Research On Valuation Adjustment Mechanism In Private Equity Investment

In recent years, start-up private enterprises are dependent on private equityfinancing. Because of the information asymmetry between investors and financers, thedivergence of the opinion on the valuation of the project company between the bothparties always exists. In order to solve this problem, VAM (valuation adjustmentmechanism) was invented.The relevant legal system governing VAM in China is not perfect yet for theVAM clauses are “imported goods” from common law system. It’s noteworthy thatthe Haifu Case (the first case concerning VAM which went to trial) ends its trail in theend of year2012. And, the VAM clauses were ruled invalid during the second trialwhich draws the attentions from financial community and legal professions.Nowadays, private equity investment plays quite an vital role among the capitalmarket in China. And as an important part of private equity investment contract, thevalidity and legality of VAM clauses are meaningful. Therefore, this paper is trying toanswer the following questions: What kind of institutional arrangement the VAM is?What is the status of VAM’s legality and validity under the laws and regulations ofChina? How to balance the interests of contracting parties and other interested party?Except the preamble, this thesis consists of five chapters: Chapter one includes a general introduction of VAM and its characteristics andtypes, and concludes the practical application by the method of empirical analysis.Chapter two analyzes and summarizes the current status of the validity andlegality of VAM clauses through the recent case (Haifu Case) in judicial practice andregulatory attitude of CSRC.Chapter three demonstrates the economic justifiability. It shows the preference ofprivate equity financing when start up enterprises choosing their ways of financing.Besides, it summarizes the valuation divergence and agency problems brought byinformation asymmetry between the parties and conclude that the VAM does have itsfunction of transactions facilitation, risks locking, management encouraging thereforelower the transaction cost.Chapter four demonstrates the judging standards of avoidance of contract fromthe perspective of contract law. And discussed the preferred stock system underChinese law system and summarizes the risk of breaking the jus cogens whenapplying VAM.Chapter five concludes the nature of VAM, and come up with the idea that VAMshall be regulated through establishing certain regulations governing aleatory contract.