The revised Company Law changes the registered capital subscription system to a time-limited payment system, and adds new provisions that shareholders who fail to pay their capital contributions on time will lose their unpaid equity[2] and be liable for compensation for the company's losses[3]. In view of this, for private equity funds that raise funds and invest in installments, if the subsequent fundraising is not smooth and the corresponding funds are not raised and invested in accordance with the agreed capital contribution period with the invested enterprise, the fund will face the risk of losing the equity of the invested enterprise for which the capital contribution has not been paid, and will also be liable for compensation for the losses incurred by the invested enterprise.

In addition, although the new Company Law does not retain the provisions before the revision that shareholders who fail to pay their capital contributions in full on time will bear the liability for breach of contract to shareholders who have paid their capital contributions in full on time, we believe that as long as there is an agreement on shareholder capital contribution breach in the signed shareholder agreement/investment agreement, the private equity fund should bear the corresponding capital contribution breach liability. Therefore, if the private equity fund fails to pay the subscribed capital contribution to the invested enterprise in full on time, it may face three risks: loss of rights, compensation for the losses of the invested enterprise, and liability for breach of contract.

In view of this, we suggest that, firstly, the managers of existing private equity funds with staged fundraising and investment arrangements should pay attention to verify whether the fundraising time agreed with investors is earlier than the fund's contribution time to the invested enterprise. If it is found that the fundraising and contribution periods do not match, the managers should promptly negotiate with the invested enterprise to deal with the plan to avoid the aforementioned fund's loss of rights, compensation and default risks. Secondly, we suggest that private equity funds with staged fundraising arrangements should include the modification of the shareholder contribution period stipulated in the articles of association of the invested enterprise in the scope of matters where the private equity fund enjoys a veto in the investment agreement for the proposed staged contribution, so as to avoid the private equity fund's contribution period for the invested enterprise determined at the beginning of the investment being modified and brought forward without the private equity fund's consent, resulting in the fund being unable to raise sufficient funds in time to complete the contribution and facing the risk of loss of rights, compensation and default.

According to the Minutes of the National Court Civil and Commercial Trial Work Conference (known as the "Nine Civil Minutes") issued by the Supreme People's Court in 2019[4], creditors can request shareholders who have not yet reached the capital contribution deadline to bear supplementary compensation liability for the company's unrepayable debts within the scope of their unpaid capital contributions in two situations: in cases where the company is the person subject to execution, the People's Court has exhausted all enforcement measures and has no property to enforce, and has bankruptcy grounds, but does not apply for bankruptcy; and after the company's debts arise, the company's shareholders' meeting resolves or otherwise extends the shareholders' capital contribution deadline. According to the new Company Law[5], if a company cannot repay its due debts, the company or creditors of matured claims have the right to require shareholders who have subscribed for capital contributions but have not yet reached the capital contribution deadline to pay their capital contributions in advance.

Obviously, there are three changes in the shareholder accelerated maturity system: first, once the invested enterprise cannot repay the due debts, it triggers the accelerated maturity of the invested enterprise's shareholders' contributions; second, in addition to the invested enterprise's creditors, the invested enterprise itself also has the right to require private equity fund investors to make early contributions; third, the shareholder's liability form is changed from supplementary compensation liability to creditors to capital contribution liability to the invested enterprise, which also means that the shareholders' early capital contribution belongs to the invested enterprise and may be shared by all creditors of the invested enterprise.

According to this new regulation, if the invested enterprise cannot repay the due debts, the private equity fund as a shareholder may be required by the invested enterprise or the invested enterprise's creditors to pay the capital contribution in advance, but the original time for the manager to call the fund in the private equity fund contract for installment fundraising may not have arrived. At this time, the fund manager's early call to investors may constitute a violation of the fund contract agreement, or even fail to raise enough funds. Therefore, we suggest that if a private equity fund has a situation where investors pay their investment funds in installments and the manager calls the funds in installments as agreed, it can be stipulated in the fund contract that if the private equity fund needs to pay its capital contribution in advance because the invested enterprise cannot repay its due debts, the private equity fund manager has the right to call the investors in advance without incurring any liability for breach of contract, and investors should fully cooperate in this regard.

According to the new Company Law, if a shareholder of a limited liability company fails to actually pay the capital contribution in accordance with the provisions of the company's articles of association, the other shareholders at the time of establishment shall bear joint and several liability with the shareholder to the extent of the insufficient capital contribution. In view of this, we recommend that private equity funds try to avoid investing in the form of jointly establishing a limited liability company with the founders, and give priority to and choose the method of increasing the capital of the invested enterprise, otherwise they will also be required to bear joint and several liability for the failure of the founding shareholders to pay the capital contribution in full on time. If it is really necessary to establish a new company in a joint venture with the entrepreneur, the capital situation of the joint venture parties should be fully investigated to ensure that they have the ability to complete the capital contribution to the joint venture company in full on time. In addition, it is worth noting that in the case where the invested enterprise establishes an employee stock ownership platform due to an equity incentive plan, private equity fund investors should pay attention to reviewing the specific arrangements of such employee stock ownership plans, including but not limited to whether the proportion of incentive equity reserved is reasonable, whether the employee's exercise period complies with the shareholder's actual payment period stipulated in the new Company Law, etc., to avoid the risk of having to bear the responsibility for making up the actual payment of such employee stock ownership platform at that time.

