sent by
email. The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
7.1.1 Notices given by personal delivery, courier services, registered mail, or prepaid postage shall be deemed
effectively given on the date of receipt or refusal at the address specified for such notices.
7.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
Address: Unit 02, (14)1702, Floor 17, No. 27 Dongsanhuan North Road, Chaoyang District, Beijing
Attention: Andy Ma
E-mail: [ ]
and
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: M&A Department
with a copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: Legal Management Department – Investment and M&A
Party B: Gu Dejun
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: M&A Department
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: Legal Management Department – Investment and M&A
9
Party C: Shengxiang Hudong Music (Beijing) Co., Ltd.
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: M&A Department
with a Copy to:
Address: 5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East Road, Chaoyang
District, Beijing
Email: [ ]
Attention: Legal Management Department – Investment and M&A
7.3
Any Party may at any time change its address for notices by having a notice delivered to the other Parties
in accordance with the terms hereof.
8.
Confidentiality
The Parties acknowledge that the existence and the terms of this Agreement, and any oral or written information
exchanged between the Parties in connection with the preparation and performance of this Agreement are regarded as
confidential information. Each Party shall maintain the confidentiality of all such confidential information, and without
obtaining the written consent of other Parties, it shall not disclose any relevant confidential information to any third
parties, except for the information that: (a) is or will be featured in the public domain (other than through the receiving
Party’s unauthorized disclosure); (b) is under the obligation to be disclosed pursuant to the applicable laws or regulations,
rules of any stock exchange, or orders of the court or other government authorities; or (c) is required to be disclosed by
any Party to its shareholders, directors, employees, legal counsels, or financial advisors regarding the transaction
contemplated hereunder, provided that such shareholders, directors, employees, legal counsels, or financial advisors shall
be bound by the confidential obligations similar to those set forth in this Section. Disclosure of any confidential
information by the shareholders, director, employees of, or agencies engaged by any Party shall be deemed disclosure of
such confidential information by such Party and that Party shall be held liable for breach of this Agreement.
9.
Further Warranties
The Parties agree to promptly execute the documents that are reasonably required for or are conducive to the
implementation of the provisions and purposes of this Agreement and to take further actions that are reasonably required
for or are conducive to the implementation of the provisions and purposes of this Agreement.
10
10.
Breach of Agreement
10.1
If Party B or Party C conducts any material breach of any term of this Agreement, or fails to perform,
incompletely performs or delays in performance of any obligation under this Agreement, Party A shall have right
to (1) requires Party B and/or Party C to compensate in order that Party A receive all its interest due the
performance of this Agreement and the right (but no obligation) to terminate this Agreement, or (2) requires Party
B and/or Party C’s compulsory performance of their obligations under this Agreement and requires Party B and/or
Party C to compensate for any loss of Party A. The validity of this Section 10 is independent of this Agreement
and shall not be invalid due to the termination or rescission of this Agreement.
10.2
Party B or Party C shall not have any right to terminate this Agreement in any event unless otherwise required by
the applicable laws.
11. Miscellaneous
11.1 Amendments, changes, and supplements
Any amendments, changes, and supplements to this Agreement shall require the execution of a written agreement
by all of the Parties.
11.2
Entire agreement
Except for the amendments, supplements, or changes in writing executed after the execution of this Agreement,
this Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the
subject matter hereof, and shall supersede all prior oral and written consultations, representations, and contracts
reached with respect to the subject matter of this Agreement.
11.3 Headings
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain, or otherwise
affect the meanings of the provisions of this Agreement.
11.4
Language
This Agreement is written in Chinese in three copies, with each Party having one copy.
11.5
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal, or
unenforceable in any aspect in accordance with any laws or regulations, the validity, legality, or enforceability of
the remaining provisions of this Agreement shall not be affected or compromised in any respect. The Parties shall
strive in good faith to replace such invalid, illegal, or unenforceable provisions with effective provisions that
accomplish to the greatest extent permitted by the relevant laws and the intentions of the Parties, and the
economic effect of such effective provisions shall be as close as possible to the economic effect of those invalid,
illegal, or unenforceable provisions.
11
11.6
Successors
This Agreement shall be binding on and shall inure to the interest of the respective successors of the Parties and
the permitted assigns of such Parties, as if such person was a party of this Agreement.
11.7
Survival
11.7.1 Any obligations that occur or are due as a result of this Agreement upon the expiration or early
termination of this Agreement shall survive the expiration or early termination thereof.
11.7.2 The provisions of Sections 5, 8, 10 and this Section 12.7 shall survive the termination of this Agreement.
11.8 Waivers
Any Party may waive the terms and conditions of this Agreement, provided that such a waiver must be provided
in writing and shall require the signatures of the Parties. No waiver by any Party in certain circumstances with
respect to a breach by other Parties shall be deemed as a waiver by such a Party with respect to any similar breach
in other circumstances.
