Analysis Of The Legal Effect Of The Terms Of The Valuation Adjustment Mechanism Agreement

In recent years, Valuation Adjustment Mechanism (VAM) as a very popular andeven trendy word has appeared frequently in the fields of securities, investment andfinancing. Initially, VAM can be seen in the foreign private equity financing and beintroduced into China mainland as a widely used investment tool. Soon it has beenfrequently used in financing activities in China mainland. Now VAM is not only usedin the private equity investment and financing, but also used in China’s capital market,especially the Initial Public Offerings (IPO) of companies as the fast development ofChina’s security market. Many companies in China have signed the VAM when theyintroduce private equity (PE) for financing before IPO. These companies were notvery decisive about going public before signing the VAM. However, in order tocomply with the VAM, they decisively struggled for going public.VAM, in essence, is a method of value evaluation with additional conditions. Itis considered an investment agreement between investors and the financing side onthe future changes to the financial position of the invested enterprise. If thecondition stipulated in the agreement are satisfied, the investors may exercise oneright, and if the condition are not satisfied, the investors may exercise another right.Thus, VAM contains essentially equivalent to the contents of the options, is also anincentive to the management of financing side. The essence of VAM promotes themanagement of financing side acquiring maximum revenue with minimum capital in a shortest time. The investor’s rights and interest can be protected effectively throughplanning of the terms of VAM agreement. Also, it is an effective financing channelfor those enterprises, which is in the initial business stage or requiring large load ofcapital distribution during cross-industry expansion.In summary, due to the uncertainty that might occur in the future, the plan of thecontents of VAM agreement originated from consideration of strong protection to theinvestors, the incentive of the management of the financial side to achievepre-depicted a win-win happing ending. However, in practice, due to the effect ofproduct supply and demand, regulation of national policy, globe financialenvironment, etc. the happy ending often cannot be achieved. In such a case, thelegal effect of VAM raised when the investors requires performance of financial sideaccording to VAM agreement. It is of profound significance to the analysis of theeffect of VAM agreement of the validity of VAM due to it involves great risk of theinvestors’ interest, and it related to whether the channel of that PE financing for smallor middle scale company is reliableTherefore, this paper tries to analyze the effect of VAM clause in the VAMagreement in practice. The article divided into four parts:Chapter one which demonstrated purposes, features, pros and cons behind theprovisions, is aimed at causing investor’s concerns to this agreement, which mayguide investors to make the best use of the VAM agreement in legal practice.Chapter two preliminary analyzed the essence of VAM clause and listed thecommon type of VAM in investment and financing process.Chapter three demonstrated the common views and doubts of parties on the legaleffect of valid or invalid of VAM clause in investment and financing process，whichprovided preliminary analysis and discussion to the validity of typical clauses in theVAM agreement under the applicable “Contract Law of the People’s Republic ofChina”.