Legal Risk Study On Valuation Adjustment Mechanism

In the last few years,with the speed progress of capital market in China,Private Equity springs up and Valuation Adjustment Mechanism(VAM)has been widely applied to SMEs financing of China.However,our law is not clear on the legality of the VAM.Since 2012,when the Supreme People's Court made its final ruling after first instance and second instance,the case of Haifu Company v.Shiheng Company which is called the first one of litigation dispute of VAM,finally got an effective judgment.These controversial rulings and verdicts have caused constant disputes and arguments.In the domestic private equity financing operation process,the VAM is still inevitable full of doubt and confusion.The first part is to ask questions.It discusses the difference between VAM and ratchet provision,and the development of VAM in China.The second part gives a definition of VAM and the functional value.It analyzes the conception,characteristic and causes of VAM.It discusses the value of VAM.The third part is about an analysis on the legal risk of VAM.Firstly,it discusses the legal risk to venture capital firms,the legal risk to the target companies and the legal risk to the majority shareholders.Secondly,it discusses the conflict on VAM and the Company Law and the Securities Law.The forth part is about providing risk prevention suggestions for the development of VAM in China.Firstly,at the macro level,we should improve relevant laws and regulations and draw up the model legal documents for venture capital investments and comply with the existing legal provisions.Secondly,at the micro level,we should write the rational agreement exemption case and resolution of contract in the VAM and set termination clause and exclusion clause in the VAM and set a reasonable target for VAM.