Validity of Pre-IPO VAM Agreements in China

December 12, 2022 | BY

Susan Mok

Guanglei Zhang and Jinhui Zhang of Jingtian & Gongcheng examine the first decision of a Chinese court in which a secret pre-IPO agreement containing a valuation adjustment mechanism based on stock market price was declared invalid.

Summary

  • Pre-IPO value adjustment mechanism agreements are contractual arrangements which are used by investors to attempt to mitigate against the uncertainty of the target company's future financial performance
  • They have been widely used in corporate financing transactions in China and were recognized as valid by the Chinese courts in 2012
  • Judicial opinion has evolved since then, and the Chinese stock market regulator requires companies to terminate such agreements before going public
  • A Shanghai court has recently held such an agreement to be invalid, raising concerns about their enforceability in future

 

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