The new regulations on accelerated maturity of capital contributions mentioned above will not only affect the fundraising side of private equity funds, but also their investment plans. In short, once the invested enterprise fails to repay its due debts, fund investors will face the risk of early capital contribution and loss of the term benefits of the capital contribution. To avoid this risk, we recommend:

First, private equity funds should conduct comprehensive and sufficient due diligence on the intended investment enterprise (especially enterprises that have not yet generated sales revenue) and its existing shareholders before investing. If the assets, liabilities, cash flow and creditworthiness of the intended investment enterprise reflect that the enterprise may not be able to repay its due debts, the private equity fund should make a prudent decision on whether to invest in it.

Secondly, on the basis of accurately investigating, evaluating and predicting the overall situation of the invested enterprise, private equity funds should reasonably set the amount of capital contribution and the term of capital contribution to the invested enterprise based on the amount of funds raised or expected to be raised. If a private equity fund intends to make phased capital contributions to the invested enterprise, we recommend that the private equity fund adopt an investment model of phased capital subscription or phased equity transfer as much as possible to avoid the risk of accelerated maturity of the subscribed but unpaid portion of the capital contribution due to a one-time subscription of all capital contributions or acquisition of all equity but actual payment in installments.

Finally, we recommend that the agreement and guarantee in the investment agreement for the period for the founding shareholders of the invested enterprise to pay the capital contribution in full on time should cover the situation of accelerated maturity of the capital contribution. In addition, if the invested enterprise requires shareholders to pay the capital contribution in advance, it can be agreed that the founding shareholders of the invested enterprise or shareholders who have not reached the capital contribution deadline other than the private equity fund investors shall make the capital contribution in advance first, so as to maximize the protection of the term interests enjoyed by the private equity fund on the subscribed capital that has not reached the capital contribution deadline.

According to the relevant provisions of the new Company Law[6], if a shareholder fails to pay the capital contribution on time and still fails to fulfill the capital contribution obligation after the company has urged him to pay and the grace period has expired, the company may, upon resolution of the board of directors, issue a written notice of forfeiture to the shareholder. From the date of issuance of the written notice, the shareholder shall lose the equity interest in the unpaid capital contribution. The above provisions will increase the instability of the equity structure of the invested enterprise. However, on the one hand, the equity structure of the invested enterprise often determines the operation and management of the invested enterprise, and changes in the equity structure will to a considerable extent affect the stability and controllability of the operating status of the invested enterprise; on the other hand, private equity funds invest in invested enterprises mainly out of recognition of the founding team of the invested enterprise. If the founding shareholders lose their rights due to failure to pay the capital contribution on time, or even lose control over the operation and management of the invested enterprise, it will be contrary to the original intention of the private equity fund to invest. Whether the invested enterprise can operate and obtain profits according to the original model and whether the private equity fund can obtain investment returns as expected will fall into great uncertainty. Moreover, if the invested enterprise adopts the method of reducing capital and cancelling the shares to deal with the lost equity, the equity ratio and rights and obligations of the fund investors in the invested enterprise will also be affected.

Therefore, we recommend that private equity funds stipulate in the investment agreement: First, clarify the progress plan of the invested enterprise's founding shareholders' actual paid-in capital contribution to the invested enterprise, as well as the corresponding liability for breach of contract, and urge the founding shareholders to properly perform their capital contribution obligations. Secondly, the shareholder loss system is not a mandatory provision, but can be resolved by the company's board of directors. Therefore, private equity fund investors can consider incorporating the founding shareholder's loss of rights notice resolution into the scope of the one-vote veto, and stipulate that when the invested enterprise's board of directors makes a resolution on the loss of rights of the founding shareholders, it shall be approved only with the consent of the directors nominated by the fund investors. Thirdly, if other shareholders of the invested enterprise lose their rights, or if the private equity fund investors suffer losses due to the loss of rights of other shareholders, the fund investors have the right to require the relevant entities (such as the founding shareholders or the invested enterprise) to repurchase all or part of their equity, or to safeguard the interests of the fund investors through other relief procedures. In addition, the new Company Law clearly stipulates that if the lost equity is not transferred or cancelled within 6 months, the other shareholders of the company shall pay the corresponding capital contribution in full according to their capital contribution ratio. Therefore, we recommend that private equity investors clearly stipulate in the investment agreement or shareholder agreement that private equity investors do not bear the obligation to accept the lost equity and make up the capital contribution. If the founding shareholders or other shareholders fail to perform the above obligations on time, the private equity investors have the right to require the relevant entities to repurchase the equity of the invested enterprise they hold.

