Study On Legal Issues Of Foreign Private Equity Funds Operating In China

As an important of sector in the investment world and a major source ofcorporate financing, private equity funds has developed and followed a efficient set ofpractical rules over a long time. In recent years, an increasing number of foreignprivate equity investors have set up “China funds” that concentrates on investment inChina. Consequently, the practical rules of private equity, which has been consistentlyfollowed by most of the western investors, are facing a new challenge of re-adjustingthemselves in the Chinese legal system. On the other side, the Chinese legislature isaware of the differences between the rigid Chinese commercial law system and therather unconventional private equity investment practices, and is contemplatingregulations that specifically apply to foreign private equity funds.This article first introduces the standard practice of foreign private equity funds,with respect to the formation of a fund and the investment following such formation.Then the article moves on to the legal system in China, analyzing whether the keyarrangements in foreign private equity practice will be recognized under Chinese laws,and the possibility to “localize” the foreign concepts. The first chapter of this articleintroduces the concept of private equity, with some description of the historicaldevelopments. The second chapter then gives a more detailed analysis of the keyarrangements and terms in the formation and operation of a private equity fund. Thethird and fourth chapters discuss the legal problems that foreign investors encounter inChina, in the aspect of fund formation and private equity investment respectively. For the purpose of better regulating this industry and providing viable solutions to foreigninvestors, the article then focuses on the possible improvements that can be made tothe current legal infrastructure in China. The fifth chapter offers three mainsuggestions in this respect, including the unification of the government supervisionbodies, the coordination of conflicting regulations and the improvements to somespecific aspects of commercial laws.