Researches On The Problem Of Validity Of Valuation Adjustment Mechanism

As a kind of conventional arrangement of investors and financiers,valuation adjustment mechanism is a creative financing mode of enterprises especially growth enterprises.The Characteristics of growth enterprises have determined that it is difficult to assess their value with traditional methods of valuation.In order to break the dilemma of valuation and avoid the endless disputes between investors and financiers on the present value of invested enterprises,the controversial points which cannot be settled immediately must be put aside temporarily,and future business objectives of target companies must be established,and the rights and obligations of both partied must be adjusted in accordance with the situation of implementation of such objectives.Besides these,although investors join target companies as shareholders,their investment preferences are different from those of original shareholders of target companies.To investment funds of private equity and other investors,what they think highly of is how to make profits by quitting successfully,and they have little interests on the voting rights related to operation and management of enterprises.Only in a few cases investors can be interested in the control power of target companies based on consideration of some special objectives.Original shareholders especially major shareholders or controlling shareholders of target companies usually attach much importance to the control power of target companies because they have put great creativity into the companies and they are unwilling to lose the control power even when facing fund shortage.Valuation adjustment mechanism could meet the different preferences of investors and original shareholders of target companies rightly,and based on above reasons,this financial innovation have been applied broadly in the capital market of our country.However,since the provisions of valuation adjustment mechanism have something uncoordinated with existing laws and regulations of our country,the validity of valuation adjustment mechanism has been the heated topic of theory and practice debate.The problem of validity of valuation adjustment mechanism has sparked much controversies,especially after the first case about valuation adjustment mechanism in our country.This paper is aimed at valuation adjustment mechanism,the financial innovation which has been applied broadly in practice but disputed on its validity,and to search proper ways to affirmation of its validity under the clarification of its legal attributes,based on existing results of researches and present legal circumstances and practical needs in our country.At the same time,I hope that the researches in this paper could help to guard against the risks in the signing of valuation adjustment mechanism by commercial subjects effectively.Besides these,the research meaning of this paper can be more prominent if some material could be provided for lawmakers from the perspective of legislative theory.This paper contains five chapters except the preface and conclusion,and their contents are:Chapter One:Clearing up the source,and discuss the nature of valuation adjustment mechanism.It is the basis of defining the concept of valuation adjustment mechanism scientifically and pursue other series of researches that to define the legal attributes of valuation adjustment mechanism exactly according to its practical operation mechanism.This chapter firstly sort out five different theories about legal attributes of valuation adjustment mechanism formed in existing researches,namely the theory of aleatory contract,the theory of conditional contract,the theory of guarantee,the theory of options and the comprehensive theory,and then criticize above theories one by one,asserting that the theory of aleatory contract distorts the transaction modes of valuation adjustment mechanism;the theory of conditional contract will bring more problems to juridical practice;the theory of guarantee breaks valuation adjustment mechanism up to analyze it and draw a conclusion,which reveal merely a kind of function of valuation adjustment mechanism but not its nature;the theory of options defines valuation adjustment mechanism as option contract over the counter,which has non-standardized contents and high risks because they are usually free from state regulation,while the laws applied are not clear,as a result,substantive justice can get no guarantee;the comprehensive theory will give rise to confusion in juridical practice,and lead to logic disorders,unconvincing reasons and even judicial injustice.All of the five theories are conclusions drawn from the mind of civil law,while juridical practice has proved that discussing the legal characters of valuation adjustment mechanism with absolute mind of civil law is at a dead end.At last this paper put forward that valuation adjustment mechanism is the realistic reflection of heterogeneity of shareholders through a series of analysis,and that with it,both parties could reach the legal effects which are almost the same as that of classified shares.In fact,valuation adjustment mechanism has become a kind of investment tool which has similar functions as classified shares,so it is an issuing mode of classified shares in its nature,namely substituting for the system of classified shares with agreements.Chapter Two:Analysize current situation of practice and value of valuation adjustment mechanism.Firstly,this chapter concludes the current situation of practice of valuation adjustment mechanism in our country and points out that our country’s enterprises have experience a process from signing valuation adjustment mechanism