Legal Analysis Of Vam Used In Private Equity

Valuation adjustment mechanism (VAM) is often used in private equity investments as a subordinate agreement incarnated in form of an attachment clause to the investment agreement. VAM, also known in Chinese as "Gambling Agreement", is not an agreement on gambling, rather an agreement between the investor(s) and the investee concerning valuation adjustments on the investee and price balancing. In essence VAM is about having the investee's commitment on future performance as the base and the premise for the valuation and hence the valuation of the investee is to be adjusted based on the achievement of the future performance targets as well as resulting compensation if any.Preface briefly introduces the meaning of VAM, its origin and background along with an overview of the current status of VAM in domestic investments and academic research. Though it has not been long since VAM was first introduced to China, VAM has been widely used in equity investment industry. Yet there are controversies concerning the legal properties of VAM. And security regulators largely view VAMs negatively in reviewing listing applications. Issues as such promote the author conduct relevant research on VAM.Chapter One provides analysis on the current situation of VAMs in private equity investments. Major sections include:a) the development and current status of overseas private equity investment; b) the investment characteristics of different categories of capital;c) the fast development of private equity investment in China and the extensive application of VAM in domestic private equity investments; and d) a few cases of typical VAM application in private equity investment.Chapter Two mainly describes the subject, the object and the content of VAM. Section One introduces the concept of VAM and the basic types of VAM; Section Two discusses about the subject of VAM; Section Three talks about the content and the object of VAM; Section Four discusses about the legal property issues of VAM to conclude that VAM is, not an aleatory contract, rather a contract with conditions appended; Section Five analyzes the legality of VAM.Chapter Three discusses a number of legal issues in the practical applications of VAM. Section One mainly talks about the equity transfer restrictions involving executing VAMs; Section Two the author analyzes the negative stance, and its root cause, regulators hold against VAMs during GEM listing review process and suggests that such a negative attitude is not an optimal choice. Lastly the author proposes to a) amend listing rules to shorten the restricted stock trade period of the controlling shareholders of listed companies; and b) launch investment instruments such as convertible bonds as soon as possible.