Although the Company Law before and after the revision clearly stipulates that "shareholders recorded in the shareholder register can claim and exercise shareholder rights based on the shareholder register", the new Company Law specifically emphasizes in Article 86 that the time when the equity transferee of a limited liability company claims shareholder rights is when it is recorded in the shareholder register, and grants the equity transfer party the right to notify the company in writing and request changes to the shareholder register. If the company refuses or does not respond, both the transferor and the transferee have the right to sue the court. We understand that this is mainly to respond to the disputes in practice surrounding the issue of when the equity transferee obtains shareholder status. Although the Company Law has clear provisions, the Supreme Court also clarified the presumption of shareholder rights of the shareholder register in the case of [(2017) Supreme Court Civil Application No. 1513] Si Moumou and Ning Mou’s liability dispute over damage to shareholders’ interests, but in practice there are still many companies that do not actually prepare shareholder registers or do not attach importance to shareholder registers. Private equity fund investors usually pay more attention to change registration when making equity investments, but do not pay attention to timely implementation of the modification and update of the shareholder register of the invested enterprise.

In view of this, we recommend that private equity fund investors specify in the equity transfer agreement or investment agreement that the invested enterprise should provide the fund investor with a valid shareholder register that has been changed and records the identity of its shareholders before or on the day the fund investor pays the equity transfer price, so as to confirm that the fund investor will enjoy the shareholder rights of the invested enterprise from the date of payment of the equity transfer price. In addition, in conjunction with the scope of the exercise of the shareholder's right to know stipulated in the new "Company Law", the shareholder register has been added as a change. In the post-investment management process, private equity fund investors can also obtain relevant information about the shareholders of the invested enterprise in a timely manner by checking the shareholder register.

The new "Company Law" stipulates [7] that if a shareholder fails to pay the capital contribution in full on time or the actual value of the non-monetary property contributed is significantly lower than the amount of capital contribution subscribed, the equity transferor and transferee must transfer the equity after the capital contribution. bear joint and several liability within the scope of deficiencies. That is to say, if the equity actually transferred by a private equity fund is "defective equity" with the aforementioned circumstances, the private equity fund should bear joint and several liability with the equity transferor for insufficient capital contribution.

Therefore, we recommend that private equity funds invest in target companies through capital increases as much as possible to avoid joint and several liability for the transfer of defective capital contributions. If the private equity fund still chooses to invest in the old shares after careful consideration, the private equity fund should conduct full due diligence on the capital contribution of the target equity before transferring the equity, including but not limited to confirming whether the transferor has contributed capital in full and on time to the target equity. . For equity invested with non-monetary property, such as intellectual property, equity, debt, etc., since its actual value is easily significantly overestimated, private equity funds should pay special attention to full due diligence. If transaction conditions or negotiation status permit, they may also consider requesting The invested enterprise or equity transferor entrusts a third-party professional evaluation agency recognized by the private equity fund to conduct an independent, objective and professional re-evaluation of the non-monetary assets used for paid-in capital contribution. If the evaluation results show that there is a gap between the non-monetary investment property and the amount of subscribed capital, it is recommended that the private equity fund investor requires the equity transferor to make up the amount first or make up the amount through the equity transfer money. If it shows that there is no difference, the private equity fund investor should keep the evaluation report, which can then be used to prove that the private equity fund, as the transferee, "does not know and should not know" that there are investment flaws in the equity. Finally, out of prudent consideration, we also recommend that private equity fund investors require the equity transferor to make sufficient statements, guarantees and commitments regarding the capital contribution of the target equity in the equity transfer agreement, and clearly stipulate that the equity transferor will be responsible for the equity transferee’s The transferee shall be liable for all losses suffered due to the transfer of defective investment equity, and the liability for such losses shall not be waived due to due diligence by the transferee.

The new Company Law adds new provisions that joint stock companies can issue shares of different classes from common shares, including shares with priority or inferior distribution of profits or residual property, shares with more or less voting rights than common shares, shares with restricted transfer, and other classes of shares specified by the State Council. In this regard, we suggest that private equity funds (especially private equity funds with state-owned assets or state-controlled assets) can agree with the invested enterprises on priority dividend rights, priority liquidation rights, special voting rights (such as AB share system, veto power) and other priority rights for the class shares of the joint stock companies they invest in, in combination with the above provisions of the new Company Law, so as to obtain the maximum investment returns and reduce investment risks.

