A Study On The Localization Of The Protective Provisions In Private Equity Investment Agreements

The development of private equity investment in China is a process which starts from zero to boom.This investment tool is a perfect method to assemble funds lying idle in society and stimulate the rapid growth of enterprises,and has created fortune legends one after another.But in China,private equity investment fund is a total “imported” concept from abroad.Whether the international private equity investment rules can be applied to our legal system and capital market has long been a heated topic in both theoretical and practical field.In current environment where capitals are highly active,how to achieve the localization of international private equity investment has attracted increasing attention,and the requirements for relevant legal system and environment has been stricter.Compared to the flexible legal system and open legal environment under common las system,many laws and regulations in China,as a civil law country,are vague.Private equity investors are faced with certain risks and problems during investment and the protection to them are therefore weak.The investors choose investment projects based on their professional judgment,and make subsequent investment to the invested enterprise normally as a preferred shareholder.The investors will get to know the ongoing operation of the invested enterprise and protect their interest during such process from any harm as a minority shareholder or a shareholder with restricted voting rights,and the investors will eventually seek exit from the invested enterprise with usually highly paid return to complete the whole investment.During the whole process,aside from the restricted protection by laws and regulations currently available,the investors will still need a set of protective provisions to be included in the investment documents.Such contractual protection is of great importance to the investors and is the main focus of this thesis.The protective provisions mentioned here mainly include: preferential provisions such as liquidation preference and dividends preference,which secure the investors' stable and fixed profits and distribution;provisions such anti-dilution which retain the investors' rights to continuous investment to the enterprise;provisions which enable the investors to know whether the founding shareholders or the management is normally operating the company and whether the company is running on the path on which the investors make investment decisions,such as information rights;other mechanisms such as value adjustment mechanism which helps the investors to exit with high returns when the company is running just fine and to minimize lost when the company is going down.All such provisions are very common in international private equity investment but whether such provisions can well fit into our legal system shall be determined comprehensively according to the investors and invested enterprises.Apart from the findings that the application of several provisions in China may confronted with risks,laws and regulations regarding preferred equity are yet to be completed and sound.Private equity investors may find it not that easy to be a preferred shareholder especially with conversion right.Besides,private equity investors with their special position as preferred shareholder have very limited right of speech in the invested company.Notwithstanding the contractual protection by the investment documents with the protective provisions,the rights of the investors as preferred shareholder cannot be equally protected due to the lack of relevant legal system and differentiated policy environment.This thesis will first look back on the history of the development of international private equity investment,elaborate on the use of protective provisions and then dig into the development history of private equity investment in China,draw an overall conclusion of the applicability of the main protective provisions and select the ones which may face obstacles and analyze problems investors may face during the localization of such provisions,try to find the source of the problems and try to provide a way out so that these contractual protections can reach their best functions.This thesis consists of four chapters and each chapter will focus on the following contents respectively:The first chapter will mainly introduce some important concepts in private equity investment agreements,and analyze the formation process of such protective provisions,its content and functions;The second chapter will focus on the development of private equity investment in a historical perspective and will compare the development of international private equity investment with the introduction of domestic private equity investment and will give an overall illustration on the current use of such provisions in China;The third chapter will firstly give an overall and comprehensive analysis of the application of the most commonly used provisions under Chinese laws,and will further elaborate on provisions such as dividend preference,liquidation preference,right of first refusal,preemptive right and veto right which may face problems or controversies under Chinese laws;The last chapter will further analyze the hidden source and cause of such application risks and try to find practical ways out to a better localization.