Abstract: This article analyzes the legal nature of valuation adjustment mechanism (VAM) repurchase rights and practical issues concerning exercise periods. It discusses the controversy over whether equity repurchase rights are claims or formative rights, synthesizes the differences in the application of statutes of limitations, exclusion periods, and reasonable periods in judicial practice, introduces the "6-month reasonable period" opinion from the Faguanwang platform and the varying stances of local courts and arbitration institutions, points out risks in commercial practice such as ambiguous clauses and missed opportunities, and provides prevention and control suggestions including refining investment agreements and standardizing exercise operations, offering guidance for relevant entities.

Keywords: Private Equity Fund Lawyer, Equity Repurchase, Exercise Period, Judicial Practice, Risk Prevention and Control

Preface

VAM repurchase has always been a focal point as a core clause in private equity investment agreements. In recent years, due to economic downturn, VAM repurchase litigation and arbitration have emerged one after another. In judicial practice, the contentious issues in such litigation and arbitration are gradually shifting from the previous "whether the VAM repurchase clause is valid and performable" and "whether the repurchase conditions are met" to the more time-sensitive issue of "exercise period." Particularly since the Supreme People's Court (SPC) indicated a tentative opinion on the exercise period for repurchase rights through the Faguanwang platform last August, the issue of the "safe window period" for exercising repurchase rights has become an urgent topic in industry practice, necessitating high attention from private equity fund managers and invested companies.

I. Dispute over the Nature of Repurchase Rights and Dynamics in Judicial Practice

In judicial practice, if the repurchase agreement explicitly stipulates an exercise period, although both parties in litigation may offer various creative interpretations, most adjudicating bodies will respect the principle of party autonomy. However, many repurchase agreements do not specify the exercise period, which gives adjudicating bodies considerable discretion. Under the current Chinese legal system, there is a lack of clear, direct legal provisions regarding repurchase rights in investment agreements. The determination of their legal nature (whether they are claims or formative rights) and the corresponding exercise period (whether the statute of limitations or exclusion period, or a reasonable period applies) primarily relies on contract interpretation rules and the discretion of judicial organs and arbitration institutions.

(A) Mainstream Views on the Nature of Repurchase Rights

The "dispute over the nature of repurchase rights" has persisted in judicial practice. Some courts characterize repurchase rights as creditor's claims, thus applying the 3-year statute of limitations stipulated in the Civil Code. The limitation period is calculated from the date the obligee knew or should have known that the right was harmed and who the obligor was. Regarding "knew or should have known," although in judicial practice, the "date the repurchase conditions are met" is often used as the starting point for the limitation period, reasoning that the investor's repurchase right can be asserted at that time; however, some courts use the "date the investor's repurchase request was rejected" as the starting point, and some courts even extend the exercise period indefinitely on the grounds that the right "can be asserted at any time."

Some courts, based on specific facts of the case (e.g., the repurchase agreement explicitly stipulates that the investor has the option to repurchase), by reference to Article 564 of the Civil Code concerning the exclusion period for contract rescission rights (if not stipulated by law or agreed by the parties, the reasonable period for exercising the right to rescind is 1 year), characterize the repurchase right as a formative right. For example, in the case (2023) Hu 01 Min Zhong 5708, the Shanghai First Intermediate People's Court clearly held that the repurchase right in question could unilaterally change the legal relationship, similar to the right to rescind a contract, necessitating the early stabilization of the legal relationship and protecting the counterparty's reliance interests, thus belonging to a formative right, and applied a 1-year exclusion period by reference. Other courts, in analogical reasoning, cite Article 89 of the Company Law concerning the appraisal right of dissenting shareholders (a 90-day exercise period from the date of the shareholder resolution, with the right extinguished after expiration) to determine that VAM repurchase rights may have the attributes of a formative right and should be subject to a reasonable time limit. If the repurchase right is characterized as a formative right, its exercise should be subject to an exclusion period or a "reasonable period." Exclusion periods or reasonable periods are immutable periods, not subject to interruption or suspension; exercising the right after expiration directly leads to the loss of the right. The exercise period (exclusion period or reasonable period) is usually calculated from the "date the repurchase conditions are met." For instance, the dissenting shareholder repurchase right under Company Law Article 89 uses the date the shareholder resolution is made as the starting point.

