Study On The Legal Issues Of Valuation Adjustment Mechanism

In 1997, the contract between Ya Xin Technology Co.,Ltd. and Warburg Pincus —a Private Equity Investment institutions, introduced the Valuation Adjustment Mechanism(the abbreviation is “VAM”) into China. And in 2003, the success of VAM for Mengniu Co.,Ltd. made this mechanism well-known in the capital market of China. And gradually, it is widely used in various fields of capital operation. But due to the lack of relevant regulation and law-system environment, the practice of the VAM still confronted with many problems such as insufficient understanding about the VAM, non-standard problem. This situation leaded both the financing party and the Private Equity Investment to the financial and legal risks. The VAM faced a dilemma of improper application and invalid judicial identification.In 2012, the case of “Shiheng vs. Haifu VAM” was finally on a verdict after the trial by three levels courts. But the quarrel to the effect of the VAM taken place in both theory and practice, the hidden legal risk became apparent. Such as the position of the VAM in the contracts law, the violation to mandatory provisions of the company law and the problem of “so-called investment but borrowing”, always impacts the effectiveness of VAM and obstructs the implementation of the right provisions.The settlement of these problems have important implications on optimizing the environment of China’s Private Equity Investment, making the financing channels of small and medium-sized enterprises unobstructed and constructing the multi-level capital market.This article is divided into four chapters.The first chapter based on many practice cases, summarized the concept, the types and the characteristics of VAM, and then analyzed the rationality of the VAM.The second chapter analyzed the nature of the VAM. This part analyzed legality of VAM as an atypical contract and aleatory contract, and indicated that the VAM is not a conditional contract.The third chapter analyzed the disputes of the VAM. This part discussed the legal risks that initiated from the case of “Gansu Shiheng vs. Haifu VAM”, summarized the main subjects, and then analyzed the effectiveness of the VAM with the empirical analysis and normative analysis methods.The fourth chapter analyzed how to regulate the VAM. This part cleared that the VAM is the choice of the market and should be respected. Judicial should intervene the civil and commercial affairs in a negative form. And then proposed the path to regulate the VAM in the point of regulating the aleatory contract. Finally, from the perspective of financing party, this article pointed out that the VAM should be utilized in the condition of confirming the risk of the VAM reasonably.