A Study On Legal Issues Of The Term Of Drag Along Right In Private Equity Contract

Private equity investment has been grouping rapidly with China's economic development since it landed in China in the 1990 s.In the past few decades,the scale of private equity investment has been considerable,but there are still a lot of gaps to be filled in the laws and regulations that are compatible with private equity investment activities.As the birthplace of private equity investment,the United States has formed a mature supporting system since the 1940 s.Whether laws and regulations,investment models or judicial precedents can find corresponding content in the U.S.venture capital system,especially the template of the terms of the venture capital contract is copied into China's private investment contract.However,due to the different legal systems,investment and financing environment within and outside China,these copying clauses are likely to encounter obstacles to the application of law in China.The "Haifu" case,known as "the first case of valuation adjustment mechanism" in China,is one of the typical examples.The purpose of this paper is to study the drag along right as one of the "terms sheet" of private equity investment contracts,its position,function and significance in private equity investment contracts,as well as the legitimacy basis in the legal context of our country.Combining with the American mature system and the specific judicial precedents,this paper combs out the experience worthy of reference for our country,and provides adapt environment for the localization transplantation of the drag along clause.In addition to the introduction and conclusion,this paper is divided into threechapters.After the introduction of the clauses of private equity investment and drag along right,this paper takes Alibaba's acquisition of Rajax as example,discussing the application of drag along right in China.Then it comes to the validity of its provisions in different legal contexts in foreign countries.The last chapter combines with specific cases to analyze the controversial issues which may encounter in specific practice,and then explores a localization path of the drag along right.The first chapter mainly studies the basic concepts of the clauses of private equity investment and drag along right.Firstly,it introduces the operation process and income mode of private equity investment.Most private equity funds operate in the form of closed limited partnership and "blind pool".The operation strategy in the field of private equity investment is to withdraw in time after distributing cash gains.After a smooth exit,the return of the investment will be evaluated to determine whether it achieves the expected return.Then it introduces the definition of the clause of the drag along right and illustrates the necessity of its existence with a case study.In the end of the first chapter,the basic framework of the clause is introduced,including the subject of the agreement,trigger elements,implementation elements,third-party investors and so on.Then it enumerates the application of the drag along right in China's specific practice which is acquisition between Alibaba and Rajax.Chapter two mainly focuses on the analysis of the legal validity of the drag along right.The extraterritorial part is mainly divided into legal basis and judicial precedents.Although the drag along right is not clearly stipulated in American law,the existence of shareholder agreement system is undoubtedly the cornerstone of the legitimacy of the right to sell clause.According to the shareholder agreement system,shareholders can create their own rights and obligations through the shareholder agreement,so the right of sale should be legitimate and effective on the basis of obtaining mutual agreement and not violating public policy.In addition,Chapter 6,Section 202,of the Delaware Common Company Law also indicates that pre-restrictions can be imposed on the transfer of shares by shareholders.Then,through a case of Riverstone National Inc.v.Caplan et.al.in 2015,we can see the court's attitude towards the clause of the drag along right in specific judicial decisions.There are more uncertain factors in the analysis of the legal Effectiveness of the drag along right in the legal environment of our country.As an exotic system,the purpose of the clause is to force other shareholders to transfer their shares.And if this clause is transplanted into our country,whether the two parties could still arrange the shares ofother shareholders in advance through it,its effectiveness is better than other countries.In order to explore the legal adaptability of drag along clause in our country,this article analyses the validity of the clause from the perspective of our current company law and contract law.Chapter three summarizes the disputes over the drag along right and the reconstruction of the clause system.Firstly,it lists several controversial issues of the drag along clause in practice,and carries out analysis with specific cases.For example,through the case of Minnesota Invco of RSA#7,Inc.v.Midwest Wireless Holdings LLC in 2006,we can see how the court to balance the conflict between right of first refusal and the drag along right.In addition,there are the pricing problems and the restriction of the trading object in the drag along transaction.Finally,we should regulate the localization path according to the risks that may arise in the practice of private equity investment under the terms of drag along right.This paper tries to explore a framework of the clause of the drag along right in order to avoid risks to the greatest extent,hoping to benefit the localized transplantation of the drag along right.