Analysis On The Performance Mechanism In Respect Of Share Repurchase In VAM

Valuation Adjustment Mechanism(VAM),as a means of equity investment,becomes widely used in the field of private equity financing,which are deeply favored due to its advantages of giving consideration to the interests of both investor and the financing party.However,such new investment tool has also brought challenges to legislation and justice in China.With the increase in the number of disputes in relation to VAM,the rules of judicial adjudication need to be adjusted accordingly from time to time.At the beginning,the Supreme People’s Court established a rigid guideline that the VAM with shareholders is valid while the VAM with the financing company is invalid in Haifu Case.Then the Jiangsu Superior People’s Court in Huagong Case confirmed that the VAM between investor and financing company is valid.At last,the Minutes of Civil and Commercial Meetings officially stipulated the legal effect and the way to interpret the legal effect of VAM.The disputes on the legal effect of VAM comes to an end,while the actual performance hereof becomes the next problem waiting for settlement.Although the Minutes of Civil and Commercial Meetings provided the regulation of trial in respect of VAM that the court shall examine the behavior of financing company and investor in accordance with the article of capital withdrawal,capital reduction and distribution of profits as provided by Company Law,the actual performance of share repurchase in VAM remains hindered in practice,which has seriously impeded the investor’s right to require the financing party to fulfill the obligation of share repurchase.This paper intends to construct a viable performance mechanism of VAM,which will be divided into four parts.The first part is the introduction of actual situation of performance and major disputes in respect of share repurchase of VAM.The capital maintenance principle under Company Law regulates the causes of share repurchase,while the Minutes of Civil and Commercial Meetings maintains the logic that the capital reduction procedure shall be the precondition of share repurchase.Based on this,the judicial practice gradually transfers the focus of review to the implementation stage.The disputes arising therefrom mainly include the substantive standards and procedural requirements during the implementation,which becomes an important issue for consideration in the construction of performance mechanism.The second part focuses on the analysis of the reason behind such performance dilemma.Firstly,the legal attribute of share repurchase in VAM is doubtful,for that it is a debt paid in money but constitutes an inability to perform,which becomes a typical problem between Company Law and Contract Law.Secondly,the capital maintenance principle under Company Law restricts the performance of share repurchase,resulting in improper binding between capital reduction procedure and share repurchase.In judicial practice,the completion of the capital reduction procedure is generally regarded as the precondition of the share repurchase in relation to VAM.The third part is the comparison on the typical cases of VAM between China and the USA,which are Huagong Case and Thought Works.By comparing and analyzing such two cases,it is easily to find the deficiencies and defects in the system of share repurchase in VAM,which provides theoretical support to the next part.The last part is to construct the performance mechanism based on actual situation in China.From theoretical prospect,we shall improve the share repurchase in VAM under the capital maintenance principle and creditor protection principle in accordance with Company Law.From practical prospect,innovating the performance regulation is necessary,by taking the board of directors of the financing party to make the judgement by reference of professional advice from consultant as the procedural requirement,and not damaging the debt paying ability as the substantive standards.