[The remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Beijing Huateng Xiangfeng Technology Co., Ltd
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd
.
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Gu Dejun
Signature: /s/ Gu Dejun
.
IN WITNESS WHEREOF, the authorized representatives of the Parties have executed this Exclusive Option Agreement as of the
date first above written.
Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
.
Business Cooperation Agreement
Exhibit 4.78
This Business Cooperation Agreement (this “Agreement”) is entered into by and between the following parties on May
15, 2019 in Beijing, the People’s Republic of China (“China” or the “PRC”).
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
Address: Unit 02, (14)1702, Floor 17, No.27 Dongsanhuan North Road, Chaoyang District, Beijing
Party B: Shengxiang Hudong Music (Beijing) Co., Ltd.
Address: Room 3092 Floor 3, No. 10 Jia Chaoyangmenwai Avnenue, Chaoyang District, Beijing
Each of Party A and Party B shall be hereinafter referred to as a “Party” respectively, and as the “Parties” collectively.
Whereas,
1.
2.
3.
Party A is a wholly foreign owned enterprise established in China, which has necessary resources to provide technology
and consulting services;
Party B is a company established in China with exclusively domestic capital and with the approval of relevant Chinese
government departments according to law may engaged in: technology development, technology popularization,
technology transfer, technology consultation, technology service; computer system services, basic software services;
application software service (excluding medical software); design and produce advertising agency; software development;
data processing; enterprise management and supervision; conference services; undertaking exhibitions and exhibitions;
sales of computer software and auxiliary equipment, daily necessities and stationery; audio and video crystal production;
publication retail. (The enterprise independently selects the business item and carries out business activities according to
laws; to carry out business activities in accordance with the approved contents after obtaining the approval of relevant
departments; it shall not engage in business activities of projects prohibited or restricted by this municipality's industrial
policies.)
Party A, Party B and other related parties executed the Master Service Agreement on May 15, 2019 (“Master Service
Agreement”), Section 4 of which stipulates that Party A shall provide Party B with the services listed in Schedule 3 of the
Master Service Agreement and Party B shall pay the service fee to Party A in accordance with Section 4.2 of the Master
Service Agreement.
4.
Party A and Party B intends to enter into this agreement to clarify the rights and obligations of each Party.
1
Now, therefore, through mutual discussion, the Parties have reached the following agreements:
1.
Services Provided by Party A
1.1
In accordance with the terms and conditions of this agreement, Party B hereby appoints Party A to act as
Party B’s service provider to provide Party B with the services listed in Appendix 4 of the Master Service
Agreement during the term of this Agreement.
1.2
Method of Services Provided.
1.2.1
services to Party B in the manner specified in Section 4 of the Master Service Agreement.
Party A and party B agree that during the term of this agreement, Party A shall provide
2.
Service Fees and Payment
2.1
The fees payable by Party B to Party A during the term of this Agreement shall be calculated as follows:
2.1.1
2.1.2
For the services provided by Party A to Party B, Party B shall pay the service fee to Party A in
accordance with the amount and method stipulated in Section 4.2 of the Master Service
Agreement.
If Party A transfers technology to Party B, or is entrusted by Party B to develop software or
other technologies, or leases equipment assets to Party B, the commissioned development fee or
rental fee for the technology transfer shall be separately agreed upon by both Parties according
to the actual situation.
3.
Intellectual Property Rights and Confidentiality Clauses
3.1
3.2
Any and all intellectual property rights (including but not limited to copyright, patent right, patent
application right, software technology secret, commercial secrets and others) created by the Parties as a
result of the performance hereof shall be distributed in accordance with the relevant provisions of Section
10 of the Master Service Agreement.
The Parties acknowledge that the existence and the terms of this Agreement and any oral or written
information exchanged between the Parties in connection with the preparation and performance of this
Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such
confidential information, and without obtaining the written consent of the other Party, it shall not
2
disclose any relevant confidential information to any third Party, except for the information that: (a) is or
will be in the public domain (other than through the receiving Party’s unauthorized disclosure); (b) is under
the obligation to be disclosed pursuant to the applicable laws or regulations, rules of any stock exchange,
or orders of the court or other government authorities; or (c) is required to be disclosed by any Party to its
shareholders, directors, employees, legal counsels or financial advisors regarding the transaction
contemplated hereunder, provided that such shareholders, directors, employees, legal counsels or financial
advisors shall be bound by the confidentiality obligations similar to those set forth in this Section.
Disclosure of any confidential information by the shareholders, director, employees of or agencies engaged
by any Party shall be deemed disclosure of such confidential information by such Party and such Party
shall be held liable for breach of this Agreement.
3.3
The confidentiality obligation under this section shall remain in force and shall not be affected by
termination or change in the effectiveness of this Agreement.
