What is a VAM clause and can I agree to a VAM clause?

A VAM clause is a VAM clause in which the future operating performance of the invested enterprise is the subject of the VAM, and the entrepreneur and the investor transfer a part of the equity or return a part of the investment money to each other as a bet to motivate the management of the enterprise to work hard and achieve the adjustment target of the enterprise. In short, the investor requires the company to make a commitment that if the performance requirements are not met, the company or shareholders will return part or all of the investment funds, or the shareholders of the company will transfer part of the equity to the capital.

The VAM clause is a clause that protects the interests of the employer, and when we are the investor, we can discuss with the other party how to enter into the VAM clause; However, when we are the investee, we should try to avoid signing VAM clauses, otherwise the pressure on the original shareholders will be too great. Even if you have to sign a VAM clause, it is recommended to agree that the company will make capital or equity compensation, and the shareholders will not bear the above liabilities.

The performance VAM agreement is both an angel and a devil for the founder of the company. VAM is actually a relatively common financing method, that is, the two parties agree on a condition, and the financier exercises a series of rights according to the contract to compensate for the loss of undervaluation of the enterprise in the early stage; On the contrary, if the conditions of the agreement are not ripe, the investor exercises a series of rights in accordance with the contract to make up for the loss of overvaluation of the enterprise.

It satisfies a large number of enterprises, especially small and medium-sized enterprises, to solve the problem of capital shortage, in order to achieve the purpose of low-cost financing and rapid expansion, and help start-ups to quickly get on the right track of development. In some cases, it is not necessary to transfer the controlling stake of the enterprise, as long as the VAM conditions are met within the scope specified in the agreement, the cost of capital utilization is relatively low.

At the same time, VAM can easily lead the management to take short-term measures, over-rely on VAM agreements, and pursue irrational expansion of scale. To a certain extent, undermining the company's internal governance, so that the enterprise emphasizes performance over governance, development over standardization, is also harmful to the company's development in the long run.

A VAM is an agreement between the investor and the financier on uncertain future circumstances. When the agreed conditions arise, the financier may exercise an agreed right; If the agreed conditions do not appear, the investor can exercise an agreed right.

1. VAM was originally translated as "VAM", or because it is very vivid in line with state-owned culture, it has been used to this day. However, its literal translation means "valuation adjustment mechanism", which better reflects its essential meaning, so the issues involved in the VAM agreements we hear daily have nothing to do with gambling.

It's actually a form of option. Through the design of the clauses, the VAM can effectively protect the interests of investors. VAM agreements have been applied in foreign investment banks' investments in domestic enterprises.

2. A VAM is an agreement between the acquirer (including the investor) and the transferor (including the financier) on uncertain future situations when they reach an M&A (or financing) agreement. If the agreed conditions arise, the investor may exercise a right; If the agreed conditions do not arise, the financier exercises a right. Therefore, a VAM is actually a form of option.

3. The VAM is the core component of the investment agreement, and is the calculation method and guarantee mechanism for the investor to measure the value of the enterprise. VAMs arise from the uncertainty of the future profitability of the enterprise, in order to achieve as reasonable and fair investment transactions as possible. It is not only the umbrella for the interests of investors, but also plays a certain incentive role for financiers.

4. Therefore, VAM is actually a financial tool, an adjustment to the valuation of an enterprise, and a value appraisal method with additional conditions. Through the design of the clauses, VAM agreements can effectively protect the interests of investors, but due to various reasons, VAMs have not yet become a system in China's capital market, and they have not been frequently adopted. However, in the investment of international companies in domestic enterprises, VAM agreements have been extensive.

Therefore, the legality of VAM agreements is still up for debate.

Legal basis

Article 502 of the Civil Code of the People's Republic of China: A contract established in accordance with law shall take effect upon its establishment, unless otherwise provided by law or otherwise agreed by the parties.

In accordance with the provisions of laws and administrative regulations, if the contract shall go through formalities such as approval, follow those provisions. If the failure to go through formalities such as approval affects the effectiveness of the contract, it does not affect the validity of the provisions of the contract on the performance of obligations such as reporting for approval and the validity of the relevant clauses. If a party who should go through formalities such as applying for approval fails to perform its obligations, the other party may request that it bear responsibility for violating such obligations.

Where, in accordance with the provisions of laws and administrative regulations, the modification, transfer, or termination of a contract shall go through formalities such as approval, the provisions of the preceding paragraph shall apply.

Legal analysis: A VAM, also known as a valuation adjustment agreement, refers to an agreement designed by the investor and the financier to adjust the valuation of the future target company such as equity repurchase and monetary compensation in order to solve the uncertainty of the future development of the target company, information asymmetry and cost of the target company between the two parties to the transaction when they reach an equity financing agreement.

Legal basis: Minutes of the National Work Conference on Civil and Commercial Trial of Courts Article 2 In practice, the so-called "VAM agreement", also known as the valuation adjustment agreement, refers to an agreement designed by the investor and the financier to resolve the uncertainty of the future development of the target company, information asymmetry and cost of the target company, including equity repurchase and monetary compensation, when the investment and demolition party and the financier reach an equity financing agreement. From the perspective of the entities that enter into VAM agreements, there are forms of VAM between the investor and the shareholders or actual controllers of the target company, VAM between the investor and the target company, and VAM between the investor and the shareholders and the target company.

When a people's court hears a VAM dispute, it shall apply not only the relevant provisions of the Contract Law, but also the relevant provisions of the Company Law. It is necessary not only to adhere to the principle of encouraging investors to invest in real enterprises, especially scientific and technological innovation enterprises, so as to alleviate the financing difficulties of enterprises to a certain extent, but also to implement the principle of capital maintenance and the principle of protecting the legitimate rights and interests of creditors, and balance the interests of investors, company creditors and companies in accordance with the law. There is no dispute in practice that a VAM entered into between an investor and a shareholder or actual controller of the target company is found to be valid and supported for actual performance if there are no other reasons for invalidity.

There are many types of VAM agreements, which can be performance VAM, profit VAM, or condition VAM, and you must ensure your understanding of the project and the validity of the agreement when you sign it.