Research On The Legal Issues Of Valuation Adjustment Mechanism In Private Equity Investment

Subject to the imperfection of the multi-level capital market in our country,acquiring financing has always been a difficult issue to the small and medium-sized enterprises As some enterprises turn their effort to overseas market this practice provides opportunities to the rapid development for more private equity investment institutions.Valuation Adjustment Mechanism(VAM),as an essential technical provision,has always been a controversial issue in the investment circle.in the field of private equity investment.While it can effectively solve the problem of information asymmetry between investor and borrower in the practice,therefore,it is widely used in the field of foreign private equity investment.Due to the fact that there is no specific laws and regulations to regulate VAM,it is hard to say whether VAM is legal or not.Such issue does not exert heated discussion until the first VAM Case,namely Haifu Case,occurred in Gansu Province.The trial has lasted for three years even though the supreme people's court identified that the VAM in this case partially effective.But as the three-level courts make different judgments,what sort of laws and regulations do we need to deal with the VAM issue becomes an inevitable question.To answer this question thoroughly,the discussions are divided into the following five parts:The first part of this article mainly includes the basic theory of VAM,among which the first section elaborates the concept of VAM,the second summarizes five characteristics of VAM,and the third mainly concerns the legal character of VAM.Through the comparison of VAM with other similar contracts,it seems that there are some similarities among VAM,aleatory contract,conditional contract and guarantee contract.But they are different in nature.Therefore,VAM should be classified into the innominate contract before VAM was incorporated into the system of contract law in China.In the second part of this paper,the generation and development of VAM are elaborated in details.In the first section,it is considered that VAM is the product of the vigorous development of private equity investment by displaying the background and the fundamental causes of VAM.And it is concluded that information asymmetry is the roots for the enterprises to adjust their value of assessment.In the second section,the current development of VAM is discussed through the introduction of the common terms and six kinds of operation modes of VAM on the international capital market.In the third part of this paper,the problems and disputes of the “first VAM Case” are thoroughly discussed.The first and two sections mainly introduces the facts of the case and the three decisions.In the third section,it is focused on the analysis of key points of the decisions,including four aspects: the compatibility between the Law of Sino-foreignJoint Ventures and VAM,whether VAM is the guarantee clause or not,whether VAM belongs to "called joint operation,in fact,borrowing",and whether GanSuShiHeng can be treated as the subjects of VAM.Based on the analysis of the case,the fourth section illustrates the legitimacy and rationality of VAM in practice.The fourth part of this paper is about the legislation,judicial practice and supervision of VAM in our country at present.This part discusses the present situation of VAM in the legal system of our country from three aspects,such as legislation,judicial practice and supervision.This part clarifies some problems in the legislation of our country,the difficulties to form a unified understanding in the judicial practice,the reasons why China Securities Regulatory Commission(CSRC)prohibit VAM existences in those companies going public,and the CSRC'S attitude changes from strictly prohibited to gradually soft.In the fifth part of this paper,the possible solutions of VAM are summarized.It is said that the legislative proposals should be more flexible in naming the innominate contract of VAM and improving the relevant provisions of the preferred shares and the provisions on the share transfer of the shares during the period of the share holding period.On judicial practice,cases are utilized to assist judicial offices to form a unified understanding,insisted on the principle of autonomy of will and adhere to the principle of "rather make the contract effective".In terms ofsupervision,a clear stand of VAM should be reestablished,and the information disclosure mechanism should be improved.