4.
Representations and Warranties
4.1
Party A hereby represents, warrants and covenants as follows:
4.1.1
4.1.2
Party A is a wholly foreign owned enterprise legally established and validly existing in
accordance with the laws of the PRC.
Party A has taken all necessary corporate actions, obtained all necessary authorizations as well
as all consents and approvals from third parties and government authorities (if required) for the
execution, delivery and performance of this Agreement. Party A’s execution, delivery and
performance of this Agreement do not violate any explicit requirements under any law or
regulation.
4.1.3
This Agreement constitutes Party A’s legal, valid and binding obligations, and shall be
enforceable against it in accordance with its terms.
4.2
Party B hereby represents, warrants and covenants as follows:
4.2.1
4.2.2
Party B is a company legally established and validly existing in accordance with the laws of the
PRC.
Party B has taken all necessary corporate actions, obtained all necessary authorizations as well
as all consents and approvals from third parties and government agencies (if required) for the
execution, delivery and performance of this Agreement. Party B’s execution, delivery and
performance of this Agreement do not violate any explicit requirements under any law or
regulation.
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4.2.3
This Agreement constitutes Party B’s legal, valid and binding obligations, and shall be
enforceable against it in accordance with its terms.
5.
Term of Agreement
5.1
5.2
5.3
This Agreement shall take effect from the seal of both Parties, and the limited period shall be from the date
of seal of this Agreement to the date of termination of the Master Service Agreement.
During the term of this Agreement, each Party shall renew its operation term in a timely manner prior to
the expiration thereof so as to enable this Agreement to remain effective.
The rights and obligations of the Parties under Section 3, 6, and 7 and this Section 5.3 shall survive the
termination of this Agreement.
6.
Governing Law and Disputes Resolution
6.1
6.2
6.3
The execution, effectiveness, construction, performance, amendment and termination of this Agreement
and the resolution of disputes hereunder shall be governed by the laws of the PRC.
In the event of any dispute (the “Dispute”) with respect to the construction and performance of this
Agreement, the Parties shall first resolve the Dispute through friendly negotiations. In the event the Parties
fail to reach an agreement on the dispute within 30 days after either Party’s written request to the other
Party for resolution of the Dispute through negotiations, either Party may submit the relevant Dispute to
Beijing International Arbitration Center for arbitration, in accordance with its arbitration rules. The
arbitration shall be conducted in Beijing, and the arbitration award shall be final and binding to all Parties.
Upon the occurrence of any disputes arising from the construction and performance of this Agreement or
during the pending arbitration of any dispute, except for the matters under dispute, the Parties shall
continue to exercise their respective rights under this Agreement and perform their respective obligations
under this Agreement.
7.
Breach of Agreement and Indemnification
7.1
The Parties agree that any breach of the provisions hereunder by either Party shall be deemed to be a
breach of the Master Service Agreement and shall be liable for breach of the Master Service Agreement.
4
8.
Force Majeure
8.1
8.2
In the case of any force majeure events (“Force Majeure”) such as earthquake, typhoon, flood, fire,
epidemic, war, strikes or any other events that cannot be predicted and are unpreventable and unavoidable
by the affected Party, which directly causes the failure of either Party to perform or completely perform
this Agreement, then the Party affected by such Force Majeure shall not take any responsibility for such
failure, however it shall give the other Party written notices without any delay, and shall provide details of
such event within fifteen days after sending out such notice, explaining the reasons for such failure of,
partial or delay of performance.
If such Party claiming Force Majeure fails to notify the other Party and furnish it with proof pursuant to the
above provision, such Party shall not be excused from the non-performance of its obligations hereunder.
The Party so affected by the event of Force Majeure shall use reasonable efforts to minimize the
consequences of such Force Majeure and to promptly resume performance hereunder whenever the causes
of such excuse are cured. Should the Party so affected by the event of Force Majeure fail to resume
performance hereunder when the causes of such excuse are cured, such Party shall be liable to the other
Party.
8.3
In the event of Force Majeure, the Parties shall immediately consult with each other to find an equitable
solution and shall use all reasonable efforts to reduce the consequences of such Force Majeure.
9.
Notices
9.1
All notices and other communications required or permitted to be given pursuant to this Agreement shall
be delivered personally or sent by registered mail, postage prepaid, by a commercial courier service or by
facsimile transmission to the address of such Party set forth below. A confirmation copy of each notice
shall also be sent by email. The dates on which notices shall be deemed to have been effectively given
shall be determined as follows:
9.1.1
Notices given by personal delivery, by courier service or by registered mail, postage prepaid,
shall be deemed effectively given on the date of receipt or refusal at the address specified for
notices.
5
9.2
For the purpose of notices, the addresses of the Parties are as follows:
Party A:
Address:
Attn:
Email(cid:0)
and
Address:
Email:
Attention:
Beijing Huateng Xiangfeng Technology Co., Ltd.
