Research Under The Background Of Post Haifu Era About The Legitimacy Of Valuation Adjustment Mechanism Agreement Within PE

Private equity investment, called Private Equity in English, abbreviated as PE, means that private equity fund invest money to non-publicly traded companies through a private placement, the implementation process is included in the transaction considering the future exit mechanism, through IPO, merger or Management Buy-Outs etc., to sell shares and get profits. In recent years, private equity investments, as a new approach in the international financial markets play an increasing role, and the successful introduction from overseas to China has solved a lot of financing difficulties of many little enterprise. With the rapid development of valuation adjustment mechanism as a way to avoid moral hazard due to asymmetric information and the means to produce adverse selection, it is widely used in the field of venture capital. Valuation adjustment mechanism shelve disputes relating to business valuation firstly, the agreement will be made in advance based on possible company performance in order to encourage investment, and the purpose of reducing investment risk. Through the valuation adjustment terms design of the valuation adjustment mechanism can effectively protect the interests of investors, encouraging performance of the company.However, due to internal and external factors, investment and financing parties in the process faces many risks, in addition to the usual financial risks, and there is still the legitimacy of valuation adjustment mechanism dispute which have became focus of market capitalization. With regard to the valuation adjustment mechanism, there are two distinctly different judicial practice. The Supreme Court denied the legitimacy of valuation adjustment mechanism in the Haifu and Shi Heng’s case, although the practice has a certain role in the guidelines, but does have legal effect in nationwide. And only a year later, the China International Economic and Trade Arbitration Commission have made an arbitrate award, which admit that the valuation adjustment mechanism is valid. These two diametrically opposed legal judgment raises the level of legal uncertainty and lead to unpredictable judicial practice, which greatly affected the confidence of investors. In order to encourage Goldman Sachs, Merrill Lynch, CVC and other private equity institutions, and create dynamic activation of capital markets, meeting the practical needs of the legalization of valuation adjustment mechanism, the author will discuss the legitimacy and nature of the valuation adjustment mechanism from the following aspects:Firstly, the first chapter analyzes the "China’s first case of Valuation Adjustment Mechanism Agreement within PE", namely "Haifu Case" and "CIETAC case" to elicit the main line of this article, that is the validity of an agreement on gambling issues and it can be effective under what conditions. The Supreme Court denied the legal effect on valuation adjustment mechanism signed between the target company and PE fund type in Haifu case, but affirmed the effectiveness on this valuation adjustment mechanism signed between the shareholder and PE fund type. Soon after this case, China CIETAC determined to admit the effectiveness on the valuation adjustment mechanism signed with the shareholders. I carefully selected these two diametrically opposed legal judgment, what is intended to explain what is an agreement on gambling as well as agreement on gambling under what circumstances could be effective.Secondly, the chapter will focus on the analysis of valuation adjustment mechanism agreement on gambling-related concepts, features and type. There are five main theories about the dispute of the legal nature of valuation adjustment mechanism, but I believe that the essence of the valuation adjustment mechanism is both a conditional contract as well as a aleatory contract. Then I would adopt the analysis of categorization to classify the valuation adjustment mechanism. Finally, through reverting the background of valuation adjustment mechanism, and through deep profiling the three origin of valuation adjustment mechanism to solid the foundation for the next start.Thirdly, the third chapter focuses on the discussion of the gambling provisions designed by adjustment mechanism, through in-depth research on the legal subject, the legal object and the legal content of valuation adjustment mechanism, which are the three elements of legal relationship to state my opinion. There are mainly three legal subject types of the valuation adjustment mechanism that are private equity investment institutions, the controlling shareholder of the target company or the target company. The legal contents of the valuation adjustment mechanism mainly includes the following three categories of gambling terms: capital entry terms, capital adjustment provisions and capital exit clause. And the legal object of a valuation adjustment mechanism is specific payment of cash compensation, valuation adjustments, stock buybacks and so on. Clarifying the adjustment mechanism of “gambling agreement” could lay foundations for the discussion of the legal effect of the agreement.Finally, the fourth chapter discusses the legality of the valuation adjustment mechanism, namely, whether the “gambling agreement” should have the legal effect. Then I will discuss the contract in accordance with the contract law to come up with effective elements applicable to the general criteria for judging the effectiveness of valuation adjustment mechanism.