En recent years, with the rapid development of the private - equity fund industry and the increase in economic fluctuations and investment changes, conflicts and disputes between investors, private - equity fund managers and other relevant entities have become more and more frequent. From the perspective of investors, this article explains the management ideas that investors can adopt and the difficulties they may encounter when facing private - equity fund disputes.
1. Basic Concepts
(1) Private - equity funds, related institutions, practitioners
- What is a private - equity fund?
A private - equity investment fund, referred to as a private - equity fund, refers to an investment fund established on the territory of the Peoples Republic of China by privately raising funds from investors. It is mainly divided private - equity investment funds, private - equity investment funds, venture - capital funds and other private - equity investment funds.
- Participants in the raising, operation and withdrawal of private - equity funds
The process of raising, investing and operating private - equity funds involves many entities. Multiple entities not only provide multi - party cooperation, mutual restriction and supervision, but also bring complex and diversified legal relationships. Understanding the concepts and identities of each entity in private - equity funds, as well as its status and role, is conducive to determining the real responsible entity when facing private - equity fund - related disputes.
- Private - equity fund shareholders: They refer to investors who become private - equity fund investors, fund asset owners and fund investment return beneficiaries by purchasing private - equity fund shares. In accordance with the contract and relevant laws and regulations, they have the right to obtain asset income, the right to know, the right to participate in decision - making, the right to withdraw, etc. of private - equity funds, and also assume obligations such as capital contribution and risk - taking. Private - equity fund shareholders must be qualified investors.
- Private - equity fund manager: It refers to an institution that uses its specialized knowledge and experience to manage the assets of the funds, make investment decisions in accordance with laws, regulations, fund articles of association or fund contracts, and according to scientific investment portfolio principles, and strive to continuously increase the value of the managed assets and enable fund holders to obtain the maximum return. It is the raiser and manager of fund products and is responsible for managing the assets of the fund. It should perform its fiduciary duties with diligence, loyalty and prudence, and has the right to receive corresponding income in accordance with the agreement.
- Private - equity fund custodian**: It refers to the party that is responsible for asset custody, transaction supervision, information disclosure, fund settlement and accounting in the operation of private - equity funds in accordance with laws, regulations and custody agreements. Generally, it is a commercial bank or other financial institution approved by the China Securities Regulatory Commission. It is responsible for asset custody, transaction supervision and other responsibilities.
- Fund sales agency: An agency registered with the China Securities Regulatory Commission or its dispatched office, which obtains fund sales business qualifications, accepts the entrustment of the fund manager, acts as an agent to sell fund products and collects sales commissions.
- Private - equity fund practitioners**: In accordance with the "Securities Investment Fund Law of the Peoples Republic of China", fund practitioners must have fund practitioner qualifications and authorize the Asset Management Association of China to organize fund practitioners to carry out qualification management. In the process of raising, investing and operating private - equity funds, it is actually the practitioners who implement it, and their official behaviors are one of the important bases for attributing responsibilities to relevant entities.
2. Analysis of Claims from the Investors Perspective
When a dispute occurs due to a private - equity fund, the most important thing for the parties is the resolution of the dispute. The methods and channels for dispute resolution should be analyzed according to the specific circumstances of different cases, and the most appropriate dispute - resolution method should be ed among different cases.
(1) Right of claim and the effect of the right of claim
- Claims arising from the contract
The core of claims arising from the contract is the contract. In disputes between investors related to private - equity funds, there are also differences in contractual claims according to different situations and different entities.
- Situation 1: The right to request contract termination
- Agreed - upon termination right: According to Article 562 of the Civil Code of the Peoples Republic of China, "The parties may terminate the contract by consensus. The parties may agree on the reasons for which one party may terminate the contract. When the reasons for termination occur, the party with the right to terminate the contract may terminate the contract." For reasons of fund stability and interests, fund managers rarely stipulate the termination circumstances in the "Fund Contract", except that the investor has a 24 - hour investment - cooling - off period after signing the fund contract and has the right to terminate the contract before the successful follow - up confirmation by the fundraising institution.
