Legal Risks Prevention Against Valuation Adjustment Mechanism

In recent years,with the promotion of economic globalization and the rapid development of our market economy,a large number of startup enterprises have emerged.The demand for capital has increased dramatically,and the investment market is vast.In this context,a large number of private equity investment entered China,and its core content"valuation adjustment mechanism" received mixed reaction due to the occurrence of some disputes.As an investment tool imported from the western capital market,the valuation adjustment mechanism has its advantages on the one hand,such as controlling risks and financing quickly in the process of investment and financing,but on the other hand,it faces a lot of legal impediments,or even be overruled due to the differences between our legal system and western countries,as well as the lack of relevant laws and regulations.When the valuation adjustment mechanism is used,the disputes of breach of contract are high,and the cases of valuation adjustment mechanism accepted by all levels courts and arbitration institutions in our country have been common.Although our country is a country with written laws,the judicial precedent is still of great significance to guide the legal and effective operation of the valuation adjustment mechanism.The purpose of this paper is to extract relevant legal regulations and judicial rules from typical cases of present judicial decision,and then provide countermeasures and suggestions on how to prevent legal risks when enterprises apply valuation adjustment mechanism.In addition to the introduction,the content of this article is as follows.Firstly,this paper introduces practical application of the valuation adjustment mechanism in China.The investment and financing parties jointly agree on a gambling target and the realization of the target determines the initiation of the valuation adjustment mechanism and the commitment of both parties.The application of the valuation adjustment mechanism is beneficial to reduce the investment risk and the principal-agent cost caused by the information asymmetry.And it can motivate the management of the target enterprise.However,due to the incomplete adaptation of our legal system,the gambling disputes gradually increased.Combining with the typical cases of dispute in recent years of our country,we can analyze current situation of judicial practice,extract relevant legal regulations and judicial rules from typical cases of present judicial decision,and we analyze the legal barriers to the valuation adjustment mechanism.Then,from the perspective of the investment and financing parties,the legal risks of using the valuation adjustment mechanism in China are analyzed.The biggest risk is undoubtedly the risk of being overruled.In addition,investors may also face the risks of being unable to obtain agreed cash compensation,limitation of share repurchase,restriction of the exercise of preferred stock rights,and so on.For the financing enterprises,they may face the risks of losing the actual control rights of the enterprises and the restriction of being listed enterprises.On the basis of the legal risk analysis,the paper puts forward the corresponding countermeasures,including both investment and financing risk prevention countermeasures,such as selection of offshore companies,as well as their respective risk prevention countermeasures,such as prudently choosing players and disputes settlement mechanism,set a reasonable goal,etc.