Unit 02, (14)1702, Floor 17, No. 27 Dongsanhuan North Road, Chaoyang District,
Beijing
Andy Ma
[ ]
5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East
Road, Chaoyang District, Beijing
[ ]
M&A Department
with a Copy to:
Address:
Email:
Attention:
5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East
Road, Chaoyang District, Beijing
[ ]
Legal Management Department – Investment and M&A
Party B:
Shengxiang Hudong Music (Beijing) Co., Ltd.
Address:
Email:
Attention:
5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East
Road, Chaoyang District, Beijing
[ ]
M&A Department
with a Copy to:
Address:
Email:
Attention:
5th Floor, Gate C7, South District, National Convention Center, No. 7, Tianchen East
Road, Chaoyang District, Beijing
[ ]
Legal Management Department – Investment and M&A
9.3
Any Party may at any time change its address for notices by delivering notice to the other Party in
accordance with the terms hereof.
10.
Assignment
Neither Party shall assign its rights and obligations hereunder to third parties unless with the prior written consent of
the other Party.
6
11.
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in
any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining
provisions of this Agreement shall not be affected or compromised in any aspect. The Parties shall negotiate in good
faith to replace such invalid, illegal or unenforceable provisions with effective provisions that accomplish to the
greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective provisions
shall be as close as possible to the economic effect of those invalid, illegal or unenforceable provisions.
12.
Amendments and Supplements
Any amendments and supplements to this Agreement shall be in writing. The amendment agreements and
supplementary agreements that have been signed by the Parties and relate to this Agreement shall be an integral part
of this Agreement and shall have the same legal validity as this Agreement.
13.
Successors
This Agreement shall be legally binding and effective on Party A and/or Party B’s successor or permitted assignee.
14.
Conflict of Articles
For the avoidance of doubt, in case of any conflict between this Agreement and the Master Service Agreement, the
Master Service Agreement shall prevail.
15.
Language and Counterparts
This Agreement is written in Chinese in two copies, one for each Party.
[The remainder of this page is intentionally left blank]
7
IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Business Cooperation
Agreement as of the date first above written.
Party A: Beijing Huateng Xiangfeng Technology Co., Ltd.
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd.
IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Business Cooperation
Agreement as of the date first above written.
Party B: Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
Power of Attorney
Exhibit 4.79
I, Yang Qihu, a Chinese citizen with PRC Identification No. [
], holds 50% of the equity interest in Shengxiang Hudong
Music (Beijing) Co., Ltd. (the “Company”) as of the date of this Power of Attorney, representing RMB 500,000 registered
capital of the Company, hereby irrevocably authorize Beijing Huateng Xiangfeng Technology Co., Ltd. (including the liquidator
replacing the WFOE, if applicable) as my sole and exclusive authorized person (the “Authorized Person”) to exercise the
following rights with respect to the existing and future equity interests held by myself in the Company (the “Owned Equity
Interest”) during the effective term of this Power of Attorney:
1) propose to convene, convene and attend the shareholders’ meeting of the Company and accept any notice of the shareholders’
meeting and the proceedings;
2) to exercise all shareholder’s rights and shareholder’s voting rights which I am entitled with under the laws and the articles of
association of the Company, including but not limited to voting rights, rights to sell, transfer, pledge or otherwise dispose of all or
any part of the Owned Equity Interest and to approve and/or obtain dividends;
3) to sign any resolutions and minutes of any meeting on my behalf as a shareholder and/or director of the company; or, as
requested by WFOE, I agree unconditionally to cooperate in signing any resolutions and minutes of any meeting as a shareholder
and/or director of the Company;
4) as my authorized representative, to nominee, appoint, elect or remove the legal representative, chairman of the board,
directors, supervisors, general manager, chief financial officer and other senior management of the Company; and
5) approve the amendment of the articles of association and sign resolutions and other documents related to the above rights.
Notwithstanding the foregoing, I reserve all voting and other relevant rights related to the Company’s application, alteration or
continuance of qualifications and compliance matters related to the operation of Internet audio-visual program services, and the
Authorized Person shall not prejudice or exercise the aforesaid rights on my behalf pursuant to this Power of Attorney.
Without the written consent of the WFOE, I am not entitled to increase or reduce capital, transfer, pledge again, or otherwise
dispose of or change equity interests in the Company held by myself.
I hereby irrevocably confirm and agree that :(1) in order to exercise the rights under this Power of Attorney, the Authorized
Person shall have the right to obtain relevant information about the Company’s operations, customers, financial status, and
employees, and shall have the right to consult other materials of the Company; (2) I will provide full assistance to the Authorized
Person in exercising the rights hereunder, including timely signing the resolutions of the board of shareholders or other relevant
legal documents when necessary (including to meet the requirements of documents required by applicable government authorities
for approval, registration and filing). My undertaking under this clause shall not limit my authorization of the delegated right to
the Authorized Person; (3) this Power of Attorney does not involve any payment; (4) I have consulted independent counsel on all
legal matters of signing this Power of Attorney.
