The Legal Risk Prevention Of Valuation Adjustment Mechanism

In recent years, private enterprises, especially small and medium enterprises inthe growth process, collecting finance is facing the bottleneck in the developmentprocess.Because accessing to loans from banks is difficult, IPO listed procedures iscumbersome and audit requirements are too rigorous, so they have to focus on therisk investment institutions regarding private equity investment fund as therepresentative, and signed the VAM for many financing. Because of the significantdifference between domestic and foreign legal system, the VAM which commonlyused by the international market do not match the Chinese legal system, and manyagreement contents are unable to get the domestic legal system support and powerfulprotection.The case of Haifu company v. Shiheng company is called the first one oflitigation dispute of VAM. In this case, the second and final verdict judgment are notidentical, reflecting the legitimacy of VAM ambiguity in the current Chinese legalenvironment.The Supreme People’s Court of retrial decision, although to someextent, recognized the validity of the VAM which between the shareholders of thefinance companies, from the system level to the VAM legal status and legal effect, itcan not make a fundamental impact. In the domestic private equity financingoperation process, the VAM is still inevitable full of doubt and confusion. Thepurpose of this thesis is to analyze the current legal obstacle to the operation ofVAM, and to provide the practical application and reasonable suggestions on how toavoid the legal risk for both sides in the private equity financing.This paper is divided into four parts，and the first part is the summary of theVAM. At first, this thesis analyzes the root causes of VAM, and give a definition ofVAM by summarizing many scholars’ views. And then it analyzes the function andlegal nature of VAM, and investigate system value and contribution to the contractlaw. The second part is the VAM legal obstacle and risk in the operation. This thesisuses the theory of civil legal act to prove that VAM is a valid contract, and gives theconclusion that there is no macro legal barrier for the operation of VAM in China.And then, I list the core terms of VAM and relevant provisions of the law, in orderto analyze the specific legal obstacles and risks of the VAM operation. The last part is the risk prevention of VAM. On the basis of cognition of legal risk, the purpose ofthis part is to provide suggestions of risk provisions for investment and financing.