A Study On The Classification Of VAM In China’s Law Practice And An Analysis Of VAM Cases

Since late 2012, when the Supreme People’s Court made its final ruling on Haifu Investment v. Gansu Shiheng, the first VAM case in China, different courts and arbitration committees have been making controversial rulings and verdicts on the enforcement of VAM cases. These controversial rulings and verdicts have caused constant disputes and arguments, which can be seen frequently online and on newspapers. This situation has been worsening since 2014. Since 2014, the amount of VAM cases has greatly increased; the categories of them have also rapidly expanded. Nowadays, VAM cases are faced with a difficult situation where there have not only been both civil and criminal disputes, but also extremely complicated facts and multiple legal relations. For the purpose of utilizing current cases to its full extent, I have studied current cases and their rulings and conducted an analysis on the classification of VAM cases.This Article consists of four chapters.The First Chapter introduces the concept of VAM by looking into its essential elements and by a comparison with Earn-out mechanism in the U.S.. This chapter also points out that VAM is a special investment tool in China.The Second Chapter conducts an analysis on the classification of VAMs by studying, analyzing and sorting VAM cases. For instance, according to the purpose of VAMs, they can be divided into Public Offering VAMs and Business Performance VAMs; according to methods of adjusting prices, they can be divided into Cash/Stock Reimbursement VAMs and Shares Repurchase VAMs. By analyzing and comparing different kinds of cases, this chapter summarizes the gist of court rulings for each kind of VAM disputes of the different categories in China.The Third Chapter focuses on the most controversial part of court rulings – the validity of VAM with target companies. This chapter explains how VAM conflicts and blends in with Chinese laws and regulations from the perspective of Corporate Law(i.e. Capital Maintenance Principle and Creditor Protection Principle), as well as the perspective of Contract Law(i.e. Validity of Contracts and Party Autonomy).Based on previous research results from the last three chapters, the Fourth Chapter conducts an analysis on the reasonableness of the emergence of VAM and its development from the perspective of Economics of Law. This chapter points out that VAM is an inevitable result because of the existence of asymmetric information and tremendous agency cost. It also fits the reasonable needs of investors in the current China’s investing environment. In addition, this chapter provides suggestions for the development of VAM in China, as well as its integration with Chinese laws and regulations.