Research On Liquidation Preference Clause Of The Investment Agreement In Private Equity Funds

Liquidation Preference clause is one of the key provisions of the investment agreementin private equity funds, and it is an important part of corporate termination phase protection ofprivate equity fund investment benefit.However, in investment practices in China’s privateequity fund, Liquidation Preference terms as a representatively investment agreement inprivate equity funds, its practice can be only counted on one’s fingers. In other words, theprivate equity fund failed to really realize the Liquidation Preference terms; at the same time,based on the development of the companies in our country, the company that invested byprivate equity fund and other shareholders or the initial shareholders not easily chooses tostop, but to keep operating the company, this also forms a barrier for private equity fundsperforming liquidation priority.This paper analyzes the current situation of China’s practice of Liquidation Preference.The application of Liquidation Preference has two problems, one is the lack of relevant laws,regulations or other normative documents, and the other one is liquidation priority ignored byprivate equity fund. The main reasons are imperfect mechanism and legal system of Chineseprivate equity fund market and the incomplete acknowledge of liquidation priority clause andits connotation.Therefore, in order to protect investment benefit of private equity fund considering theshareholders or initial shareholders of the company and promote the practical operation ofLiquidation Preference meanwhile, this article utilizes methods combining theory withpractice and case analysis, based on explaining the meaning, exercise conditions andfunctions of Liquidation Preference, and we also use the basic theories of law and relevantdisputes and cases on investment agreement of private equity fund to analyze the legitimacyand rationality of Liquidation Preference; at the same time, this paper analyzes the presentsituation of the practice operation of Liquidation Preference, find out the problems andreasons of liquidation priority, point out solutions to problems existing in practical operationof Liquidation Preference.