A Study On The Legal Effect Of Valuation Adjustment Mechanism

Valuation Adjustment Mechanism(VAM) is an untypical contract, which created by the commercial subject according to the commercial habits. VAM has played an important role in the international investment activities. In recent years, the cases are involved in VAM have also emerged in China, which attracted much attention. Under this circumstance, we must focus on the legal nature of VAM, and it is also necessary to analyze its legal validity.Besides preface, this article text is divided into five parts:The first part: the judicial judgments are different concerned with the cases of VAM and the causes lead to this phenomenon. Through these cases, author concludes that the different courts hold different views on the legal validity and the legal liability of VAM. These are three reasons lead to the wrong cognition of legal effect of VAM, include lacks the law to be clear about the VAM in our country; confusion of legal nature of VAM, the theory “aleatory contract”, “conditional contract”, “options” are difficult to justify itself; VAM is also implemented in disguised form.The second part introduces the features and types of VAM, as well as the necessity of VAM should be regarded as a new typical contract.VAM is an agreement that investors adjust its equity investment in accordance with business performance of the financier. Its content includes performance target and methods of adjustment. The asymmetry between the investment of the investor and its equity, and the volatility of the equity of the investor are two key features of VAM. The most types of VAM contain cash compensation, equity adjustment, equity repurchases, etc. VAM is an untypical contract. Definition of characteristics and types cannot resolve the jurisdiction on disputes about VAM. Based on the situation that expansions of application of VAM, numerous potential legal disputes, lacks the law to be clear about VAM, and is own particularity. It is necessary that the VAM should be regarded as a new typical contract.The third part introduces the consideration factors of the VAM effectiveness. Firstly, author insists that VAM is an untypical contract, which created by the commercial subject, based on commercial customs. The judicial adjudication should respect the commercial custom. Secondly, author considers that validity judgment of VAM must refer to the value factors such as freedom, efficiency and transaction security. Thirdly, VAM cannot damage interests of the company and its creditors.The fourth part:Author insists validity of VAM should not be denied indiscreetly. The classifying analyses of methods of adjustment are the key to determine VAM effectiveness.The fifth part: analyzes the necessity and the methods of conversion of invalid VAM. Conversion methods of invalid VAM are beneficial to protect the interests of innocent party, reflects the idea of private autonomy and contract efficiency. Although, our nations haven't establish rules of conversion methods of invalid contract, author put forwards the conversion methods of valid or invalid VAM based on technology of interpretation conversion.