The Legal Analysis Of Valuation Adjustment Mechanism

Abstract:As an innovation in the field of private equity investment, the valuatio n adjustment mechanism (VAM) is emerged in response to private equity funds’ failure to fully obtain information of borrowers. An agreement reached under th e VAM is an aleatory contract, which includes four factors, parties, investment f rom investor(s), particular object(s) and VAM project. Being an advanced form of entrustment, the VAM not only is a means to address information asymmetrie s between investors and borrowers, but also is required for valuation adjustment. Its legal status has not been explicitly regulated by the laws of our country, but r elated regulations have paid some attention on the VAM, relating to clear stock r ights, anti-monopoly and equity withdrawal. In domestic practice, the VAM is a pt to put an company’s public listing in difficulty; an invested company may exp and its scale recklessly and impair the interests of minority shareholder(s); differ ent valuation on an invested company between investor and borrower may make the VAM fail to perform its incentive function as expected; and indefinite legal force of the VAM makes the passive influence on investor’s confidence. With re gard to the obstructions of the VAM in the legal environment of China as said a bove, on the one hand at the legislative level, it is required to improve stipulatio ns on preferred stock, disclosure of information about the VAM, and withdrawal approaches for investors, and to give a clear legal statue of the VAM; on the ot her hand at the practical level, it is required to establish a comprehensive and rea sonable valuation mode, engage in repeated games, and to realize clever withdra wal via offshore company.