Research On Valuation Adjustment Mechanism In The Field Of Chinese Equity Investment

Valuation adjustment mechanism is a way in the equity investment which bothsides of the transaction adjust the valuation by the management situation of the targetenterprise in order to let the valuation closer to the reality, which is introduced byforeign venture capital who always invest in the start-up company. Valuationadjustment mechanism is widely used because it is able to deal with the valuationperplexities when both sides of the transaction are confused by the risk caused of themanagement of target enterprise and information asymmetry. With the widely usedof this mechanism, dispute also comes out. Some well-known domestic enterprisesuch as Yongle Electric Appliance Company, fall into this mechanism trouble.Considering the importance and the existing problem of the valuationadjustment mechanism in the equity investment, this paper uses example to analysisthe adaption of the valuation adjustment mechanism based on the conclusion of alarge amount of examples and point out the main model, trends of development andthe problem of hardness to exercise in the mechanism, which thoroughly analysis theapplication situation of valuation adjustment mechanism. As the situation statedabove become more and more concentrated nowadays, based on the classicalexamples of valuation adjustment mechanism, this paper analysis the attitude by thejudger about the force of valuation adjustment mechanism and define the effectiveevidence when the valuation adjustment mechanism is valid in the theoretical level.Moreover, in order to solve the problem of that the valuation adjustment mechanismis often hard to exercise and make the mechanism to play its supposed function, thispaper attempt to make rational suggestions in the design of the valuation adjustmentmechanism and to fulfill its own function that adjust the valuation, which canbalance the risk, accelerating the progress and protecting the interest in thetransaction for both sides.Nowadays, valuation adjustment mechanism is widely used in equityinvestment field. Besides the investment of venture capital and private equity, the mechanism is also used in merge and acquisition, private investment in public equityand non-tradable shares reform. The parties of agreement mostly use the businessperformance of the target enterprise or the IPO promise as the trigger condition ofthe valuation adjustment mechanism and making the investing party as the exerciseparty because the transaction conditions are always different. Because valuationadjustment mechanism is based on the self-adjustment of the transaction parties, it isnot illegal and doesn’t break the mandatory provision of administration regulation.There isn’t specific obstacle for the validation of valuation adjustment mechanism inthe legal framework and the judger are paying more attention on the value of themechanism and admit its act of law step by step. On the other side, the parties ofagreement cannot only rely on the relief afterwards when facing the problem that theagreement cannot exercised. They should design the agreement rationally, andconsidering the solution when the hardness of exercising happened in order to makethe valuation adjustment mechanism play its function to the maximum extent andavoid paying the cost of lawsuit based on prudence, legality, rationality.