Legal Analysis About Valuation Adjustment Mechanism

Valuation adjustment mechanism(VEM) is a common institutional arrangement in foreign capital markets. It is introduced into China while foreign investors enter Chinese capital markets. It developed rapidly in Chinese capital markets in the past 20 years. Both the international investment banks and the local equity investment institutions like to choose it.The vast majority of venture capital institutions' equity investments are using VEM.Controversies also increase gradually. Different scholars take different views on the nature of VEM and whether it has justification and legally binding.In this paper, I will analyze the VEM from the following four perspectives.The first chapter is a general overview of the VEM. In this chapter, I introduce the meaning of VEM, and analyze its basic operation mode and effect.The second chapter is legal analysis of VEM. In this chapter, I analyzed the legal relationship of the VEM from the perspective of the legal relationship elements. I analyze the legal nature of the VEM by contrast with aleatory contracts, conditional contracts and option contracts. Meanwhile, I prove the justification of VEM by analyzing its effective elements,fair, risk allocation and value.The third chapter is the substantive analysis of the dispute resolution and the SFC's attitudes to VEM. I analyze the Dispute Settlement Body's attitudes to VAM by learning court cases and arbitration cases. And I analyze SFC's attitudes to VEM by learning IPO cases.The fourth chapter focuses on how to reduce risks when a company signs a VEM. I advise to reduce risks from the perspective of law. These advices are designing the terms of VEM, setting performance standards, retaining control, setting limiting terms, selecting development strategies, enhancing investigation and choosing dispute settlement mechanism.