Validity On The Target Companies As The Subject Of Valuation Adjustment Mechanism Agreement

Valuation Adjustment Mechanism(VAM),is an agreement reached by the relevant parties of the private equity investment concerning the valuation adjustment of the target company.It is generally reached between the investor and the target company,or between the investor and the target company’s shareholders.VAM is an important mechanism to balance the interests of all parties involved in investment agreement.It can solve the financial difficulties of the target company,constrain and inspire the target company,protect the interests of the investor,and lower the investment risk.This thesis assumes that the validity of the VAM between the investor and the target company’s shareholders has reached a consensus among Chinese academics and judicial practice,and it is believed to be effective.It also recognizes that on the same issue,decisions of the courts were basically negative,though the arbitration tribunals have demonstrated more flexibility.This paper tries to analyze the necessity of the target company as the subject of the VAM and explore its value,points out the reason why it’s controversial on the validity of the agreement under the existing legislation in China.This paper focuses on elaboration of the target company’s legitimacy as the VAM entity.This type of agreement meets the requirements for the establishment of the contract.It neither breaches the principle of corporate capital,nor necessarily harm the interests of the company and its creditors.Also,it does not breach the principle of risk-sharing.As the subject of the VAM agreement,there is no legal obstacles for the target company,whether from the perspective of contractual entity or the coherence of rights and obligations.The target company should not be excluded from the subject of the agreement,and we should broadly recognize the VAM validity between the investors and target companies.Finally,this paper explores the idea of introducing preferred stock system from the Corporation Law,and suggests the formulation of a model of private equity investment contract,and proposes to the transaction parties a reasonable set of VAM terms.