The Legal Effect Of Valuation Adjustment Mechanism Agreement And Its Application

The case of Haifu thorough Lanzhou Intermediate People’s Court of First Instance, Gansu Province Higher People’s Court of second instance, after the Supreme People’s Court retrial finally lasted about three years, finally settled. The first and second instance courts found that Valuation Adjustment Mechanism is invalid. This caused extensive discussions, called “the country’s first case of Valuation Adjustment Mechanism is invalid."The Supreme Court conducted in the form of arraignment to make a final judgment which voted down the legal effect of this agreement between the investor and the target company and considered that the provision violated the prohibitive regulations of Article 20 of corporation law to the detriment of the corporation and creditors; but asserted the validity of the agreement between the investing party and the original shareholders and considered that the provision did not violate the prohibitive regulations of corporation law,nor damage interests of the corporation and creditors, is the true intention of litigants. Although our country is not precedent law country, the Supreme Court’s ruling on a class of cases often have guidance and reference value.Valuation Adjustment Mechanism is different from gambling contract. It is used widely in the field of private equity, and is a relatively new kind of aleatory contract, which used properly, can make the investors and financiers to reach a win-win situation. Although our law does not clearly define, in our current legal framework, Valuation Adjustment Mechanism doesn’t have any legitimacy obstacles. This paper mainly focus on the determination of reason by the courts’ at all levels attitude to the case of haifu, from the legal relationship, the main content, assignment of responsibilities and so on multi-angle proved that Valuation Adjustment Mechanism is legal under the current legal framework in China. During proving the effect of Valuation Adjustment Mechanism, the author puts forward a series of legal loopholes, such as there are legal gaps in the set of regulations and preference shares of the agreement; and presents measures to improve our law and related systems, such as in the factor of perfecting multi-level capital market and determining the bargaining counter, so that Valuation Adjustment Mechanism can really get recognized and protected by law and the related system expressly.