A Research On Legal Issues Of Companies' Participating In Duidu Contracts In Private Equity Investment

As a new financial instruments with complex structure of deal,Duidu contract has been widely used and played an important role in Private Equity Investment in China,but it also has poor compatibility with Chinese law,represents legislation gap and judicial adjudication dispute.In 2012,the Chinese Supreme Court's judgment on Haifu Case pointed to the mainstream reading that the Duidu contracts between shareholders would be fine while those between the shareholder(s)and the company would not survive judicial review,which put a deep influence on the private equity investment area.However,this precautionary regulatory thinking treats the validity of contract related to mandatory rules as the overwhelmingly core or even sole issue,and actually ignores the complexity of the cross-dislocation between the contract law and the company law in the disputes over the Duidu contracts.In the context of contract law,the validity of contract shall be separated from the performance of contract,the obstacles to the performance of contract shall not directly affect the validity of contract.In the context of contract law,althought the company which need to undertake the due obligations has to accept the test of the principle of capital maintenance,it doesn't necessarily incur the legal consequences of violating the provisions on prohibiting the abuse of shareholders' rights,the provisions on capital withdrawal and the provisions on share repurchase.In addition,the practical significance of the view of "Duidu contract between the shareholder(s)and the company would not survive judicial review" is aimed at protecting creditor.However,according to the actual situation of the company's capital after undertaking the due obligations,it can be seen that in some cases,the existing trial logic will lead to a greater degree of impairment of the company's liability property.There is conflict between the ideal and the reality,it is unreasonable to deny the legitimacy of the company's participation in Duidu Contracts.In September 2018,the Chinese Supreme Court's judgment on Hanlin Case recognized the validity of the guarantee in Duidu contract which had throughed the company's internal decision-making process.Judicial practice has released a new signal to the change of the trial tendency of the company's participation in Duidu Contracts,which has prompted both the academic field and practice field to rethink the path of the settlement of the disputes over Duidu contract.In this paper,based on the experience of Chinese and foreign cases,the author plans to make an ideal deduction on the investigation dimension of the validity of Duidu contract and the way to undertake the Duidu obligation,so as to contribute some inspiration to the legal issues of the company's participation in Duidu contract.This paper is mainly divided into three parts.Part One is the overview of Duidu contracts.Section One clarifies the difference between "Valuation Adjustment Mechanism(VAM)" and Duidu contracts by tracing the source of the concept of the Duidu.Section Two distinguishes different types of Duidu terms in order to find the commonness of legal consequences from the differences in economic connotation and to clear the obstacles to the analysis of legality caused by the differences in forms of expression of Duidu terms.Section Three summarizes the changing trend of the thinking in judicial practice from 2014 to2018,aiming at re-understanding the cross-dislocation between the problems of the company law and the contract law in Duidu cases.Part Two is the legality analysis of Duidu contracts.This part attempts to analyze the legal barriers involved in the context of contract law and company law.Firstly,in the context of contract law,contract effectiveness and contract performance belong to different levels of problems,and the obstacles encountered in contract performance cannot directly affect the effectiveness of the contract.Secondly,in the context of the company law,although the company should accept the test of the principle of capital maintenance to assume the gambling responsibility,it does not necessarily lead to the legal consequences of violating the provisions against the abuse of shareholders' rights,the provisions against the withdrawal of capital and the provisions on share repurchase.In addition,judicial adjudications held protecting creditors' benefit as the first value orientation,this part of give Haifu Case example,tries to prove that the contract is invalid control means useless or even harmful to the the first value orientation.Part Three combines the experience of Thoughtworks Case,in order to make an ideal deduction on the inspection dimension of the effectiveness of the Duidu contracts and the way to assume the Duidu responsibility.Thoughtworks Case and Haifu Case have extremely high similarity in both key facts and the application of law.The Delaware court's judgment approach of embedding capital maintenance principle and creditor protection concept into specific cases can also provide reference for the settlement of Duidu disputes.