King & Wood Mallesons

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The use of the VAM in an equity investment scheme

By You Yang, Lin Kaiyi and Zhao Zhihan

The Haifu Case caused the private equity industry consternation until a clarifying judgment from the Supreme People’s Court of China (the Supreme Court) in December 2012. The Supreme Court overruled the second instance court’s opinion that PE investments are ‘joint risk sharing’ and investors are not entitled to a guaranteed profit without regard to the performance of the business.

The Supreme Court recognised the legitimacy of the PE investment model, fully considered all the various interests of the project company, the creditors of the project company and the shareholders of the project company, distinguished VAM (Valuation Adjustment Mechanism) agreements between the project company and the shareholders from VAM agreements between the company shareholders, and affirmed the validity of the latter with certain prerequisites.

The Haifu Case has significant implications not only for PE firms, but also for the investment industry, which may find guidance from it when designing equity investment structures…

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