The Risk Preventions Of Valuation Adjustment Mechanism In Private Equity

Valuation Adjustment Mechanism is a typical imported vocabulary, originated in developed countries like Europe and the United States. It has been widely applied in the Anglo-American law system countries. In our country it is widely known as "bet agreement" because of its gambling character. It is an important part of private equity investment activities. In private equity investment operation, the current value assessment of target firm is related to whether the two sides can reach an agreement or not. The difficulty of the problem is that the two sides often cant’t reach an agreement because they have different interests, and asymmetric information about profitability and development prospects of the target enterprise. To make equity investment activities can go smoothly, the investors and financiers signed an valuation adjustment agreement in order to eliminate the differences. It reduces cost of both investors and financiers. The valuation adjustment mechanism is one of the most efficient institutional arrangement in order to eliminate the influence of information asymmetry between investors and financiers.Valuation adjustment mechanism has became a hot and frontier topic as a kind of contractual arrangements in the private equity practice due to its violation of the principle of investment risks and benefits coexist and may damage the interests of creditors and minority shareholders in the forefront. The first case of valuation adjustment mechanism in China is Haifu investment case, it lasted for three years. Through the judgment of first instance, second instance and retrial, finally made an conclusion of the validity of valuation adjustment agreement. But the reasons seems to be differences, it also reflects that the academic and practical departments has not rearch an agreement yet about the property and effectiveness of the valuation adjustment mechanism. There are much more room for discussion about that.At present, systematic work about valuation adjustment mechanism has not been formed. Only a small amount of papers you can see in some journals, and the research contents of the same, mainly focusing on the theoretical analysis. Athought very little foreign research data about the valuation adjustment mechanism, but it is very widely used in foreign country. In western developed capital market, investors would like to take measures to protect their own interests at the same time, to reduce the risk of their own. The valuation adjustment mechanism is a good choice.This paper trying to seek the feasible methods which can applied to practice. It is involving knowledge of law, economics, and trying to undertake a comprehensive study on this problem. This paper contains a variety of research methods,such as qualitative analysis combined with quantitative analysis, comparative analysis and comprehensive analysis, the combination of theoretical research with empirical research methods.This article takes the first case of valuation adjustment mechanism called Haifu company investments case as the breakthrough point. This paper briefly introduces the background and origin of valuation adjustment mechanism, to proposed the problems and the focus in this paper. By comparing with some typical contract, combined with the option theory, to clarify the legal propery of valuation adjustment mechanism in private equity. Through relevant case analysis in our country, to clarify the legal effect of valuation adjustment. Pointed out that the theoretical basis of valuation adjustment mechanism and existence value, and the legal obstacles faced in our country. Finally from the macro level and micro level puts forward relevant suggestions to against risks.