Study On The Performance Of The Rules Of Valuation Adjustment Mechanism In Private Equity Investment

The Valuation Adjustment Mechanism(VAM)signed by the investor(s)and the target company in the process of private equity investment is a unique design to solve the valuation differences and information asymmetry between the investors and the financing parties of the target company.Our country has witnessed legal evolution in terms of the regulation of VAM."Haifu case" could be deemed as the prudent treatment stage,during which time most of the courts did not recognize the effectiveness of the agreement.The "Huagong case" represented the exploring attempt stage,in which the Jiangsu provincial high court accepted the effectiveness of the agreement and concerned about the actual performance of the agreement.On November 8,2019,the Supreme People’s Court issued the Minutes of the National Courts’ Civil and Commercial Trial Work Conference(hereinafter referred to as the “Conference Minutes”),which focused on the adjudicative logic of the claims of the investors who bet against the target company and the rules for the performance of the agreement.First,it defines the concept of the VAM and recognizes the contractual validity of the VAM in practice.Secondly,it distinguishes the validity of the VAM from the actual performance of the VAM,so that the performance of the contract is independent of the identification of the validity of the contract.Although the introduction of the “Conference Minutes” unified the judging criteria for the performance of VAM cases involving share repurchase and cash compensation,the “Conference Minutes” is not a unified legal regulation on VAM,and there is still a lack of special laws to regulate VAM in China.There are various forms of contracts or contract clauses in VAM in practice.However,the “Conference Minutes”only establishes the judgment rules for contract performance for the above two types of VAM,and does not provide further contract performance rules for other types of VAM.As for the performance standards of the above two types of VAM,there is no clear rule on the procedure of capital reduction or the definition of the range of distributable profits.At the same time,the contract performance judgment rules established in the “Conference Minutes” also reflect the inadequacy of the protection of investors’ interests.Both the cash compensation and share repurchase agreements are subject to the mandatory provisions of the principle of capital maintenance in the Company Law,so there are obstacles to the performance of the contracts.However,in the case of private equity investment,the funds signed and invested by private equity investment in the target company,from the perspective of legal nature,have both the nature of equity investment and the nature of borrowing.If the VAM is triggered,therefore,when the target company to compensate the investor,if the total amount paid by the investors is less than the loan part of both sides decides later,we can see this part of the investment funds as investment direction of the target company to repay the interest-free debt without the restraint of capital maintains principle,also have nothing to do with the flight of capital contribution of shareholders.This paper,using literature review,case study and other research methods to analysis judicial practice related to VAM in our country.For the research of the performance of the rules of VAM,this paper uses the methods of literature analysis,case analysis,to sorting and analyzing the cases related to the VAM in the judicial practice in our country,to comb the problems of VAM agreement existing in the performance of the rules in the judicial practice,and analyze the reasons,finally reconstruct the rules for the implementation of the VAM agreement.It is found that there are still some problems in the judicial practice,such as the ambiguity in the application of the principle of capital maintenance by the court,the difficulty in reducing the investment due to the small shareholding ratio of the investors,the narrow scope of the source of funds for the performance of the VAM,and the wrong identification of the validity of the provision of corporate guarantee liability,etc.By perfecting the system of category shares in our country,we can effectively protect the exit mechanism of investors.The nature of cash compensation obligation fulfilled by the target company to investors is defined as the common debt of the company and the scope of compensation fund sources is broadened.In the absence of shareholder meeting resolutions,the correct identification of the validity of the guarantee contract are effective ways to solve the above-mentioned problems in judicial practice.In terms of legislation,special judicial interpretations related to the VAM agreements should be introduced to incorporate typical cases of the VAM agreements in the past to guide the trial practice better in the future.At the same time,this paper puts forward specific suggestions to reconstruct the performance rules of the VAM agreement based on share repurchase and cash compensation in the “Conference Minutes”.For the share repurchase VAM agreement,the procedure of shareholders’ meeting resolution is deemed to have completed the capital reduction procedure.In the cash compensation VAM agreement,when the target company compensates the investors,the bottom line of the compensation amount shall be no more than the total investment minus the net asset value per share recognized at the time of investment and the number of shares acquired.