The Research On Validity Of Redemption Clauses In Private Equity Investments

As one of the common rights clauses of investors' shareholders in private equity investment agreements,equity redemption clause is a technical means which can effectively resist the risk of faults in investment decisions,facilitate operation and promise yield.Despite that the return of equity redemption is relatively conservative,the agreement on the situations of redemption effectively improves the dilemma of information asymmetry between investors and financiers,the failure to reach the consensus of valuation,and the lack of liquidity of the non-listed companies' equity held by investors through enriching the exit channels of investors.Nevertheless,there is no mature or unified understanding of the effectiveness of such innovative equity investment and financing clauses in the judicial and academic circles,especially in the context that the target company is the redemption subject when most courts tend to recognize such clauses as invalid on the basis of the Company Law protecting the interests of the company,other shareholders and creditors as well as the mandatory provisions on effectiveness of the Contract Law,etc.In view of this,based on the different judgments made by the courts in different places on the disputes arising from the equity redemption of the target company in private equity investment,this paper summarizes the focuses of the disputes on the redemption of company equity in judicial practice,namely,the effectiveness of the provisions,the application of laws and the protection of the company's capital system,and then conduct targeted analysis and demonstration from the perspective of the application of Contract Law,Company Law and Commercial Justice Concepts to draw the conclusion that equity redemption is valid in accordance with the Contract Law while companies may be allowed to repurchase at its discretion in accordance with the Company Law and redemption does not necessarily do harm to the interests of the company,other shareholders and creditors.Finally,in terms of the validity identification of such clauses,this paper suggests that in judicial decisions,we should differentiate between non-gambling and gambling redemption clauses in different situations by focusing on the essence of the acts behind the clauses,combining with the substantive review of the capital system,giving priority to the application of Commercial Justice Concepts,and comprehensively considering the actual situation of the specified case,in the hope of providing reference for such innovative mechanism to be fairly treated,thereby safeguarding the legitimacy,autonomy and freedom of the market as well as achieving the justice and efficiency of judiciary.