Research On The Validity Of Valuation Adjustment Mechanism In China’s Private Equity

Gambling agreement, also known as the Valuation Adjustment Mechanism（refers asVAM）,refers to the contract arrangement reached by investors and the target company or theshareholders in private equity (refers as PE) investment concerning on titling some rights toeither side when a certain event takes place. VAM originated in the West capital markets. Withthe deepening of cross-border mergers and acquisitions and the rise of the private equitymarket in China, VAM has frequently appeared in the field of private equity investment inChina. However, in the case of Suzhou Haifu Co. Ltd v. Gansu Shi Heng Co Ltd gamblingagreement dispute in2012, the VAM was judged invalid during the first and second instancejudgment, and ultimately the validity of VAM was confirmed by the Supreme People’sCourt.This case raised widely discussion both in academics and practitioners, which isknown as “the first case of VAM in China’s PE”.At present,“the first case of VAM in China’s PE” is still continue raising disputes. Thisarticle attempts to lay analysis on the question of the validity of the gambling agreementbased on China’s current legal system, combined with the analysis of specific circumstancesof the current civil and commercial legal system and the spirit of the legislation and thedevelopment of private market. On one hand, the question of the validity of the gamblingagreement must firstly be traced back to the understanding of the legal nature of the gamblingagreement itself. On the other hand, the question of the validity of the gambling agreementrelates to the basic theory of the Civil and Commercial Law. This article aims to explore thelegal nature of VAM from different points of view and understanding of the academic andpractical. Simultaneously on the basis of defining the legal nature of VAM, the article willcombine the basic system of Civil and Commercial Law and the spirit of the legislation thegambling agreements to argue the validity of VAM under China’s legal circumstance.This article is divided into four parts. The first chapter mainly introduces the basic theoryof VAM. The second chapter leads to the dispute about the legality of VAM through “the firstcase of VAM in China’s PE”, and raises the "invalid theory" and “valid theory” upon thequestion of the VAM. The third chapter will comprehensively apply the General Principles ofCivil Law, Contract Law, Company Law, Civil and Commercial Law to analyze the question of the validity of VAM. The fourth chapter will demonstrate the legalization of VAM based onthe results of the analysis of the previous chapter, lay analysis on “the first case of VAM inChina’s PE” in accordance with the logic and viewpoints of this article, and finally givesuggestions on preventing legal to Chinese enterprises after the results “the first case of VAMin China’s PE” came out, in order to provide theoretical support for the private equitypractice.