Study On The Legal Validity Of Liquidation Preference Clause In Private Equity Investment

The research on the validity of liquidation preference clause in private equity investment,refers to whether or not liquidation preference clause is valid under the legal framework of our country.Liquidation preference clause is necessary in private equity investment agreement in China,which comes into effect when liquidation events or deemed liquidation events happened in the invested company.As the private equity investment in China has gradually become a mainstream approach of investment,the questions of legal application of liquidation preference clause has become a hindrance to unblock exit channel of private equity investment and promote the development of private equity investment.Entitled with ‘ Study on the Legal Validity of Liquidation Preference Clause in Private Equity Investment ',this essay analyzes the specific legal validity of liquidation preference in the existing legal order of China,Which is not only to unblock the exit channels of private equity investment,but also to improve the system of private equity investment related and promote economic development of China.The chapter1 discusses the concept,composition and other basic theories and validity disputes of liquidation preference.In the first section,the definition of liquidation preference is summarized from the historical perspective,and the classification of liquidation priority is defined according to the extent of liquidation priority participating in the allocation in practice.Section 2 is divided into four parts: trigger cause,agreement on investment return,order of distribution of residual property and guarantee clause according to the provisions of liquidation priority clause in practice.The third section analyzes the disputes about whether the liquidation preference clause violates the compulsory provision of law or administrative regulations,and whether it belongs to the guarantee clause in practice.This chapter lays a foundation for the discussion in chapter 2 and chapter 3.Chapter2 discusses how to judge the validity of liquidation priority clause in the current legal order of our country.Firstly,the nature and content of the private equity investment agreement accord with the definition of contract in the contract law and the civil code(draft),so it should be analyzed on the basis of the contract law.Secondly,based on the nature of the invested enterprise,item 5 of article 52 of the contract law will lead to mandatory norms in the enterprise law such as the company law,so it should be analyzed in combination with the norms in the enterprise law.Finally,when analyzing the validity of the liquidation priority clause,we should pay attention to the function of respecting commercial transaction freedom and commercial habits,and consider the whole private equity investment transaction to grasp the application of the principle of fairness.Chapter 3 discusses the validity of liquidation preference clause triggered by "liquidation event " and by "deemed liquidation event”.The validity of liquidation preference clause in Corporation Law fundamentally depends on the nature of the Article 186,paragraph 2.If liquidation preference clause triggered by liquidation events in violation of the provisions of first part of paregragh2 shall be null and void.However,the agreement on the distribution of property of remaining assets between shareholders shall be valid,which does not violate the mandatory provisions in the Corporation Law of China.The relevant provisions of the original sino-foreign cooperative enterprise law and sino-foreign joint venture law of China's partnership enterprise law are arbitrary norms,which provide a useful reference for the validity determination in the perspective of the company law.Deemed liquidation event is difficult to become the cause of dissolution of the company due to the obstacles in practice,so the realization of the liquidation preference clause triggered by deemed liquidation event is not based on the premise of company dissolution and substantive liquidation.Because the liquidation preference clause in this case is consistent with the valuation adjustment mechanism in the implementation procedure,it can refer to the relevant provisions on the validity of valuation adjustment mechanism in Supreme People's Court of Issuing the Minutes of the National Courts' Civil and Commercial Trial Work Conference.The liquidation preference clause is valid with respect to the validity of the clause triggered by deemed liquidation event.The performance of liquidation priority clause needs to review the mandatory provisions of "shareholders shall not withdraw capital" and share repurchase,or it will not be supported by the court.