On Validity Of The Target Company's Repurchase Clause In The Context Of PE

The VAM(Valuation Adjustment Mechanism)is the most focused contract in the field of PE(Private Equity),which is universal and quickly becomes the darling of capital market From entry to exit in VAM,it usually includes the agreement of relationship between the right and the obligation of investment and financing parties,and share repurchase agreement is a common arrangement of Investor's exit path,but the choice of repurchase subject becomes the“white-hot”topic in practical and theoretical circles.After the retrial of“Hai Fu Case" in 2012 which drew a conclusion that VAM terms with the target company are invalid,the exit term of the target company as repurchase subject has also been identified legally invalid by court.Because of unclear nature of the Contract Law and immature legislative techniques of the Company Law,the target company's repurchase terms thus maintain controversial in terms of its effectiveness cognizance.Theorists discuss mainly on the disputes of“a joint venture is a loan”,“bottom profit clause”and breaking relevant forbidden provisions of the Company Law.The arbitration philosophy reflected by“Fu Hui Case”has a strong impact on judicial practice of our country.In 2012-2018 VAM cases,we can see gradual easing of the judicial attitude from the target company's repurchase clause is absolutely invalid to emphasize on respect for autonomy,we can spot the difficult traces of the judges5 exploration from minor changes in wording of the adjudications,and from negating the target company's repurchase warranty clause to recognizing its effectiveness also reflects the significant innovation in trial idea.According to normative analysis of the Contract Law,the target company's repurchase clause suffers from the questions that harming the public interest and violating peremptory norms.On the premise of the repurchase agreement which is not an aleatory contract,the disputes over VAM are private benefits of businessmen,which hardly touch the public interests.And the distinction between peremptory norms on validity and on management is implemented to judge the damage of the public interests through measurement of the value of the legal benefit.Under the concept of contract autonomy,judges should respect the consent of rational businessmen and distinguish the judgment of the contractual effect from the contractual performance,while obstacles to the contractual performance cannot be regarded as the negation of contractual effect.Under the background of China's controlling Company Law,the target company's repurchase clause is suspected to violate the relevant provisions of legal means that shareholders cannot withdraw capital contribution and acquire company's assets,which may cause abuse of rights from malicious shareholders and damage to the interests of the whole company,minor shareholders and creditors.However,through coordination of accounting recognition and legal determination,the legal effect of withdrawing capital contribution can be avoided.Following proper procedure of capital reduction and applying rules for the liquidation of shareholders' claims after inferiority can also minimize the infringement of the interests of other related subj ects.Under the principle of capital maintenance,the binding standard of“legal available funds for distribution”provides a legalized path for the target company's repurchase.As a tool to govern the capital market,the Company Law,while effectively regulating the market through predictable and universally applicable rules,should also be interpreted flexibly to meet development needs of the society.