An Analysis On Dispute Between Guoxin Company And Jiaheng Company Over Capital Increase

Valuation Adjustment Mechanism,as one of important investment vehicles in private equity investment,has been widely utilized in the investment market in China.However,its legality has not been unanimously approved.In this case,the borrower?Xinxiang Company and shareholders Yinghe Li and others?and two investors?Guoxin Company and Jiaheng Company?trilaterally signed Agreement of Capital Increase and Share Enlargement and Supplemental Agreement,which promise that Xinxiang Company issues additional shares and two investors purchase them.Also,Yinghe Li and other shareholders promise that the annual profit in Xinxiang Company will reach a certain amount in the future or the company will be listed directly or indirectly in China or abroad before September 31^st,2014.If they cannot meet these requirements,they are supposed to compensate two investors in cash based on their shareholding proportion.The investors are entitled to require Yinghe Li to repurchase all shares held by them.The repurchase price should be the higher between the price that ensures the annual yield is not lower than 15%and the price that is derived from its net share capital.The fact is that Xinxiang Company did not meet its promised profit,so Guoxin Company and Jiaheng Company claimed that Xinxiang Company should pay for the share repurchase in accordance with the agreements.After two trials on this case,Hunan Provincial Higher People's Court affirmed the verdict of the first instance that Yinghe Li should pay for the share repurchase in accordance with the agreements.The controversies in this case mainly focus on the following three aspects—whether this VAM is legal and valid,whether Xinxiang Company should repurchase the shares based on shareholding proportion,and whether joint trial is illegal procedurally.In response to these three controversies,Hunan Provincial Higher People's Court claims as following.Firstly,the three parties that signed the contracts are proper and the contents are legal and true.Also,those commitments to investors made by Yinghe Li did not impair other shareholders and creditors.Therefore,the VAM in this case is legal and valid.Secondly,these two investors are entitled to require Xinxiang Company's shareholders Yinghe Li and others to repurchase all shares held by them.The repurchase price should ensure the annual yield to be 15%.Since there is no mention about the shareholding proportion,Xinxiang Company,based on the principle of justice,is supposed to pay for share repurchase in accordance with its own shareholders'proportion.Thirdly,the counterparts in this case are the same legal relationships and the claims are based on the same legal facts.The object of action is also the same category without any objection in the first instance.That means joint trial for this case is deemed to be approved and the procedure of first instance is legal.