Source| Shanghai Financial Court
On February 17, the Shanghai Financial Court held a press conference to release the Report on the Prevention of Legal Risks in Private Equity Fund Disputes (hereinafter referred to as the Report). This is the first time that the Shanghai Financial Court has established the "Annual Release Mechanism for Legal Risk Prevention Reports on Financial Disputes".
In order to thoroughly implement the central government's decision-making and deployment on preventing and resolving financial risks, actively respond to the actual needs of financial market risk prevention, give full play to and extend the role of financial adjudication functions, and provide more powerful judicial guarantees for financial openness and innovative development, the Shanghai Financial Court has established the "Annual Release Mechanism for Financial Dispute Legal Risk Prevention Reports", in the form of "Financial Dispute Legal Risk Prevention Series Reports", adopting a new perspective combining law and market logic. Provide a new paradigm of legal risk analysis from a mesoscopic perspective, and explore a new path of customized judicial advice for all parties, so as to improve the pertinence and effectiveness of judicial prevention and resolution of financial risks.
The Report focuses on private fund disputes. In recent years, the rapid development of the private equity fund industry has played an active role in increasing the proportion of direct financing, promoting scientific and technological innovation, optimizing the investor structure of the capital market, serving the real economy and enriching the form of resident wealth management; but at the same time, there have been violations such as circumventing the requirements of qualified investors, disguised capital pool operation, rigid payment, etc., and industry risks have gradually emerged, and it is necessary to sort out and analyze the legal risks of the industry to promote the healthy development of the industry.
The Report sorts out and analyzes the legal risks of the private fund industry from five aspects, including the litigation involved in private funds, the risk management of the industry, the types of disputes and risk disclosure, the suggestions for legal risk prevention, and the suggestions for improving the key points of contract terms.
The Report conducts a statistical analysis of private equity fund-related cases concluded by Shanghai courts from 2016 to 2021, and finds that such cases have the following characteristics:
First, the amount of the subject matter is large and the number of cases is on the rise, the amount of litigation subject matter is mainly concentrated between 1 million yuan and 10 million yuan, the number of cases has shown an upward trend in the past six years, especially from 2017 to 2018 showed a rapid growth trend; second, disputes mainly occur within private funds, 67.53% of the disputes occur between investors, managers, custodians, investment consultants, and sales agencies; third, the cause of the case is diverse but mainly contract disputes, accounting for 71.96% Fourth, the types of litigation are diverse but mainly claim liability for breach of contract, accounting for 67.34%; fifth, disputes are mostly individual investors suing managers, 68.08% of the litigation cases are initiated by investors, of which 92.95% are individual investors; sixth, private equity fund organizations are diverse and mainly partnership and contract type; seventh, the main investment targets are non-standardized assets, and most of the investment targets are equity, accounting for 41.11%; eighth, disputes are more often at the investment and exit stages, accounting for 34.50% respectively. and 61.25%; ninth is that the principal income commitment is more common and diverse, accounting for 28.41%; 10 is that the number of litigation cases is much smaller than the number of arbitration cases; 11 is that the enforcement rate in place is low due to the poor credit of the judgment debtor, 62.57% of the people have no property to enforce, only 14.62% are fully executed, and the actual enforcement rate is 13.60%.
In order to dig deeper into the overall data related to litigation and the market, and comprehensively judge the problems existing in the risk management of the private fund industry, the Shanghai Financial Court issued a questionnaire to the domestic private equity fund member units. The report conducts an in-depth analysis of the 519 valid questionnaire surveys that have been fed back, and summarizes the current problems in risk management in the private equity industry, mainly including:
The number of small-scale managers is large; the compliance staffing of managers is small; the investment target of private equity funds is relatively single; the nature of the legal relationship of funds is disputed; nearly one-third of private fund managers have not implemented the cooling-off period telephone return visit system; about one-fifth of the fund contracts do not fully stipulate the manager's duty of diligence; the contractual agreements in the fund liquidation link are not clear enough; and the holder meetings do not fully play their role.
The Report sorts out the specific situations of disputes involved in the various stages of private fund raising, investment, management and withdrawal, and analyzes and reveals the risks of the deep-seated causes of disputes involving the appropriateness of investors, the commitment of principal returns, the violation of the obligations of managers and custodians in the investment management stage, and withdrawal and liquidation one by one from a comprehensive legal and financial perspective. According to different entities, the "Report" puts forward opinions and suggestions on investors, regulatory authorities, market institutions, etc.
For investors, it is recommended to:
Truthfully and objectively provide investor appropriateness information; rationally view the principal return commitment, carefully select the manager and private equity products, and bear the commercial risks themselves; pay attention to the contractual agreements for the withdrawal and liquidation of private funds.
For regulators, it is recommended that:
Improve the fulfillment standards for refining the suitability obligations of investors; improve the regulatory norms on the commitment of principal returns; clarify and refine the standards for the obligations of managers; construct industry guidelines based on market best practices; clarify the nature and behavior standards of custodians' obligations; and strengthen the normative guidance for the withdrawal of private funds.
For managers, sales organizations, and custodians, it is recommended that:
Managers and sales institutions should further standardize the performance of the obligation of appropriateness; should establish market credibility by improving service levels and business capabilities, avoiding the provision of principal return commitments as a means to attract investors; select the appropriate legal relationship and organizational form of private funds; managers should fully perform their duties of loyalty and diligence; clearly stipulate the custody duties, draw a clear line between the rights and obligations of custodians; and refine the rights, obligations and operational procedures of all parties in the liquidation process of private funds when they expire.
Finally, in order to further clarify and refine the situations that are prone to disputes, effectively plug risk loopholes, and strengthen the governance of the source of disputes, the Report puts forward ten suggestions for improving the terms of private fund contracts:
The first is to clarify the nature of the legal relationship of the private fund; the second is to indicate the circumstances and legal consequences of the rigid redemption; the third is to disclose whether other credit enhancement measures and specific methods are provided; the fourth is to clarify the nature and content of the manager's obligations; the fifth is to clarify the legal status and obligations of the custodian; the sixth is to clarify the circumstances of the modification, rescission and termination of the fund contract and its legal consequences; the seventh is to clarify the conditions, specific methods and procedures for investors to withdraw; and the eighth is to clarify the special precautions for the withdrawal of investors of partnership private funds The ninth is to clarify the conditions, time limit and methods for the liquidation of private funds; the tenth is to clarify the liability of the manager for breach of contract when he is lazy in liquidation.
Xiao Kai, vice president of the Shanghai Financial Court, said: "The Shanghai Financial Court will further promote the institutionalization, standardization and normalization of the 'annual release mechanism for legal risk prevention reports on financial disputes', continue to do a good job in risk prevention and resolution, and provide more powerful judicial guarantees for financial openness and innovative development." ”