On The Legal Validity Of Valuation Adjustment Mechanism

As the common method of corporation financing, PE plays an important role in international finance market. To decrease risk of investment and the imbalance between the corporation partners, VAM stand out as the most efficient method in PE.VAM(valuation adjustment mechanism) is defined as the system for the corporation partners to continuously adjust the firm valuation for achievement of the target value as set by their original agreement. It was very popular in oversea venture capital markets. Until 2003, the first VAM appeared in China when three foreign investment firms including Morgan Stanley injected capital to Mengniu Diary Group. However,VAM has not been commonly used in China. In 2009, the intermediate People’s court of Lanzhou City, Gansu Province heard the first VAM case in China, the Suzhou Haifu investment Case. This case has been through three trials, Because of the differences in the three trials, legal validity of VAM attracted the most dispute.VAM commonly existed in PE. Therefore, the legal status and effectiveness of VAM directly affect implementation of rights and responsibilities for the corporation partners, which is really in an emergency. In this research, the meaning,characteristics, and legal aspects of VAM were firstly analyzed to determine the legal status of VAM, then the legal nature of VAM was investigated, and at last VAM was determined as option contract which belongs to Aleatory contract. Through analysis and evaluation of the first VAM case “the Suzhou Haifu investment case” and the new VAM case “the Shanghai Ruifeng investment case”, attitudes of judicial organs and scholars to validity of VAM were summarized. Finally, different circumstances in practice of VAM were categorized and listed, then by combing the attitudes of the judicial organs and scholars to the validity of VAM, the identification criteria for evaluation of the legal validity of VAM were concluded, which might provide some guidance in practice of judgment.In this study, it was found that the controversy on legal validity of VAM in judicial and academic circles was mainly from the difference in the signing subjects.The judicial circles considered that VAM between the investor and the shareholders of the target company is valid, but that between the investor and the target company is ineffective. However, although the scholars admitted the validity of VAM between the investor and the shareholders of the target company, they think that the VAM between the investor and the target company can not be considered as absolutely invalid. In this study, the researcher considered that as long as the partners clearly addressed their opinions before signing the contract, the VAM does not harm the public interests and is legal, VAM between the investor and shareholders of the target company should be admitted as valid. However, if the VAM is between the investor and the target company, in addition to shareholders not to distribute profits to the investor to pay cash compensation effective, all other circumstances should be considered as invalid.