Except as otherwise provided for herein, the Authorized Person may conduct all actions regarding the Owned Equity Interest
based on its own judgment and without my oral or written instructions. All such actions with respect to the Owned Equity Interest
shall be regarded as my actions, all documents executed by the Authorized Person accordingly shall be regarded as executed by
myself, I hereby acknowledge and/or confirm such actions or documents.
This Power of Attorney shall become effective as of the date of execution. The term shall begin from the date of execution to the
date (whichever is earlier) (i) when Warner Music China (HK) Limited (“Warner”) acquires the shares and other related interests
of WT2 Limited (“WT2”) held by Tencent Music Entertainment Hong Kong Limited (“TME HK”) pursuant to Section 24.4 of
the Joint Venture Agreement executed by and among Warner, TME HK and WT2 on April 16, 2019, or (ii) the termination date
of the Joint Venture Agreement (the “Authorization Period”). This Power of Attorney shall be irrevocable and remain valid and
effective during the Authorization Period. All power of attorney in connection with any equity interests issued by me prior to the
date of this Power of Attorney shall be revoked and I hereby undertake not to issue any separate power of attorney in connection
with any equity interests. This Power of Attorney and any power, right or interests granted hereby in connection with the
Company’s equity interests are irrevocable.
This Power of Attorney is binding upon all my officers, directors, agents, assigns and successors and I shall make the foregoing
aware of the existence of this Power of Attorney.
During the term of this Power of Attorney, I hereby waive all rights in connection with the Owned Equity Interests which have
been granted to the Authorized Person by this Power of Attorney and will not exercise such rights on my own.
This Power of Attorney shall be governed by the laws of People’s Republic of China. The execution, validity, interpretation,
performance, modification and termination of this Power of Attorney and any dispute or claim (hereinafter referred to as
“Dispute”) shall be settled through friendly negotiation first. The requesting party shall, by dated notice, promptly inform the
other parties of the Dispute and explain the nature of the Dispute. If no settlement can be reached through negotiation within
thirty (30) days after the date of notice of such Dispute, either party may submit the Dispute to Beijing International Arbitration
Center for arbitration in accordance with its arbitration rules. The arbitration shall take place in Beijing. The arbitral award shall
be final and binding upon all parties.
Yang Qihu
Signature: /s/ Yang Qihu
Date: May 15, 2019
Accepted by:
Beijing Huateng Xiangfeng Technology Co., Ltd.
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd.
Acknowledged by:
Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
Power of Attorney
Exhibit 4.80
I, Gu Dejun, a Chinese citizen with PRC Identification No. [
], holds 50% of the equity interest in Shengxiang Hudong Music
(Beijing) Co., Ltd. (the “Company”) as of the date of this Power of Attorney, representing RMB 500,000 registered capital of the
Company, hereby irrevocably authorize Beijing Huateng Xiangfeng Technology Co., Ltd. (including the liquidator replacing the
WFOE, if applicable) as my sole and exclusive authorized person (the “Authorized Person”) to exercise the following rights
with respect to the existing and future equity interests held by myself in the Company (the “Owned Equity Interest”) during the
effective term of this Power of Attorney:
1) propose to convene, convene and attend the shareholders’ meeting of the Company and accept any notice of the shareholders’
meeting and the proceedings;
2) to exercise all shareholder’s rights and shareholder’s voting rights which I am entitled with under the laws and the articles of
association of the Company, including but not limited to voting rights, rights to sell, transfer, pledge or otherwise dispose of all or
any part of the Owned Equity Interest and to approve and/or obtain dividends;
3) to sign any resolutions and minutes of any meeting on my behalf as a shareholder and/or director of the company; or, as
requested by WFOE, I agree unconditionally to cooperate in signing any resolutions and minutes of any meeting as a shareholder
and/or director of the Company;
4) as my authorized representative, to nominee, appoint, elect or remove the legal representative, chairman of the board,
directors, supervisors, general manager, chief financial officer and other senior management of the Company; and
5) approve the amendment of the articles of association and sign resolutions and other documents related to the above rights.
Notwithstanding the foregoing, I reserve all voting and other relevant rights related to the Company’s application, alteration or
continuance of qualifications and compliance matters related to the operation of Internet audio-visual program services, and the
Authorized Person shall not prejudice or exercise the aforesaid rights on my behalf pursuant to this Power of Attorney.
Without the written consent of the WFOE, I am not entitled to increase or reduce capital, transfer, pledge again, or otherwise
dispose of or change equity interests in the Company held by myself.