(B) Faguanwang Opinion

In August 2024, the "Selected Consultations from Faguanwang (Ninth Batch)" for the first time responded to controversies regarding the nature of repurchase rights and exercise periods in a Q&A format with an official tone ("Q&A"). Although the Q&A did not directly define the nature of the repurchase right, it opined that investors can choose to request repurchase for exit or continue holding the equity. To stabilize the business expectations of the company, if the agreement does not explicitly stipulate the exercise period for the repurchase right, the exercise of the repurchase right should be subject to a "reasonable period," which should preferably not exceed 6 months. The statute of limitations would be calculated from the day after the request is made within this 6-month period. If the investment agreement stipulates an exercise period (e.g., 3 months), and the investor makes a repurchase request within that period, the statute of limitations is calculated from the day after the request. If the investor requests repurchase after this 3-month period, it is deemed to have waived the repurchase right or chosen to continue holding the equity.

(C) Court Rulings Post-Faguanwang Q&A

Shortly after the Q&A was published, the Shanghai First Intermediate People's Court, in case (2024) Hu 01 Min Zhong 12277, referenced the Q&A's discussion, changing the first-instance determination of a 1-year reasonable period to 6 months, and accordingly held that the investor's repurchase right was extinguished due to overdue exercise. Of course, we also note that in this case, the agreement did explicitly stipulate that the investor had the option to repurchase, making a time limit reasonable. However, we understand that the Shanghai First Intermediate Court has also held in other cases without explicit stipulation of the investor's repurchase option that the exercise period should be limited to 6 months. The parties have already appealed to the Shanghai High People's Court.

Differing from the Shanghai First Intermediate Court's reference to the Q&A, the Beijing Second Intermediate People's Court, in its judgment for case (2024) Jing 02 Min Zhong 13539, explicitly pointed out that the 6-month period proposed in the Q&A does not have retroactive effect for repurchase rights that were triggered (conditions met) before its publication. Its core logic is that, according to the principle of "non-retroactivity of laws," particularly that restrictive and stringent provisions do not apply retroactively, the commercial expectations of the investor regarding the exercise period at the time of contract signing and performance should not be deprived. The court also emphasized that the Q&A represents judges' answers to questions, not law or judicial interpretations, and the expression "preferably not exceeding 6 months" is a recommendatory suggestion, not a mandatory requirement.

(D) Arbitration Practice Post-Faguanwang Q&A

A case heard by the Shanghai Financial Court in early 2025, concerning applicants Ding, Wei and respondents某基金 (Limited Partnership),某公司 applying to set aside an arbitral award, showed that the relevant arbitral tribunal did not simply adopt the "right extinguished after exceeding 6 months" view proposed in the Q&A. During its review, the Shanghai Financial Court clarified that the adjudication opinions of people's courts in similar cases (including the (2024) Hu 01 Min Zhong 12277 judgment cited by the applicant in that case) are not legally binding on the arbitral tribunal. Accordingly, even if the investor's exercise time exceeds 6 months, the arbitral tribunal may still support the investor's repurchase request based on specific factors such as the contract terms, trading practices, existence of obstacles to exercise, and whether substantial unfairness would result.

II. Typical Risk Points in Commercial Practice

On the one hand, adjudicating bodies have no unified understanding of VAM repurchase rights. On the other hand, in commercial practice, private equity funds commonly face the following risks during the signing of investment agreements and the exercise of repurchase rights:

First, ambiguous clause stipulations. A large number of private equity investment agreements only stipulate in principle that "the investor has the right to request repurchase when repurchase conditions are met," but fail to clearly define the specific exercise period (including the starting point and duration) and the legal consequences of failing to exercise the right on time.

Second, missing the exercise timing. After repurchase conditions are met, fund managers often delay initiating exercise procedures due to expectations for the invested company, waiting for negotiation opportunities, observing market changes, lengthy internal decision-making processes, etc. They mistakenly believe that they are secure as long as the repurchase conditions are met, overlooking the risk of rights loss due to missing the statute of limitations or exclusion/reasonable period.

Third, non-standard exercise operations. Failing to send a written exercise notice with clear demands when exercising the right may give the repurchase obligor an opportunity to defend against a claim in litigation or arbitration on the grounds of "overdue exercise" due to inability to provide evidence.

