VAM Legal Issues In Domestic Private Equity

"Valuation Adjustment Mechanism"(VAM) is a financial instrument commonly used in domestic and international financial market, especially in private equity industry. As an imported phrase, VAM has been literally translated into Chinese. Since domestic financial market started late, it has great disparity with developed countries. It, however, asides difference between two financiers in assessing business value of Target Company, so the company’s agent can avoid moral hazard. In this way, domestic financial market inspires corporate management to insure trade security. Consequently, in a short time, it has become popular in investment community. Chinese law is not adequate enough to define and specify domestic financial market. In Haifu investment case, judgments are different in every period. The judgment difference shows that our legal community lacks of knowledge and has no unified view in domestic financial market. This impedes the health development of private equity industry, so the legal issues of VAM worth researching.In the first part, the author gives us an overview of VAM by introducing its concept, content, nature, characteristics, major categories and advantages; the second part presents the legal analysis and current situation of VAM and applicable analysis of VAM laws. To analyze relevant law issues, the author takes "Haifu investment case "as an example. The third part focuses on VAM problems in domestic private equity investment. Its legal definition is vague; its legitimacy is ambiguous; it might be unfair and unreasonable; it can harm the interests of company’s creditors; it may against the principle of two sides bearing the financing risk; it can harm the interests of minority shareholders. The fourth part is the core of this paper. In this part, the author proposes measures to legally settle VAM problems in private equity investment. In doing so, we need to develop model contracts to insure its legal status, improve VAM rules by providing compensation standards to insure that it’s fair and reasonable, standardize the subject of VAM by giving priority to creditors to insure their legitimate rights and interests, and set company valuation standard by improving multi-level capital markets to insure that two sides bear the financing risk together, giving minority shareholders the right to repurchase and strengthening their appeal right. All this effort will protect the interests of minority shareholders.