H.Brothers’ Risk Identification And Response Research On Its Valuation Adjustment Mechanism

With the continuous development of China’s market economy,the number of mergers and acquisitions continues to rise,information asymmetry,the lack of minority shareholders’ interests protection mechanisms,etc.,there may be risks such as high-value mergers and acquisitions,and Valuation adjustment mechanism(VAM)can alleviate the above risks.However,the VAM itself is a principal-agent act.China’s current laws and regulations do not make mandatory requirements for its signing,and it has autonomy in the specific arrangement of the VAM filling measures,and lacks express provisions for recognizing the validity of the VAM.A variety of factors can lead to a greater risk to the VAM.This paper uses H.Brothers’ two VAMs to analyze the possible risk points of signing the VAM in the M&A activities,and proposes countermeasures based on the perspective of small and medium shareholders,hoping to help identify the risk of VAM and protect the interests of minority shareholders..By understanding the common ground of H.Brothers’ signing of the VAM,this paper analyzes the content and implementation of the VAM between Zhejiang Changsheng and Meila Media,and identifies the three stages of H.Brothers’ VAM before,during and after the M&A decision.The risks brought to the small and medium shareholders of H.Brothers,include: management easing pre-investigation risk due to difficulties in human resources investigation;valuation manipulation risk and distortion pricing risk due to excessive duration estimation,risk to the VAM’s standard and profit manipulation risk;Legal control risks and social public opinion risks.Finally,it is proposed that small and medium shareholders of H.Brothers should use various channels to participate in decision-making and continue to supervise the disclosure of the VAM,and focus on the characteristics of lowrisk clauses.Low-risk terms include: longer betting periods,flexible criteria,consideration of the actual value and availability of compensation methods,and appropriate introduction of other terms that affect performance.The marginal contributions of this paper are as follows.First,there are few case studies on VAM in M&A activities in China.The research on VAM mostly focuses on legal perspectives or private placements and VCs.This paper focuses on M&A activities to enrich the research system.Secondly,this paper is based on the perspective of many neglected small and medium-sized shareholders,and proposes risk response measures from a more detailed setting of the terms of the VAM.