It is worth noting that the new Company Law does not stipulate a class share system such as priority liquidation for limited liability companies. Although there have been judicial precedents in practice that have affirmed the effectiveness of the priority liquidation clause for limited liability companies, there is no unified and clear provision for this, and there may still be relevant disputes in actual operations. Therefore, we suggest that private equity fund investors can still refer to previous practices, such as stipulating that the founding shareholders and other entities compensate the private equity fund investors for the difference in property that they failed to obtain due to distribution according to the investment ratio, and clearly stipulate this through a shareholder agreement/investment agreement.

The new Company Law provides[8] that the articles of association or shareholders' meeting of a joint-stock company may authorize the board of directors to issue no more than 50% of the issued shares within three years. Therefore, from the perspective of the company, when a joint-stock company authorizes the board of directors to issue shares, it should pay attention to whether the company's existing private equity fund investors enjoy anti-dilution rights. If there is an agreement on anti-dilution rights with the private equity fund investors, it should pay attention to the specific settings such as the lower limit of the unit price per share corresponding to the authorized issuance of shares, so as to avoid triggering the anti-dilution rights of the private equity fund investors and requiring them to pay anti-dilution compensation in accordance with the agreement.

From the perspective of private equity fund investors, combined with the provisions of the new Company Law on the supplementary capital contribution liability of the equity transferee, if the anti-dilution compensation method is agreed that the founding shareholders of the invested enterprise and other entities transfer their equity to the fund free of charge, it should be further clearly stipulated that the founding shareholders and other entities have paid the compensation equity before the transfer (and try to pay it in cash) to avoid the private equity fund assuming the supplementary capital contribution liability after acquiring the defective equity. If it is agreed that the anti-dilution compensation method is for the invested enterprise to issue new shares to the private equity fund investors, it should be agreed that the founding shareholders and other entities shall bear the obligation to pay the actual capital contribution of the new shares for such compensation.

According to the relevant provisions of the new Company Law[9], shareholders of limited liability companies are newly granted the right to review and copy the company's shareholder register and the company's accounting vouchers, and are newly granted the right to review and copy relevant materials of wholly-owned subsidiaries. Shareholders of joint stock companies who hold more than 3% of the company's shares individually or in aggregate for more than 180 consecutive days are granted the right to review the company's accounting books and vouchers, and have the right to copy relevant materials of the company's wholly-owned subsidiaries. Previously, there was considerable controversy in judicial practice as to whether shareholders could review the company's accounting vouchers. Many courts believed that accounting vouchers did not fall within the scope of what shareholders could review as stipulated by law, or that the shareholders who filed the lawsuit had no need to review the original vouchers, and rejected the shareholders' requests for the right to know about the company's accounting vouchers. After the implementation of the new Company Law, the scope of shareholders' right to know has been expanded. Based on this, it is recommended that private equity funds improve the shareholders' right to know clauses in the investment agreement in accordance with the relevant provisions of the new Company Law, including but not limited to increasing the shareholders' right to review the original accounting vouchers of the target company and relevant materials of the wholly-owned subsidiaries of the invested enterprise, so that they can better supervise and manage the operation of the invested enterprise by exercising the statutory and agreed shareholders' right to know in the post-investment stage.

Of course, for private equity funds, the statutory right to know is still insufficient. It is recommended that private equity funds make detailed provisions on the right to know in the investment agreement or shareholder agreement based on actual circumstances in order to fully understand the actual operating conditions of the invested enterprises.

The board of directors shall check the capital contributions of shareholders. If it is found that a shareholder has not paid the capital contribution in full and on time as required by the company's articles of association, the company shall urge the payment of the capital contribution. If the obligations prescribed in the preceding paragraph are not performed in a timely manner, causing losses to the company, the responsible directors shall bear the liability for compensation.

Directors, supervisors and senior managers should take measures to avoid conflicts between their own interests and the interests of the company, and should not abuse their power to seek improper benefits (duty of loyalty); when performing their duties, they should exercise the reasonable care that managers should normally exercise for the best interests of the company (duty of diligence).

The new Company Law has added a new "report + resolution + abstention" system arrangement for directors, supervisors and senior managers who directly or indirectly enter into contracts or conduct transactions with the company, seek business opportunities for the company, or compete with the same industry. Specifically, directors, supervisors and senior managers should report relevant matters to the board of directors or shareholders' meeting, and the resolution should be passed by the board of directors or shareholders' meeting in accordance with the provisions of the company's articles of association[10]. If the resolution is made by the board of directors, the related directors should abstain from voting.

In addition, the new Company Law has also expanded the scope of related persons. The close relatives of directors, supervisors and senior managers, enterprises directly or indirectly controlled by directors, supervisors and senior managers or their close relatives, and entities with other related relationships with directors, supervisors and senior managers are all included in the scope of related persons. When related persons directly or indirectly enter into contracts or conduct transactions with the company, they must also comply with the aforementioned "report + resolution + abstention" rules.

According to the new "Company Law", if a shareholder withdraws his capital and causes losses to the company, the responsible directors, supervisors and senior managers shall bear joint and several liability for compensation with the shareholder.

