Although regulatory scrutiny on valuation adjustment mechanisms (VAMs) in listings is stricter, unconditional removal of these clauses in IPO documents is not yet required, say lawyers.
Jia Yuan Law Offices senior partner Yi Jiansheng said the recent speculation that all IPO projects in the Chinese mainland must unconditionally remove VAMs before filing “has yet to be clearly verified”.
Grandway Law Offices partner He Haifeng agreed. The unconditional removal of all VAMs was “not entirely accurate”, but review standards had tightened markedly of late, He said.
In cases Yi handled that were accepted at the end of last year, some filings still retained VAM clauses at the time of submission, where the controlling shareholder or de facto controller bore responsibility and included reinstatement conditions.
However, these cases “were subject to repeated rounds of inquiries during review and the regulatory intent was clear in requiring a complete termination of such arrangements”, he added.
“In my understanding, the regulatory scrutiny of VAM clauses is becoming stricter, but it is not yet possible to conclude that unconditional removal is required at the time of filing,” said Yi. VAM agreements are common in private equity investments. Investors and financiers agree on specific performance targets or trigger events, under which, if the company’s actual development deviates from expectations, the original shareholders or the de facto controller provide compensation, including in cash or through share repurchases, to recalibrate valuation.
These arrangements aim to address information asymmetry and uncertainty over the target company’s future performance, helping to protect investors’ interests. In practice, however, they may affect shareholding stability, introduce uncertainty into corporate governance, or conflict with IPO requirements for clear ownership and stable control.
He, of Grandway Law Offices, explained that, under the current Guidelines for the Application of Regulatory Rules – Issuance Category No. 4 from the China Securities Regulatory Commission (CSRC), VAM agreements should in principle be cleared before filing, subject to four exemptions.
The CSRC issued the guidelines on 17 February 2023 and since then has not updated its rules on VAMs. The guidelines set out four exemptions: the issuer is not a party to the relevant clauses; control remains unaffected; the clauses are not linked to market capitalisation; and when VAMs do not materially impair the company’s ability to continue as a going concern.
The CSRC also emphasised that issuers should disclose in the prospectus the specific terms of any VAM agreements, their potential impact on the issuer and provide appropriate risk warnings.
“Regulators have become more cautious in recognising exceptions. Clauses with reinstatement provisions, side agreements or links to market capitalisation are being strictly rejected. Any VAM arrangements that do not meet the criteria must be fully cleared before filing,” He said.
On the potential impact of the unconditional removal of all VAMs, Yi said regulators did not permit issuers to act as the obligor in repurchase-based VAMs. As such, market speculation about their removal is directed at VAM structures involving non-issuers.
Yi said that even if further requirements were imposed to remove VAM clauses where the de facto controller or controlling shareholder was the obligor, this would have no substantive impact on issuers and could in fact benefit controllers. Market-oriented fund investors, however, may be more affected, as such changes could weaken their downside protection if a listing fails.
Beyond investor expectations and financing timetables, He said that a full clean-up of VAM agreements would require all parties to rebalance commercial terms to avoid disputes. He described the shift as “overall conducive to reducing post-listing uncertainty, but it places higher demands on companies’ capital planning”.
Removing VAM arrangements might also involve the reclassification of financial instruments and equity instruments in accounting treatment, increasing compliance costs, He added.
