Legal Analysis On The Gambling Agreement

VAM (Valuation Adjustment Mechanism), also called Agreement on Gambling,is a common investment tool in the international capital markets. In the jurisprudenceperspective, VAM is the accord reached by the investing and financing parties on theuncertainty of the future development of enterprises. In fact, it is such an arrangement:during the process of consultation, the two parties set aside their disagreement oncurrent value of the invested enterprise, set a unanimously approved targetachievement, adjust the valuation and shares distribution of the company according tothe actual performance.In recent years, VAM has been observed frequently signed in Chinese capitalmarket. The phenomenon that some emerging growth domestic private enterprisescooperate with JP Morgan, Goldman Sachs and other foreign private equity funds hasmade VAM a top hot issue in domestic media. In this paper, through interpretation oftypically significant gamble cases, the true face of the VAM is revealed and theconnotation and core provisions are legally analyzed. In the end, various issues whichoccurred when VAM applied in China will be discussed.The article is divided into three parts:In the first chapter, two typical cases-Mengniu Dairy Company Limited andTaizi Dairy are contracted in order to intrigue the concept of VAM. Then this paperintroduces the concept of private equity investment, the different characters andoperation mechanisms of different types of investment, and analyzes the concept ofVAM, and its caustion.The second chapter is the detailed legal analysis on gambling agreement. Thesubject, object and content of VAM, especially content of VAM in foreign practice areintroduced first. Next, the paper focuses on the legal nature of the gamblingagreement, by establishes and proves the opinion that VAM is not an aleatory contract,but a conditional contract.Chapter3is analysis of the legal application of VAM. This part starts bypresenting and analyzing the fundamental concept and provisions of the VAM, such asconvertible preference shares, convertible bonds, the floating equity ratio terms,anti-dilution provisions. Secondly, in the legal perspective, the paper analyzes anumber of problems encountered in domestic practice of VAM and points out that theunreasonableness of China’s legal system. Upon the present problems, there arerecommendations on the available amendments in our application.