The new Company Law has newly added a prohibition on financial assistance and its exceptions[11]. If the above rules and exceptions are violated and losses are caused to the company, the responsible directors, supervisors and senior managers shall bear the liability for compensation.

If directors, supervisors and senior managers violate the provisions of laws, administrative regulations or the company's articles of association when performing their duties and cause losses to the company, they shall bear liability for compensation. At the same time, the new Company Law adds new rules for shareholders' dual subrogation lawsuits and their pre-litigation procedures[12], which means that company shareholders can also bring shareholder representative lawsuits against directors, supervisors and senior managers of the company's wholly-owned subsidiaries for the above-mentioned acts when certain pre-litigation procedures are met.

Liability of directors and senior executives for compensation to third parties

Directors, supervisors and senior managers who are responsible for the company's illegal distribution of profits and illegal reduction of capital shall bear corresponding compensation liability.

The new Company Law stipulates that the person who is obliged to liquidate the company shall be the director. The director shall form a liquidation group to conduct liquidation within 15 days from the date when the cause of dissolution occurs. The liquidation group shall be composed of directors or other candidates determined by the company's articles of association or shareholders' meeting resolution. If the director fails to perform the liquidation obligation in a timely manner and causes losses to the company or creditors, he shall bear the liability for compensation.

In summary, the obligations and responsibilities of the company's directors/supervisors/executives have been comprehensively strengthened in the new Company Law. Therefore, private equity funds should carefully consider whether to appoint directors/supervisors/executives to the invested enterprises. For the directors who have been appointed, they can consider using the director resignation rules stipulated in the new Company Law[13] to arrange relevant matters. If directors/supervisors/executives are not appointed, the decision-making authority of the shareholders' meeting of the invested enterprises should be strengthened through various agreements and arrangements, and shareholders should have a veto power over important matters.

If it is considered necessary to appoint directors/supervisors/executives to the invested enterprises, the following aspects should be noted:

Private equity fund managers should establish internal audit and internal control pre-emptive mechanisms for the decision-making and other official behaviors of the appointed directors, supervisors and senior managers in the invested enterprises, to ensure that the directors, supervisors and senior managers appointed to the invested enterprises have undergone sufficient and complete review and evaluation within the fund manager before performing their official duties, thereby reducing the risk of erroneous performance of duties in the invested enterprises and the corresponding liability.

The directors/supervisors/executives appointed by private equity fund investors should take the initiative to gain in-depth knowledge of the business conditions of the invested enterprises and other important information on which they rely in performing their duties. In the process of post-investment management, they should promptly, comprehensively and appropriately perform the more stringent statutory or contractual duties and obligations stipulated in the new Company Law and the articles of association of the invested enterprises, and properly retain relevant evidence of performance of duties to avoid being deemed "responsible" or "with intent or gross negligence" in related matters due to lack of sufficient evidence and thus being held liable for compensation.

It is recommended that private equity funds consider clearly stipulating in investment agreements and other documents that unless there is intent or gross negligence and a clear violation of the duty of loyalty and diligence stipulated in the Company Law, if the directors/supervisors/executives appointed by the private equity funds are deemed to be "responsible" and "liable for compensation" for performing their duties, the invested enterprises should, to the maximum extent possible, provide a bottom-line compensation for the losses suffered by the directors/supervisors/executives due to the claims.

The directors/supervisors/executives appointed by private equity funds to the invested enterprises essentially represent the interests of the private equity funds, but as directors/supervisors/executives of the invested enterprises, they have legal obligations to the invested enterprises, especially the obligation of loyalty and diligence. So when the interests of private equity fund investors conflict with the interests of the invested enterprises, how should the appointed directors/supervisors/executives weigh and deal with it? We suggest that when private equity funds instruct directors/supervisors/seniors to perform duties such as voting, they should avoid considering only their own interests, but should consider the overall situation and pay special attention to whether the relevant actions may cause a violation of legal obligations and whether they may bring about compensation liability or claims risks. In addition, private equity fund contracts generally stipulate exemption clauses for the performance of duties of its senior executives and employees. It is recommended that the liability exemption obligations of such personnel engaged in investment activities on behalf of private equity funds can be further detailed in the fund contract.

In practice, private equity funds may invest in multiple companies with similar business scopes and businesses in the same track and field. This means that if the directors/supervisors/executives appointed by private equity fund investors to one of the invested companies have a non-compete obligation to the company, the fund investors cannot appoint them to companies in the same industry. Therefore, we recommend that private equity fund investors and invested companies agree to exempt the non-compete obligation of the appointed directors/supervisors/executives.

The new Company Law clarifies that companies can purchase liability insurance for directors’ compensation liability for the performance of their duties during their term of office. We recommend that if a private equity fund appoints a director to an invested enterprise, it should agree with the invested enterprise to purchase liability insurance for the directors appointed by it, so as to transfer the risk of economic losses that may be caused by compensation liability.

