Analysis Of The Validity And Performance Of Valuation Adjustment Mechanism

Valuation Adjustment Mechanism(VAM)is a kind of contract which is widely employed in Private Equity Investment(PE)to resolve the valuation dilemma and asymmetric information problem by compensation or purchase of stocks and shares terms.There is no doubt that VAM is valid where the parties involved is the investor and the shareholders of the company.But when the company is involved,It is much more complicated to decide if VAM is valid and can be performed.Since 2012,established by "Haifa case",People’s Courts have been declaring such VAM as invalid.But ever since,many scholars insist that VAM between the investor and the company is concluded in accordance with genuine and free will.The legal principle of contract has jurisdiction over such VAM that it is inappropriate to deny its validity.Besides,many arbitration institutions are inclined to approve of the validity of VAM between the investor and the company.2016,in "Hanlin case" Supreme People’s Court Confirmed the validity of the conduct in which the company undertook joint liability guarantee when the shareholders were obliged to purchase stocks and shares of the investor.2019,Supreme People’s Court published Minutes of the national civil and commercial trial Conference(the Minutes),in which for the first time Supreme People’s Court approved of the validity of VAM between the investor and the company.On that condition,Supreme People’s Court stipulated that People’s Court must investigate if the terns of VAM comply with the compulsory stipulations of the Company Law,such as "After the establishment of a company,no shareholder may illegally take away the registered capital" or "A company shall not purchase its own shares except under particular circumstances",to decide if VAM between the investor and the company can be actually performed.Therefore,VAM between the investor and the company is valid foe sure.But with regard to performance,the compulsory stipulations of the Company Law must be taken into account.This article consist of five chapters:ChapterⅠ:introduces the meaning,terms and implication of VAM;Chapter Ⅱ discuss the legal character of VAM;Chapter Ⅲintroduces the validity status of VAM in different time,mostly with reference to judgement and logic behind;Chapter Ⅳ introduces the performance of VAM in the light of the compulsory stipulations of the Company Law;Chapter V introduces the risks in performance of VAM between the investor and the company.