Effectiveness Research On Valuation Adjustment Mechanism Between Investors And Target Companies

In recent years, as a private equity investment vehicle, valuation adjustment mechanism is frequently used in our investment activities. Simply speaking, the subject of valuation adjustment mechanism involves investors and financing parties, but there are many forms in practice, such as investors to target companies, investors to actual controller, and investors to the management of targeted company. The specific subject form of valuation adjustment mechanism can not be lumped together, it need be comprehensively considered on the base of gambling objects, gambling tools and other specific contents of valuation adjustment mechanism provisions. However, our law is not clear on the legality of the valuation adjustment mechanism, which leads to many disputes on the validity of the valuation adjustment mechanism in practice. With the Supreme People’s Court’s judgment on the first case of the valuation adjustment mechanism, "Haifu investment case", concerning valuation adjustment mechanism, a basic consensus is generally formed in judicial practice. That is, valuation adjustment mechanism between Investors and controlling shareholders is deemed to be valid, as long as the true Intentions of both parties are truly conveyed and do not violate law prohibitions. However, the legality of the valuation adjustment mechanism agreement between Investors and target companies is not supported from judicial practice yet. Supreme People’s Court denied its legitimacy in the first case of valuation adjustment mechanism, and the China International Economic and Trade Arbitration Commission did not rule that the company assume the obligation to equity repurchase, although recognized its legitimacy in relevant cases. The core purpose of valuation adjustment mechanism is to achieve a reasonable and fair investment transaction as far as possible, which not only protects investment interest, but also plays an incentive role for financiers, as a structural expansion of equity development in capital market. Further the recognition of the legality of valuation adjustment mechanism between investors and target companies will contribute to the development of capital markets. Therefore, with reference to related cases, this paper radically gives us a valid interpretation on the legality of valuation adjustment mechanism between investors and target companies from a legal perspective, discusses how domestic enterprises can effectively use the valuation adjustment mechanism for serving their own development in Chinese institutional environment, and puts forward that the company law legal system should be improved and judicial philosophy should be changed, so as to promote the legalization development of valuation adjustment mechanism.This paper is divided into four parts as follows:In the first part, on the basis of deep analysis on Supreme People’s Court’s judgment on the first case of valuation adjustment mechanism and the arbitration case of the China International Economic and Trade Arbitration Commission, hereinafter referred to as "CIETAC", leads to the different value orientation on the effectiveness of valuation adjustment mechanism between investors and target companies in judicial practice, and then put forward the questions of this paper. The court held that the valuation adjustment mechanism between Investors and target companies is invalid, however, The arbitration organization held opposite view, that valuation adjustment mechanism between Investors and target companies is legal and valid, but did not support the repurchase obligations of the Company. So we propose, the effectiveness of valuation adjustment mechanism between investors and target companies is disputed.In the second part, we introduce the basic legal content of valuation adjustment mechanism to clarify the basic problem, laying a theoretical groundwork for the legal effect of valuation adjustment mechanism between investors and target companies in next analysis. and then analyze the causes, basic legal relationship, legal nature and recognized legal effect difficulties of valuation adjustment mechanism in detail.In the third part, we specifically analyze the effectiveness of valuation adjustment mechanism between investors and target companies. We criticize the views that the court judged it ineffective from the two perspectives of Contract law and Corporate law and propose the following points. In the perspective of Contract law, the valuation adjustment mechanism between investors and target companies reveals true intentions of both parties, does not violate the mandatory provisions of laws and administrative regulations.on the same time, In the perspective of Corporate law, the valuation adjustment mechanism between investors and target companies does not necessarily violate the capital maintenance principle, and also does not necessarily damage the company and the interests of creditors. The possibility of illegal on the valuation adjustment mechanism between investors and target companies mainly due to the illegal of perform acts, rather than the illegal of valuation adjustment mechanism itself. Then we put forward that the valuation adjustment mechanism between investors and target companies should be deemed to be legal and valid.In the forth part, the dispute on the effectiveness of the valuation adjustment mechanism between investors and target companies results in some considerations and suggestions on Chinese institutional environment. We Propose that domestic enterprises should set reasonable goals for gambling, and increase some flexible indicators for evaluation criteria; the company law legal system should be improved, the special protection of investment contracts should be strengthened; and courts’ treatment on related cases of valuation adjustment mechanism agreement should comply with commercial judicial philosophy, and respect the autonomy of will of the market parts at the greatest extent.