The new Company Law has deleted the rule that shareholders of a company must obtain the consent of other shareholders before transferring equity to other parties, but has specified that shareholders should notify other shareholders in writing of the number, price, payment method and term of the equity transfer. Therefore, if there are no other restrictions in the articles of association of the invested enterprise, it may be more convenient for private equity funds to exit the invested enterprise by transferring equity.

Therefore, we suggest that private equity funds can appropriately lower their expectations of exit returns and give priority to the exit method of equity transfer to save time and avoid uncertainty. However, in order to speed up the transfer procedure, it is recommended that private equity fund investors stipulate in the investment agreement or shareholders' agreement that other shareholders should waive their preemptive right in this case. If the equity to be transferred has not been paid in full, the fund shall bear additional liability if the transferee fails to pay the capital contribution in full on time after the equity transfer. Therefore, in this case, the creditworthiness of the transferee should be carefully investigated to avoid the responsibility of paying the capital contribution in full after the equity transfer is completed. If the negotiating position of the fund allows, the transferee may be required to complete the payment of equity first.

The Ninth Civil Opinion issued by the Supreme People's Court in 2019 further clarified that "if the investor requests the target company to repurchase the equity, the people's court shall review it in accordance with Article 35 of the Company Law on 'shareholders shall not withdraw their capital contributions' or Article 142 on the mandatory provisions of share repurchase. If the target company has not completed the capital reduction procedure after review, the people's court shall dismiss its lawsuit." That is, based on the principle of capital maintenance, if private equity fund investors require the invested company to repurchase the equity, they can only do so by means of targeted capital reduction by the invested company.

However, in practice, according to the relevant provisions of the Company Law before this revision, the shareholders' meeting of the invested company must pass a resolution to reduce the registered capital, which must be approved by shareholders representing more than 2/3 of the voting rights. Private equity investment institutions generally do not hold more than 30% of the equity (or shares) of the invested company, and the possibility of successfully promoting the invested company to make a capital reduction resolution is small. On the other hand, even if the invested company can pass a resolution to reduce the capital of the private equity fund by majority vote, the validity of the resolution is controversial. In the two cases of Chen Mouhe and Jiangyin XX Industrial Co., Ltd.'s company resolution validity confirmation dispute and Hua Mouwei and Shanghai XX E-commerce Co., Ltd.'s company resolution dispute, the court denied the validity of the resolutions on targeted capital reduction involved in the cases.

The new "Company Law" clearly states that "when a company reduces its registered capital, it shall reduce its capital contribution or shares in proportion to the shareholders' capital contribution or shareholding, except where otherwise provided by law, all shareholders of a limited liability company have otherwise agreed, or the articles of association of a joint-stock company have otherwise provided." That is, in principle, a company should reduce its capital year-on-year, but a limited liability company can achieve targeted capital reduction through the form of agreement of all shareholders, and a joint-stock company can provide for targeted capital reduction through its articles of association.

Therefore, for private equity fund investors, when agreeing on equity repurchase with the invested enterprise: if the invested enterprise is a limited liability company, the relevant targeted capital reduction matters should be clearly approved by all shareholders through the signing of an investment agreement/shareholder agreement/shareholder meeting resolution, etc., which reflects the unanimous consent of all shareholders; if the invested enterprise is a joint-stock company, the targeted capital reduction matters can also be stipulated through the articles of association (but whether the resolution of such articles of association should be passed by shareholders unanimously or by majority vote remains to be seen).

The new Company Law grants shareholders of joint stock companies the same repurchase rights as shareholders of limited liability companies in three objection situations, namely, the company has been profitable for five consecutive years and meets the profit distribution conditions but has not distributed profits to shareholders for five consecutive years, the company transfers major assets, and the company amends its articles of association to extend the term after the dissolution reasons occur.

In addition, the new Company Law also adds the following situations in which shareholders can exercise the right to request repurchase:

According to the new "Company Law", when a company merges with another company in which it holds more than 90% of the shares, the merged company does not need a resolution of the shareholders' meeting, but it must notify other shareholders, who have the right to request the company to repurchase the company.

According to the provisions of the new "Company Law", if the controlling shareholder of a limited liability company abuses shareholder rights and seriously damages the interests of the company or other shareholders, other shareholders have the right to request the company to repurchase. However, joint-stock companies have not added similar provisions for shareholder repurchase rights.

It can be seen that the new "Company Law" has enriched the path for private equity funds to exit the company through repurchase. Most importantly, it provides a practical remedy for the deadlock in which the rights and interests of private equity funds are infringed by the controlling shareholder but cannot exit. However, it is worth noting that the aforementioned provisions clearly state that shareholders have the right to request the company to purchase their equity at a reasonable price. What is a "reasonable price"? From the perspective of private equity fund investors, we recommend that private equity fund investors and the invested enterprises agree in advance on the calculation standard of the "reasonable price" for the fund investors to request the invested enterprises to purchase equity, so as to avoid disputes caused by failure to reach a consensus on the purchase price at that time; and on this basis, it can be supplemented with an agreement that if the agreed repurchase price is not recognized as a reasonable price, the repurchase obligor has the obligation to compensate the fund investors for the difference between the recognized reasonable price and the agreed repurchase price.

