A Study On The Exercise Of Drag-along Right Of The Preferred Stock

As one of the most important clauses in venture capital contract,drag-along right has been widely used recently.95%of venture capital project in America use preferred stock,and the pilot work of preferred stock in China is as well in progress.Preferred stock plays an important role in the recovering of capital market.Considering the current grim economic situation and strict IPO review,drag-along right,as a key point of preferred stock's preferential right,does have a positive effect on market stability,capital liquidity and resources utilization and it offers for venture investors an extra exit-strategy.China's related laws and regulations do not clearly stipulate drag-along right,but some scholars have already did corresponding research.However,in practice,companies and investors may still encounter problems such as interests losses because they have not been very cautious on the exercise of drag-along right.And as a typical clause of Valuation Adjustment Mechanism,drag-along right does have its own unsteadiness and unfairness.Taking this into consideration,this paper mainly focuses on the problems and conflicts we may have when exercising;meanwhile,it pays attention on the function of board of directors.And that we can hold the key point of drag-along right and enter into a fair and reasonable contract in advance.In the process of investigating and sorting out relevant papers,the author found that drag-along right has been studied and applied in many other countries.Among them,the United States,as the birth place of venture capital,has done a systematic and complete study on drag-along right.Firstly,this paper adopts the method of comparative study.It focus on relevant papers and cases in different countries especially the United States.Conclusions suitable for China is made during the process of doing comparative analysis.Second,although China's law does not regulate drag-along right,but the nature of this right--a contract between investors and companies or the transfer of equity is within scope of the Contract Law and the Company Law.Therefore,this paper also adopts the research method of hermeneutics of law.Considering the legal framework of our country,the author intends to find a legal and reasonable way to combine drag-along right with the current law in China.This paper analyzes and summarizes the existing research,and offers some feasible suggestions which mainly includes:comprehensively and systematically discussing the subject,object,procedure,price,time,notice,etc.of the exercise of drag-along right;clarifying the enforceability of drag-along right by analyzing foreign and domestic cases,and putting forward reasonable suggestions to improve the possibility of positive judgement;analyzing the significance of the board of directors to both company and investors in the exercise of drag-along right,and as well analyzing the corresponding remedies when the board of directors refuses to approve the transaction.To sum up,based on the existing research,this paper firstly briefly analyzes and summarizes the less controversial part such as the legality of drag-along right.Secondly,it focuses on the difficult and complex issues such as exercise,execution,conflict and the board of directors of drag-along right.Finally,it summarizes the whole paper and find out the reasonable design of a drag-along right which can improve safety and fairness of the venture investment contract and reduce the possibility of damage occurring.Only that can the writing purpose of this paper be achieved.