Partner Yingxi Fu-Tomlinson Discusses Recent Private Equity Court Rulings in Asian Venture Capital Journal

Asian Venture Capital Journal recently wrote on a significant Chinese court ruling that questioned the amount of down-side protection afforded to private equity funds. The specific case at hand concerned private equity firm Suzhou Industrial Park Haifu Investment, which sued its portfolio company Gansu Shiheng after it failed to meet net profit guarantees. The court dismissed the claim and did not grant the compensation the plaintiff sought, declaring the net profit provision invalid. This ruling places China even further behind in getting its investor protection practices up to speed with its growing capital markets. Many such customs utilized internationally to protect investors, including issuance of preferred shares and ratchet clauses, are not allowed in China.

So how does one provide such protection in China? “In China, investors would have to look for protection through a contractual agreement with founders and other shareholders. However from an enforcement perspective, a shareholder agreement and a statutorily provided structure are somewhat different species.” said Kaye Scholer Partner Yingxi-Fu Tomlinson, a corporate attorney based in Shanghai.