In addition, for the repurchase rights of other shareholders when the controlling shareholder of a limited liability company abuses his rights, how to determine whether the controlling shareholder abuses his shareholder rights will be an important factor in whether the private equity fund can claim the repurchase right. In judicial practice, it is mainly manifested in the mixing of the property of the controlling shareholder and the invested enterprise, the controlling shareholder using its controlling position to conduct illegal and irregular related transactions or provide guarantees for related transactions, transfer company assets and arbitrarily intercept the business opportunities of the invested enterprise. We suggest that private equity fund investors can refer to the above common situations, clearly list them in the investment agreement or shareholder agreement, and collect and retain relevant evidence in a timely manner when it is found that the controlling shareholder may have the above-mentioned behavior in order to facilitate the smooth exercise of the repurchase right.

[1] The scope of this article is limited liability company-type private equity fund managers (hereinafter referred to as "company-type private equity fund managers") and private equity investment funds. Private equity fund managers of joint stock limited companies and company-type private equity funds are relatively rare in practice and will not be discussed in this article.

[2] Article 52, paragraph 1 of the new "Company Law" If a shareholder fails to pay the capital contribution on the date specified in the company's articles of association, the company may issue a written reminder to urge the payment of the capital contribution in accordance with the first paragraph of the previous article, and may specify a grace period for payment of the capital contribution; the grace period shall not be less than sixty days from the date on which the company issues the reminder. If the shareholder still fails to fulfill the capital contribution obligation after the grace period expires, the company may, upon resolution of the board of directors, issue a notice of forfeiture to the shareholder, which shall be issued in writing. From the date of issuance of the notice, the shareholder shall lose the equity interest for which the capital contribution has not been paid.

[3] Article 49, paragraph 3 of the new "Company Law" If a shareholder fails to pay the capital contribution in full on time, in addition to paying the full amount to the company, he shall also bear liability for compensation for the losses caused to the company.

[4] Minutes of the National Conference on Civil and Commercial Trial Work of the People's Courts, 6. [Should shareholders' capital contributions be accelerated] Under the registered capital subscription system, shareholders enjoy the benefits of the term in accordance with the law. If a creditor requests that shareholders who have not reached the capital contribution deadline bear supplementary compensation liability for the company's unpaid debts within the scope of their unpaid capital contributions on the grounds that the company cannot repay the debts due, the people's court will not support this request. However, the following circumstances are excluded:

(1) In cases where the company is the person subject to enforcement, the people's court has exhausted all enforcement measures and has no property to enforce, and the company has bankruptcy reasons, but does not apply for bankruptcy;

(2) After the company's debts arise, the company's shareholders' meeting (general meeting) resolves or extends the shareholders' capital contribution deadline by other means.

[5] Article 54 of the new "Company Law" If a company cannot repay its due debts, the company or the creditors of the matured claims have the right to require shareholders who have subscribed for capital contributions but have not reached the capital contribution deadline to pay their capital contributions in advance.

[6] Article 52 of the New Company Law: If a shareholder fails to pay the capital contribution on the date specified in the company's articles of association, and the company issues a written reminder for payment in accordance with the first paragraph of the preceding article, the company may specify a grace period for payment of the capital contribution; the grace period shall not be less than sixty days from the date the company issues the reminder. If the shareholder still fails to fulfill the obligation to contribute capital after the grace period, the company may, upon resolution of the board of directors, issue a notice of forfeiture to the shareholder, which shall be issued in writing. From the date of issuance of the notice, the shareholder shall lose the equity interest for which the shareholder has not paid the capital contribution.

The equity interest lost in accordance with the preceding paragraph shall be transferred in accordance with the law, or the registered capital shall be reduced accordingly and the equity interest shall be cancelled; if it is not transferred or cancelled within six months, the other shareholders of the company shall pay the corresponding capital contribution in full in proportion to their respective capital contributions.

If a shareholder objects to the forfeiture of rights, he shall file a lawsuit with the people's court within thirty days from the date of receipt of the notice of forfeiture.

[7] New Article 88 Where a shareholder transfers equity for which he has subscribed capital contribution but before the capital contribution deadline has expired, the transferee shall bear the obligation to pay the capital contribution; if the transferee fails to pay the capital contribution in full on time, the transferor shall bear supplementary liability for the capital contribution not paid by the transferee on time.