I hereby irrevocably confirm and agree that: (1) in order to exercise the rights under this Power of Attorney, the Authorized
Person shall have the right to obtain relevant information about the Company’s operations, customers, financial status, and
employees, and shall have the right to consult other materials of the Company; (2) I will provide full assistance to the Authorized
Person in exercising the rights hereunder, including timely signing the resolutions of the board of shareholders or other relevant
legal documents when necessary (including to meet the requirements of documents required by applicable government authorities
for approval, registration and filing). My undertaking under this clause shall not limit my authorization of the delegated right to
the Authorized Person; (3) this Power of Attorney does not involve any payment; (4) I have consulted independent counsel on all
legal matters of signing this Power of Attorney.
Except as otherwise provided for herein, the Authorized Person may conduct all actions regarding the Owned Equity Interest
based on its own judgment and without my oral or written instructions. All such actions with respect to the Owned Equity Interest
shall be regarded as my actions, all documents executed by the Authorized Person accordingly shall be regarded as executed by
myself, I hereby acknowledge and/or confirm such actions or documents.
This Power of Attorney shall become effective as of the date of execution. The term shall begin from the date of execution to the
date (whichever is earlier) (i) when Warner Music China (HK) Limited (“Warner”) acquires the shares and other related interests
of WT2 Limited (“WT2”) held by Tencent Music Entertainment Hong Kong Limited (“TME HK”) pursuant to Section 24.4 of
the Joint Venture Agreement executed by and among Warner, TME HK and WT2 on April 16, 2019, or (ii) the termination date
of the Joint Venture Agreement (the “Authorization Period”). This Power of Attorney shall be irrevocable and remain valid and
effective during the Authorization Period. All power of attorney in connection with any equity interests issued by me prior to the
date of this Power of Attorney shall be revoked and I hereby undertake not to issue any separate power of attorney in connection
with any equity interests. This Power of Attorney and any power, right or interests granted hereby in connection with the
Company’s equity interests are irrevocable.
This Power of Attorney is binding upon all my officers, directors, agents, assigns and successors and I shall make the foregoing
aware of the existence of this Power of Attorney.
During the term of this Power of Attorney, I hereby waive all rights in connection with the Owned Equity Interests which have
been granted to the Authorized Person by this Power of Attorney and will not exercise such rights on my own.
This Power of Attorney shall be governed by the laws of People’s Republic of China. The execution, validity, interpretation,
performance, modification and termination of this Power of Attorney and any dispute or claim (hereinafter referred to as
“Dispute”) shall be settled through friendly negotiation first. The requesting party shall, by dated notice, promptly inform the
other parties of the Dispute and explain the nature of the Dispute. If no settlement can be reached through negotiation within
thirty (30) days after the date of notice of such Dispute, either party may submit the Dispute to Beijing International Arbitration
Center for arbitration in accordance with its arbitration rules. The arbitration shall take place in Beijing. The arbitral award shall
be final and binding upon all parties.
Gu Dejun
Signature: /s/ Gu Dejun
Date: May 15, 2019
Accepted by:
Beijing Huateng Xiangfeng Technology Co., Ltd.
/s/ Seal of Beijing Huateng Xiangfeng Technology Co., Ltd.
Acknowledged by:
Shengxiang Hudong Music (Beijing) Co., Ltd.
/s/ Seal of Shengxiang Hudong Music (Beijing) Co., Ltd.
Spouse Consent Letter
Exhibit 4.81
The undersigned, Guo Jin (PRC Identification No. [
])
(“My Husband”). I hereby unconditionally and irrevocably issue this Spouse Consent Letter in respect of the 50% equity interest
(the “Equity Interests”) of Shengxiang Hudong Music (Beijing) Co., Ltd. (the “Company”) held by My Husband:
]), is the lawful spouse of Yang Qihu (PRC Identification No. [
I hereby acknowledge and agree that:
(1) all the Equity Interests of the Company held by My Husband shall be disposed of pursuant to the Exclusive Option
Agreement executed by and among My Husband, the Company and Beijing Huateng Xiangfeng Technology Co., Ltd. (the
“WFOE”) on May 15, 2019, the Equity Pledge Agreement executed by and among the WFOE (as the pledgor), My Husband (as
the pledgee) and the Company on May 15, 2019; and the Business Cooperation Agreement executed by and between the
Company and the WFOE; the Equity Interests are controlled by the WFOE;
(2) all the Equity Interests of the company held by My Husband d shall be disposed of pursuant to the Power of Attorney issued
by My Husband to the WFOE on May 15, 2019.
