A Research On Preferential Rights Provisions In Venture Capital Legal Documents

In order to re-allocate risks arising from asymmetric information among venture capitalists and venture entrepreneurs and protect the venture capitalists against adverse effects arising from asymmetric information, preferential rights provisions occur in venture capital legal documents. As a pragmatistic outcome, the preferential rights provisions are commonly used in venture capital deals and recognized by laws of the countries with advanced capital markets. However, as venture capital is new to China, relevant laws and regulations are not in order, some of the preferential rights provisions may encounter difficulties under China's legal framework.The preferential rights provisions have been a rare target for relevant academic research with respect to venture capital. Relevant academic achievements are in eager demand and the lack of academic achievements is in disproportion with the demand by the fast development of China's venture capital market.This paper presents a systematic research on the preferential rights provisions in venture capital legal documents from a jurisprudential perspective, the contents of which are as follows:1. The author is of the view that the preferential rights provisions in venture capital legal documents have the following characters: relatively dependent, preferential, conditional, optional, terminable, flexible and diversified. 2. The occurrence of the preferential rights provisions results from (i) the high risk of the venture capital market; (ii) asymmetric information between the venture capitalists and the venture entrepreneurs; and (iii) funds security as required by venture capitalists, etc.3. The preferential rights provisions have protective, incentive and distributive functions.4. Based on the above analysis, the author is of the view that the underlying orientation and principle of the preferential rights provisions is the doctrine of freedom of contract. The preferential rights provisions themselves are fair and just, thus the law should tolerate such provisions and should not interfere with the transactions and relationship between the venture capitalists and the venture entrepreneurs.5. This paper then makes summaries of the legal forms and the detailed contents of each kind of the preferential rights provisions, and makes comments on such provisions from a legal perspective.6. In addition, this paper addresses the legality and enforceability of the preferential rights provisions under PRC law from a pure legal perspective and a practical perspective.7. At last, this paper discusses the problems in China's legislation, and makes proposals with respect to the application of the preferential rights provisions in China.