Research On Legal Issues Of Valuation Adjustment Mechanism In Private Equity Investment

Valuation adjustment mechanism（VAM）is a widely used financing tool for private equity investment in China.By signing a VAM agreement with the target company and its shareholders,the investment institution agrees on the gambling terms such as cash compensation and share repurchase,so as to ensure that it can withdraw in time during the investment process and obtain the proceeds of the capital increase.In previous judicial practices,the effectiveness of valuation adjustment mechanism has always been the focus.On November 14^th,2019,The Minutes of the National Courts’Civil and Commercial Trial Work Conference（Hereinafter referred to as The Minutes）responded to the effectiveness of valuation adjustment mechanism.It stipulates that valuation adjustment mechanism is effective when there is no legal invalid cause.Though the problem of effectiveness is solved,it still faces many legal problems.For instance,the logical conflict between the share repurchase and the procedure of capital reduction would lead to failed actual performance of valuation adjustment mechanism.What’s more,when the gambling is failed,the funding restriction on share repurchases of the target company is ambiguous.Therefore,this study will focus on the unresolved issues in The Minutes.By analyzing the typical cases of the valuation adjustment mechanism of private equity investment,the major legal problems it faces will be concluded.Based on this,by drawing lessons from extraterritorial experiences and combining with the existing legal system and judicial practice in China,feasible solutions to the legal dilemmas faced by valuation adjustment mechanism will be provided.This study is divided into four parts.The first part is an overview of the valuation adjustment mechanism for private equity investment.In this part,first,the normative connotation of valuation adjustment mechanism of private equity investment will be categorized and defined.Its causes will be discussed from the perspectives of financing and valuation of multiple enterprises,transaction efficiency,investment risk control and market differences.By analyzing the constitution of the legal relations of valuation adjustment mechanism of private equity investment,the necessity of legal regulation for valuation adjustment mechanism of private equity investment can be obtained.The second part is the case analysis of the valuation adjustment mechanism of private equity investment.In this part,three typical cases in judicial practice,namely the Haifu Case,the Hanlin Case and the Huagong Case,are selected as the research samples.By analyzing the judicial rules in the three cases,the legal problems involved will be concluded,which lays the foundation for the analysis of legal dilemmas in the third part of this study.The third part discusses the legal dilemma of the valuation adjustment mechanism of private equity investment.Based on the problems raised in the previous part,by analyzing the three cases,the regulatory defects in the cash-compensated valuation adjustment mechanism will be discussed.Despite its effectiveness,valuation adjustment mechanism would encounter with the problems such as the impossibility of performance,the lack of funding restriction on share repurchases and the ambiguity of capital surplus used in compensation.The fourth part provides the solutions to the legal dilemmas in the valuation adjustment mechanism of private equity investment.Suggestions will be proposed,including:perfecting and standardizing the preferred stock system which“incorporates”the valuation adjustment mechanism;establishing the generalized concept of“allocation”and funding restriction on share repurchases;formulating standard risk investment contracts by the regulator and transforming the administration of justice from formal examination to substantive intervention.