with the help of offshore companies to directly signing that in the land.Except analysis of the reasons of signing valuation adjustment mechanism through offshore companies by enterprises in our country in earlier period,successful and failed cases are also listed here.On that basis,this chapter further points out that as the improvement of our country’s legal circumstances,the perfection of multilevel capital market and the development of private equity funds,enterprises in our country tend to sign valuation adjustment mechanism directly within our borders,and valuation adjustment mechanism has been applied in investments of private equity,mergers of companies,reforms of split share structure,directional add-issuance of listed companies and national equities exchange and quotations broadly.Secondly,this chapter sums up the six kinds of clauses contained in valuation adjustment mechanism,namely clauses about cash compensation,equity compensation,preferred stock,stock repurchase,drag along right and inversion of control,and elaborate their legal structures respectively.On that basis,valuation adjustment mechanism can be classified into limitation of shareholders’ economical rights or expansionary valuation adjustment mechanism,limitation of shareholders’ rights of participation or expansionary valuation adjustment mechanism and comprehensive valuation adjustment mechanism.At last this chapter comment the value of valuation adjustment mechanism from two perspectives of functions and risks.Chapter Three:Current situation of affirmation of validity of valuation adjustment mechanism.Firstly,this chapter sorts out and induces the laws and regulations concerned valuation adjustment mechanism comprehensively and compare them with clauses contained in valuation adjustment mechanism to find out the integrated and conflict points.Secondly,this chapter concludes the general situation of juridical practice about valuation adjustment mechanism under existing legal circumstances in our country according to cases on valuation adjustment mechanism which entered judicial trials and their verdict results,and selects three cases corresponding to disputes about clauses of cash compensation,valuation adjustment mechanism with the participation of state-owned enterprises and clauses of stock repurchase respectively,and describes the attitudes of courts to such cases and their verdict results.At last this chapter selects a certain case to describe the attitudes of arbitration bodies about valuation adjustment mechanism and further concludes that the courts tend to keep conservative and cautious attitudes in these cases,while arbitration bodies usually have more forgiving attitudes and don’t deny validity of valuation adjustment mechanism between investors and target companies hastily.Chapter Four:Dispute focus about validity of valuation adjustment mechanism from different perspectives of research.Currently,researches about valuation adjustment mechanism in academic circle are usually from the perspectives of economic law,civil law,company law and contract law.There are all kinds of problems in different extents in existing researches,such as bias in the horizons and extents of existing affirmation of legal validity of valuation adjustment mechanism,lack of universality in existing conclusions,and that the legal attributes and validity affirmation of valuation adjustment mechanism haven’t been combined organically.Disputes in results of researches arise from the differences between perspectives,and the dispute focus are centralized in following aspects mainly:whether the clauses about compensation in valuation adjustment mechanism belong to minimum guarantee clauses,whether valuation adjustment mechanism between investors and target companies will do harm to interests of creditors inevitably,whether the clauses in valuation adjustment mechanism breach the principle of capital maintenance,whether the valuation adjustment mechanism with participation of state-owned enterprises is valid,whether validity of valuation adjustment mechanism will affect validity of other contracts or other clauses in the same contract,whether the principle of change of circumstances can be applied to valuation adjustment mechanism,and so on.Chapter Five:Remodeling of affirmation methods of validity of valuation adjustment mechanism.Affirmation of validity of valuation adjustment mechanism should be based on fundamental theories in contract law.Considering valuation adjustment mechanism is different from general civil and business contracts and have functions of risk sharing and governance mechanism which civil contracts don’t have,the mind of business law must be prominent in its validity affirmation.Both the signing of valuation adjustment mechanism between parties concerned and trials about such cases by judicial authority should follow some certain principles,and the establishment of such principles must coincide with the nature of valuation adjustment mechanism.Specially,both parties should follow the principle of good faith,the principle of matching between risk and revenue and the principle of pluralism of shareholders’ rights,and courts should also be guided by such three principles when judge disputes on valuation adjustment mechanism.Considering that traditional judicial syllogism can hardly make effective judgments in cases about valuation adjustment mechanism,the courts could try to hear such difficult cases by methods of retroduction in consequentialism.Correspond with the assertion about legal attributes of valuation adjustment mechanism,this paper also put forward that courts should uphold judicial view of materialism in cases about valuation adjustment mechanism.