Are bet-on agreements a safe bet?

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The valuation adjustment mechanism (VAM), also known as “bet-on agreement”, is usually concluded between an investor and the company invested in, or between an investor and major shareholders.

The VAM agreement commonly is adopted due to quite a few factors – including the information asymmetry between investment transaction parties – which make it hard for the transacting parties to give an accurate valuation on the investee company at the inception of the transaction. To improve the transaction efficiency, the parties agree to make their investment based on the valuation of the future operating performance of the investee company.

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When the actual performance deviates from the expected performance, the initial valuation of the investment is adjusted afterwards and the investment capital amount or shareholdings are refunded for overpayment or compensated for deficiency – it is similar to using the initial investment to bet on future performance, and to make corresponding adjustments and compensation.

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Tao Xiuming is a CIETAC arbitrator and a partner at Beijing JunZeJun Law Offices