Chinese Courts Create More Flexibility For Alternative Transaction Structures

In two cases decided in 2012 and 2014, Chinese courts extended the way in which sellers and buyers can agree on various structures to bridge a potential value gap. Before the court rulings, a buyer might have wanted to claw-back part of the purchase price or sell back part of the equity stake (sometimes referred to as a ratchet) stemming from poor performance after closing, but the validity and enforceability in China of these ratchet structures was uncertain. Chinese courts have now removed this uncertainty in corporate transactions. The rulings show that Chinese courts are increasingly willing to accept different forms of transaction structures.

Ratchet structures are sometimes used by private equity investors to bridge management's more optimistic performance forecasts and private equity's more conservative projections. These arrangements can take various forms. In one form, if the target company cannot meet the agreed post-closing performance targets within a