Legal Issues Of The Buyout Fund Established By Listed Companies And Private Equity

The first buyout fund, established jointly by the listed companies and private equity(PE), was set up by Tiantang Guigu in September 2011. The model is followed by other listed companies and PEs, because it not only helps the list company select merger targets but also locks the exit strategy for the PE in advance. This specific mode works in this way: the listed company, cooperating with the PE fund, set up a buyout fund, usually in the form of a limited partnership. At first, the buyout fund gains control of the target company through the acquisition of the target company's equity. Then the buyout fund will carry out a series of M&A transactions, restructuring and optimization operations to improve the market value of the target company. At last, the listed company will purchase the target company's equity.To fully understand the buyout fund, this paper emphatically analyzes the background and the specialty of the buyout fund. Through the empirical study, it indicates that the buyout fund has four characteristics. Firstly, the form of the buyout fund is a limited partnership generally. Secondly, the investment objectives are limited in the upstream or downstream enterprises in the industry chain of the listed company. Thirdly, the listed company is actively involved in the buyout fund's management. Fourthly, the exit strategy of the buyout fund is that the listed company purchases the target company's equity.As for the legal risks of buyout fund, this paper mainly discusses the legal risks from two aspects of corporate governance and external supervision.In terms of corporate governance, the listed company is actively involved in limited partnership affairs by setting up investment management committee or "veto". If this behavior does not belong to the statute's safe harbor provisions, and it reaches the level of controlling the buyout fund, this behavior will be regarded as the listed company participating in the limited partnership affairs. This paper studies the evolution of the limited partnership system in US, and analyzes the cognizance and legal consequences of the behavior mentioned before. Finally this paper raises the proposals of moderately expanding the scope of the safe harbor provision and redesigning transaction structure to avoid the legal risk.Since the implementation process of the buyout fund is very concealing and complicated, the regulatory legal risk reflects in the following three aspects: a) market manipulation in the name of value management; b) the insider trading and contact related party transactions; c) the information disclosure is lack of effectiveness and pertinence. In order to prevent the listed company and PE from using this model to engage insider trading, market manipulation or other issues, we need strengthen the information disclosure. To build a more targeted and effective information disclosure system, we should require the disclosure of the buyout fund's management, the PE fund and executives' shareholdings of the target company, potential benefits chain relationship between the PE fund and the listed company, etc. In addition, the paper discusses whether the business between the PE fund and the listed company is involved with the affiliate transaction. The paper also analyzes the legal risks of major shareholders damaging the interests of the listed company.