Where a shareholder transfers equity for which he fails to pay the capital contribution on the date specified in the company's articles of association or the actual value of the non-monetary property used as capital contribution is significantly lower than the subscribed capital contribution, the transferor and the transferee shall bear joint and several liability to the extent of the insufficient capital contribution; if the transferee does not know and should not have known of the existence of the above circumstances, the transferor shall bear the liability.

[8] New Company Law Article 152 The company's articles of association or the shareholders' meeting may authorize the board of directors to decide to issue shares not exceeding 50% of the issued shares within three years. However, capital contributions made with non-monetary property shall be subject to a resolution of the shareholders' meeting.

Where the board of directors decides to issue shares in accordance with the preceding paragraph, resulting in changes in the company's registered capital or the number of issued shares, the amendment of the relevant matters recorded in the company's articles of association does not need to be voted on by the shareholders' meeting.

[9] Article 57 of the new Company Law provides that shareholders have the right to review and copy the company's articles of association, shareholder register, minutes of shareholders' meetings, resolutions of board of directors meetings, resolutions of board of supervisors meetings and financial accounting reports.

Shareholders may request to review the company's accounting books and accounting vouchers. If a shareholder requests to review the company's accounting books and accounting vouchers, he shall submit a written request to the company stating the purpose. If the company has reasonable grounds to believe that the shareholder's review of the accounting books and accounting vouchers has an improper purpose and may damage the company's legitimate interests, it may refuse to provide access and shall reply to the shareholder in writing within 15 days from the date of the shareholder's written request and state the reasons. If the company refuses to provide access, the shareholder may bring a lawsuit to the people's court.

Shareholders may entrust accounting firms, law firms and other intermediary institutions to review the materials specified in the preceding paragraph.

Shareholders and their entrusted accounting firms, law firms and other intermediary institutions shall comply with the provisions of laws and administrative regulations on the protection of state secrets, commercial secrets, personal privacy, personal information, etc. when reviewing and copying relevant materials.

If a shareholder requests to review and copy relevant materials of a wholly-owned subsidiary of the company, the provisions of the first four paragraphs shall apply.

Article 110 Shareholders have the right to review and copy the company's articles of association, shareholder register, minutes of shareholders' meetings, resolutions of board meetings, resolutions of supervisory board meetings, and financial accounting reports, and to make suggestions or inquiries on the company's operations.

Where shareholders who hold 3% or more of the company's shares individually or in aggregate for more than 180 consecutive days request to review the company's accounting books and accounting vouchers, the provisions of Article 57, paragraphs 2, 3, and 4 of this Law shall apply. If the company's articles of association have lower provisions for shareholding ratios, such provisions shall prevail.

Where shareholders request to review and copy relevant materials of the company's wholly-owned subsidiaries, the provisions of the first two paragraphs shall apply.

Shareholders of listed companies who review and copy relevant materials shall comply with the provisions of the Securities Law of the People's Republic of China and other laws and administrative regulations.

[10] Regarding seeking business opportunities for the company, if the company cannot use the business opportunity according to laws, administrative regulations or the company's articles of association, directors, supervisors and senior managers may also seek such business opportunities belonging to the company.

[11] Article 163 of the new Company Law: A company shall not provide gifts, loans, guarantees or other financial assistance for others to obtain shares of the company or its parent company, except when the company implements an employee stock ownership plan.

For the benefit of the company, the company may, upon resolution of the shareholders' meeting or resolution of the board of directors made in accordance with the company's articles of association or authorization of the shareholders' meeting, provide financial assistance to others to acquire shares of the company or its parent company, but the cumulative total amount of financial assistance shall not exceed 10% of the total issued share capital. Resolutions made by the board of directors shall be approved by more than two-thirds of all directors.

If the violation of the preceding two paragraphs causes losses to the company, the responsible directors, supervisors and senior managers shall bear the liability for compensation.

[12] Article 189, paragraph 4 of the new "Company Law" If the directors, supervisors and senior managers of a wholly-owned subsidiary of a company are in the circumstances specified in the preceding article, or if others infringe upon the legitimate rights and interests of a wholly-owned subsidiary of the company and cause losses, the shareholders of a limited liability company or shareholders of a joint stock company who individually or collectively hold more than 1% of the company's shares for more than 180 consecutive days may, in accordance with the preceding three paragraphs, request the board of supervisors or board of directors of the wholly-owned subsidiary to file a lawsuit with the people's court or directly file a lawsuit with the people's court in their own name.

[13] Article 70, Paragraph 2, Clause 3 of the New Company Law: If a director's term of office expires and is not re-elected in a timely manner, or a director resigns during his term of office, resulting in the number of board members being less than the statutory number, the original director shall continue to perform his duties as a director in accordance with the provisions of laws, administrative regulations and the company's articles of association before the re-elected director takes office.

If a director resigns, he shall notify the company in writing, and the resignation shall take effect on the date the company receives the notice. However, if the circumstances specified in the preceding paragraph exist, the director shall continue to perform his duties.