I hereby confirm that, I acknowledge and agree that My Husband enter into and further agree the Company to enter into the
Exclusive Option Agreement, the Equity Pledge Agreement, Business Cooperation Agreement and the Power of Attorney
(hereinafter referred to as the “Transaction Documents”) and disposed of such Equity Interests in accordance with the terms of
the Transaction Documents. I will not at any time take any action to hinder disposal arrangements of the Equity Interest. I
undertake not to make any claim in respect of the Company’s Equity Interests held by My Husband, including but not limited to
the claim that the Company’s Equity Interest is the community property of My Husband and me. I hereby waive any right to
claim ownership of the Equity Interests or any future rights.
I further confirm that My Husband can perform the Transaction Documents and further amend or terminate the Transaction
Documents absent any authorization or consent from me. I undertake to sign all necessary documents and to take all necessary
actions to ensure appropriate performance of the Transaction Documents (as amended from time to time).
I hereby agree and undertake that, if I acquire any Equity Interests for whatever reasons, I shall be bound by the Transaction
Documents (as amended from time to time) and shall comply with the obligations of a shareholder of the Company thereunder.
For this purpose, upon the WFOE’s request, I shall execute a series of written documents in substantially the same format and
content as the Transaction Documents (as amended from time to time). I further undertake and confirm that under no
circumstances, directly or indirectly, actively or passively, shall I take any action or make any claim with an intention which is
conflict with the above arrangements.
This Spouse Consent Letter shall be governed by the laws of the People’s Republic of China. The execution, validity,
interpretation, performance, modification and termination of this Spouse Consent Letter and any dispute or claim (hereinafter
referred to as “Dispute”) shall be settled through friendly negotiation first. The requesting party shall, by dated notice, promptly
inform the other parties of the Dispute and explain the nature of the Dispute. If no settlement can be reached through negotiation
within thirty (30) days after the date of notice of such Dispute, either party may submit the dispute to Beijing International
Arbitration Center for arbitration in accordance with its arbitration rules. The arbitration shall take place in Beijing. The arbitral
award shall be final and binding upon all parties.
Signature: /s/ Guo Jin
May 15, 2019
Spouse Consent Letter
Exhibit 4.82
The undersigned, Chu Jie (PRC Identification No. [ ]), is the lawful spouse of Gu Dejun (PRC Identification No. [ ])
(“My Husband”). I hereby unconditionally and irrevocably issue this Spouse Consent Letter in respect of the 50% equity interest
(the “Equity Interests”) of Shengxiang Hudong Music (Beijing) Co., Ltd. (the “Company”) held by My Husband:
I hereby acknowledge and agree that:
(1) all the Equity Interests of the Company held by My Husband shall be disposed of pursuant to the Exclusive Option
Agreement executed by and among My Husband, the Company and Beijing Huateng Xiangfeng Technology Co., Ltd. (the
“WFOE”) on May 15, 2019, the Equity Pledge Agreement executed by and among the WFOE (as the pledgor), My Husband (as
the pledgee) and the Company on May 15, 2019; and the Business Cooperation Agreement executed by and between the
Company and the WFOE; the Equity Interests are controlled by the WFOE;
(2) all the equity interests of the company held by my husband shall be disposed of pursuant to the Power of Attorney issued by
my husband to the WFOE on May 15, 2019.
I hereby confirm that, I acknowledge and agree that My Husband enter into and further agree the Company to enter into the
Exclusive Option Agreement, the Equity Pledge Agreement, Business Cooperation Agreement and the Power of Attorney
(hereinafter referred to as the “Transaction Documents”) and disposed of such Equity Interests in accordance with the terms of
the Transaction Documents. I will not at any time take any action to hinder disposal arrangements of the Equity Interest. I
undertake not to make any claim in respect of the Company’s Equity Interests held by My Husband, including but not limited to
the claim that the Company’s Equity Interest is the community property of My Husband and me. I hereby waive any right to
claim ownership of the Equity Interests or any future rights.
I further confirm that My Husband can perform the Transaction Documents and further amend or terminate the Transaction
Documents absent any authorization or consent from me. I undertake to sign all necessary documents and to take all necessary
actions to ensure appropriate performance of the Transaction Documents (as amended from time to time).
I hereby agree and undertake that, if I acquire any Equity Interests for whatever reasons, I shall be bound by the Transaction
Documents (as amended from time to time) and shall comply with the obligations of a shareholder of the Company thereunder.
For this purpose, upon the WFOE’s request, I shall execute a series of written documents in substantially the same format and
content as the Transaction Documents (as amended from time to time). I further undertake and confirm that under no
circumstances, directly or indirectly, actively or passively, shall I take any action or make any claim with an intention which is
conflict with the above arrangements.