III. Risk Prevention and Control Suggestions for Private Equity Funds

Facing the unclear legal definition of repurchase rights and the practical disputes caused by the "6-month exercise period," we recommend that private equity fund managers build a risk prevention and control system from the following dimensions:

(A) Refine and Standardize Investment Agreement Clauses

It is recommended to explicitly stipulate the exercise period for repurchase rights in the investment agreement. For example: The investor shall, within [X] months from the date the repurchase conditions are met, send an exercise notice in writing to all repurchase obligors. Although the judicial community still has disputes over the Faguanwang opinion, it is, after all, an opinion from SPC judges published on an official SPC platform, which will inevitably significantly influence many judges hearing equity repurchase dispute cases. For prudence's sake, and comprehensively considering the logic of Faguanwang's discussion on the reasonable period, it is recommended that the period not exceed 12 months, and it can be adjusted based on the actual situation of the investment project and the repurchase trigger conditions.

Furthermore, it is recommended to include the exercise notice template as an appendix to the investment agreement. Essential elements of the exercise notice include: factual basis for the fulfillment of repurchase conditions, clear expression of intent to exercise, calculation method and amount of the repurchase price, payment account information and performance period, delivery method and receipt requirements, etc.

(B) Standardize the Management of Exercise Operations

First, improve post-investment tracking management. The post-investment management department of the fund manager should track triggers for repurchase conditions, such as the performance commitment completion status of the invested company, listing progress, etc. Once repurchase conditions are met, immediately initiate the internal decision-making process to avoid exercise delays caused by lagging decision-making.

Second, strictly control time nodes. If the investment agreement does not stipulate an exercise period, we recommend not considering the potential stance of the competent court or arbitration institution stipulated in the agreement, but rather treating the 6-month reasonable period proposed in the Q&A as the maximum risk alert threshold from the perspective of ensuring rights are not lost. In practice, an "Exercise Timeline" should be created, specifying the time limits for each step of the exercise process (including internal approval, notice drafting, delivery tracking, etc.) in conjunction with the manager's internal procedures.

Third, strengthen the effectiveness of exercise notice delivery. In practice, situations often occur where the repurchase obligor and guarantor change their contact address or refuse to accept notices. It is recommended that once a repurchase trigger occurs, confirm the effective delivery addresses of the repurchase obligor and guarantor as soon as possible by appropriate means. Deliver the exercise notice to the repurchase obligor and guarantor by traceable means (e.g., EMS), noting "Repurchase Notice" on the mail details slip, and retain mail tracking records and proof of receipt. If the counterparty refuses to accept delivery, the delivery process can be notarized on-site by a notary office.

(C) Prepare for Litigation or Arbitration in Advance

First, collect, organize, and secure evidence. The evidence should include but not be limited to: investment agreement and supplementary agreements (if any), investment payment vouchers; shareholder register, capital contribution certificates, company registration files; evidence of repurchase conditions being met (e.g., audited reports of the invested company, termination announcement of listing); communication records between the parties; evidence of issuing and delivering the exercise notice; subsequent reminder records (e.g., lawyer's letters and proof of delivery).

Second, given that the nature of repurchase rights remains inconclusive in judicial practice, it is recommended to prepare response strategies in advance for possible defenses raised by the repurchase obligor during the future exercise of repurchase rights, considering both the "formative right" and "claim" paths.

Third, comprehensively collect information on the assets of the repurchase obligor and guarantor. This serves as a means for achieving settlement and a guarantee for enforcement after winning the case.

Conclusion

The legal nature of VAM repurchase rights and the issue of exercise periods are core practical matters directly affecting the effectiveness of investment exit. The "6-month reasonable period" signal released in the "Selected Consultations from Faguanwang (Ninth Batch)," although not a legally binding norm, sounds an alarm for the industry regarding exercise timeliness management. Against the backdrop of尚未 unified judicial standards, private equity fund managers should refine investment clauses upfront, standardize post-investment tracking management and exercise operations mid-process, prepare for litigation or arbitration in advance, and build a full-process risk prevention and control system to avoid investment recovery being hindered by exercise period issues. Furthermore, close attention should be paid to the latest precedents from relevant courts in regions concentrated with private equity funds, such as Beijing, Shanghai, Guangdong, and Jiangsu, and the adjudication tendencies of arbitration institutions in similar cases should be regularly reviewed to adjust exercise strategies promptly.