The Legal Analysis Of Valuation Adjustment In Private Equity Investment

At the beginning of the 21 st century, the valuation adjustment agreement got into China’s capital market with private equity investment. Now, it has been widely applied to the field of investment and financing businesses, with the relevant disputes continue to appear. However, paradoxically with the capital markets’ attitude to the terms of the valuation adjustment, the legislative and judicial practice hold unified,authoritative, and clear views on the treatment methods. Creating a legal and orderly environment plays a vital role for active capital market. The purpose of this article is from the theory and practice aspects of investment agreement and its core provisions,making a more comprehensive analysis, trying to clarify this important issue and to make targeted recommendations.Based on features of private equity investment, the article first leads to the appearance of the terms of the valuation adjustment. Due to asymmetric information of investment and financing parties, and the valuation of portfolio companies are difficult to determine, as investors intended to avoid the risk of investment failure,design and signed the terms of the valuation adjustment becomes a necessary methods to promote efficient investment and financing of the deal. The terms of the valuation adjustment can satisfy investors who seek to maximize the interests of capital and the demand of start-up or growth companies of funds. But as the risk of man-made creation, and in most cases, particularly in the absence of inherent risks, however, arepotential factors that may influence social stability. The terms of the valuation adjustment form the uncertainty for the ownership structure and capital maintenance of enterprises caused the inevitable problems. From the view of reducing uncertainty and social harm, the terms of the valuation adjustment need to be regulated.This article summarizes and retrieved hundreds of cases so far in the field of judicial practice relates to the terms of valuation adjustment, found the body of the terms of the valuation adjustment in capital markets are generally the investor and major shareholders, actual controllers of the financing enterprise. The terms of the valuation adjustment between the investor and the financing enterprise in judicial practice mostly are held invalid, but the invalid of the terms of valuation adjustment generally do not affect the overall agreement or that the effectiveness of investment behavior. However, the courts hold a big different view on the invalid provisions. In order to solve the different judicial practice, and systematically regulate the effect and performance of valuation adjustment agreement, this article discusses nature and effectiveness of the terms of valuation adjustment, and analyzed when terms of valuation adjustment invalid, the validity of the entire agreement and how the interests of both the investment and financing parties adjustment.In a study of existing reference documents, the author found that scholars for discussion of the nature of the valuation adjustment does not distinguish between different individual terms and the whole contract, and therefore the opinions can not be unified. This article describes the investment agreement is an aleatory contract, the terms of valuation adjustment is the dependent covenant, and that the terms of valuation adjustment set by investors and the financing enterprise is invalid because it violate the terms of corporate law, does not meet the principle of capital maintenance and damage the interests of creditors and minority shareholders, but it does not affect the overall effectiveness of other terms in the agreement. The negative external influences of the agreement worth more than the real intention of the investor. In addition, through the principle of autonomy and the principle of equity, depending on risk-benefit analysis, the terms of valuation adjustment set by investors and shareholders of the financing enterprise and actual controller should be legal andvalid.The performance of the contract is the aim of discussing the validity of it, and this article discusses several outstanding issues on The performance of valuation adjustment terms combining with real cases, including how to determine time of payment performance request, and the starting time of statute of limitation when both parties did not determine the performance time and the application of rights abusing principle. This article suggests that in drawing up the terms of adjustment agreement,the investors should avoid treating financing enterprises as the obligor, as well as fulfilling the procedural requirements of the company law or the Articles of Association concerning the creditor of the company and other shareholders’ benefits,agreed to a reasonable estimate value and as fully as possible set the rights and obligations of investment and financing of both parties, especially the allocation of rights and obligations on perform stage, in order to achieve the cooperation of both parties and eventually achieve the win-win goal.