| After Chinese courts shifted their focus from the issue of legal validity to that of enforceability of VAM contracts in VAM cases concerning venture capital and its portfolio companies, they are facing two further inquiries. Firstly, what kind of substantive standard can be applied to judge the legal obstacles to the fulfilment of obligation by the portfolio company under VAM? Secondly, who is the proper subject to make this judgment? Both the Huagong Case and the Minutes of the National Courts' Civil and Commercial Trial Work Conference only deal with the first inquiry, and apply the principle of capital maintenance to VAM disputes as the main standard. The current practice of capital maintenance doctrine in China, however, is very crude, without such overall definition as "large distribution" or the idea of bottom line regulation that are common in many other countries. This results in the fact that the portfolio company requiring redemption under VAM has no way but operate a costly and burdensome procedure of capital reduction. Alternatively, the insolvency test in many modernized company laws is used to replace the traditional capital maintenance doctrine, carrying out the same task of restricting the outflow of company assets to shareholders in order to protect the interests of creditors, although the insolvency test operates with higher cost and greater uncertainty. As for the second inquiry, Delaware Court, as a pioneer and most influential court in this area, has shifted from judicial business judgment to corporate business judgment while further highlight the complex conflict of interest among the company, different types of shareholders and creditors. In this regard, the value balancing and policy choice on the legislative level will ultimately determine the direction of judicial development. The upcoming revision of Chinese Company Law should respond to the demands of business practice. Meanwhile venture capital has to undertake the risk of investment failure. |
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