This Spouse Consent Letter shall be governed by the laws of the People’s Republic of China. The execution, validity,
interpretation, performance, modification and termination of this Spouse Consent Letter and any dispute or claim (hereinafter
referred to as “Dispute”) shall be settled through friendly negotiation first. The requesting party shall, by dated notice, promptly
inform the other parties of the Dispute and explain the nature of the Dispute. If no settlement can be reached through negotiation
within thirty (30) days after the date of notice of such Dispute, either party may submit the dispute to Beijing International
Arbitration Center for arbitration in accordance with its arbitration rules. The arbitration shall take place in Beijing. The arbitral
award shall be final and binding upon all parties.
Signature:
/s/ Chu Jie
May 15, 2019
List of Significant Subsidiaries and VIEs
Exhibit 8.1
Significant Subsidiaries
Tencent Music Entertainment Hong Kong Limited
Tencent Music Entertainment Technology (Shenzhen) Co., Ltd.
Tencent Music (Beijing) Co., Ltd.
Ultimate Music Inc.
Ultimate Music China Limited
Shenzhen Ultimate Xiangyue Culture and Technology Co., Ltd.
Yeelion Online Network Technology (Beijing) Co., Ltd.
VIEs
Guangzhou Kugou Computer Technology Co., Ltd.
Beijing Kuwo Technology Co., Ltd.
Shenzhen Ultimate Music Culture and Technology Co., Ltd.
Xizang Qiming Music Co., Ltd.
Place of Incorporation
Hong Kong
PRC
PRC
Cayman Islands
Hong Kong
PRC
PRC
Place of Incorporation
PRC
PRC
PRC
PRC
I, Cussion Kar Shun Pang, certify that:
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.1
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Tencent Music Entertainment Group (the “Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the Company’s auditors and the audit committee of the Company’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal
control over financial reporting.
Date: March 25, 2020
By:
Name:
Title:
/s/ Cussion Kar Shun Pang
Cussion Kar Shun Pang
Chief Executive Officer
I, Min Hu, certify that:
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.2
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Tencent Music Entertainment Group (the “Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the Company’s auditors and the audit committee of the Company’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal
control over financial reporting.
Date: March 25, 2020
By:
Name:
Title:
/s/ Min Hu
Min Hu
Chief Financial Officer
2
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
In connection with the annual report of Tencent Music Entertainment Group (the “Company”) on Form 20-F for the year ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cussion Kar Shun Pang, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 25, 2020
By:
Name:
Title:
/s/ Cussion Kar Shun Pang
Cussion Kar Shun Pang
Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
In connection with the annual report of Tencent Music Entertainment Group (the “Company”) on Form 20-F for the year ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Min Hu, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 25, 2020
By:
Name:
Title:
/s/ Min Hu
Min Hu
Chief Financial Officer
Exhibit 15.1
Date: March 25, 2020
Tencent Music Entertainment Group
17/F, Songri Dingsheng Building
Kejizhongyi Road Midwest District of Hi-Tech Park
Nanshan District Shenzhen, 518057
The People’s Republic of China
Dear Sirs/Madams,
We hereby consent to the reference to our firm in Tencent Music Entertainment Group’s annual report on Form 20-F for the fiscal
year ended December 31, 2019, which will be filed by Tencent Music Entertainment Group in March 2020 with the Securities
and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and further consent to the
incorporation by reference of the summaries of our opinions that appear in the annual report on Form 20-F into the Registration
Statements (No. 333-230930) on Form S-8.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the
regulations promulgated thereunder.
Yours Sincerely,
HAN KUN LAW OFFICES
/s/ Han Kun Law Offices
Exhibit 15.2
Our ref KKZ/713476-000003/16359640v1
Tencent Music Entertainment Group
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)
17/F, Malata Building
Keijizhongyi Road
Midwest District of Hi-tech Park
Nanshan District
Shenzhen 518057
People's Republic of China
25 March 2020
Dear Sirs
Tencent Music Entertainment Group
We have acted as legal advisers as to the laws of the Cayman Islands to Tencent Music Entertainment Group, an exempted limited
liability company incorporated in the Cayman Islands (the “Company”), in connection with the filing by the Company with the United
States Securities and Exchange Commission (the “SEC”) of an annual report on Form 20-F for the year ended 31 December 2019
(the “Annual Report”).
We hereby consent to the reference to our firm under the heading “Item 10. Additional Information—E. Taxation—Cayman Islands
Taxation” in the Annual Report, and we further consent to the incorporation by reference of the summary of our opinions under these
headings into the Company’s registration statement on Form S-8 (File No. 333-230930) that was filed on 18 April 2019, pertaining to
the Company’s 2014 Share Incentive Plan, the 2017 Option Plan and the 2017 Restricted Share Scheme.
We consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or
under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours faithfully
/s/ Maples and Calder (Hong Kong) LLP
Maples and Calder (Hong Kong) LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.333-230930) of Tencent Music Entertainment Group of
our report dated March 25, 2020 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this
Form 20-F.
Exhibit 15.3
/s/ PricewaterhouseCoopers Zhong Tian LLP
PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
March 25, 2020
1