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Valuation Adjustment Mechanism Agreement

Using empirical evidence, this paper concludes that VAMs serve as contractual protection for investors. A VAM is put in place to fill the valuation gap by reducing the risk of overvaluation for investors and incentivizing entrepreneurs to provide services. An alternative and popular mechanism used in the United States is that of convertible preferred shares. However, Chinese companies, including limited liability companies and public limited companies, may not issue convertible preferred shares under the Companies Law of the People`s Republic of China (`the company law of the PRC`). My paper suggests that the prevalence of VAMs in China may be due to the following: (1) a serious asymmetry of information in the less informed Chinese market, (2) the absence of convertible preferential shares as an investment mechanism and other excessive legal restrictions on investment instruments and contractual risk financing mechanisms, and (3) insufficient legal protection for investors under chin legislation. Oise. The main issue in this case was the validity of the VAM share buyback agreement concluded by the shareholders. Both the Hubei Higher People`s Court and the Supreme People`s Court upheld the validity of the VAM share buyback agreement in this case. In addition, the Supreme People`s Court upheld the validity of this VAM agreement on share buybacks on the grounds that, first, the agreement is based on the true intention of all parties; second, the provisions of the redemption provision do not violate mandatory provisions of the law or administrative provisions; Third, the process of signing the terms of the VAM buyout agreement was not patently unfair. Compared to the courts, arbitration institutions focus more on protecting party autonomy, so their decisions are more flexible than these.

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