- Statutory termination right**: According to Article 563 of the Civil Code, the parties may terminate the contract in any of the following circumstances: (1) The purpose of the contract cannot be achieved due to force majeure; (2) Before the performance deadline, one party clearly states or demonstrates by its own behavior that it will not perform its main obligation; (3) One party delays the performance of its main obligation and still does not perform it within a reasonable period after being urged; (4) One party delays the performance of its obligations or commits other breaches, which makes the purpose of the contract unachievable; (5) Other circumstances provided by law. The key to determining whether a statutory termination right can be exercised lies in whether the purpose of the contract can be achieved. In this regard, the judicial authorities adopt relatively strict standards. If the private - equity fund manager fails to raise funds and the purpose of the contract cannot be achieved, the investor can terminate the private - equity fund contract through the statutory termination right.
- Legal effects after contract termination**: According to Article 566 of the Civil Code, if the contract has not been performed after the contract is terminated, the performance shall be terminated; if it has been performed, the parties may request restitution or other corrective measures according to the performance and the nature of the contract, and have the right to request compensation for damages. If the contract is terminated due to a breach of contract, the party with the right to terminate may request the breaching party to bear the liability for breach of contract, unless otherwise agreed between the parties. Therefore, when the private - equity fund contract is terminated, the investor requests the fund manager to return the principal and investment interest.
- Situation 2: The investor and the fund manager sign the "**** Private - Equity Fund Contract", and the private - equity fund manager breaches the contract and assumes the liability for breach of contract
As a party to the "Private - Equity Fund Contract", the fund manager has corresponding obligations under the contract. The specific obligations assumed by fund managers will be described differently in different fund contracts. However, in combination with laws, regulations, judicial precedents, etc., the obligations of private - equity fund managers include at least four major sections: suitability obligations, good - faith obligations, due - diligence obligations and information - disclosure obligations. In judicial proceedings, the specific obligations violated by the fund manager should be judged one by one based on the fund contract and relevant facts.
According to Article 577 of the Civil Code: "If one party fails to perform its contractual obligations or performs its contractual obligations inconsistent with the agreement, it shall bear the liability for breach of contract, such as continued performance, taking corrective measures or compensating for losses." When the fund manager breaches the contract, the investor can request it to compensate for losses, and the judicial authority will determine its ultimate liability share - total or partial - based on factual evidence and the fund managers breach of contract.
In the second situation, it should be noted that the dispute - resolution clause in the "Private - Equity Fund Contract" stipulates the dispute - resolution method: "The parties agree that all disputes arising from or in connection with this contract shall be... 2. The cost of arbitration is higher than the cost of litigation, which constitutes another dilemma for investors who initiate lawsuits on their own; 3. In terms of substantive judicial procedures, arbitration may pay less attention to balancing social interests and protecting vulnerable groups than courts.
- Situation 3: The investor and the sales agency form a legal relationship in an entrusted financial - management contract, and the sales agency breaches the contract and assumes the liability for breach of contract
In real - world judicial practice, investors often not only require the fund manager to be held responsible, but also require the sales agency that recommended the investor to buy the fund to be held responsible.
Holding the sales agency responsible can not only avoid the constraints of many fund - contract clauses that are not favorable to investors, such as the arbitration clause in dispute resolution; investors can also choose entities with stronger compensation capabilities; and, from the simple feelings of investors, whoever introduces and recommends the fund should also assume corresponding responsibilities.
In the sales of some private - equity funds, fund managers will entrust fund sales to fund - sales agencies for agency sales. There is a principal - agent relationship between fund managers and sales agencies, but most of the relationships between investors and sales agencies do not have written legal documents.
According to Article 178 of the Civil Code, if two or more persons are tly and severally liable in accordance with the law, the right - holder has the right to request some or all of the tly and severally liable persons to assume liability. At the same time, according to Article 74 of the "Minutes of the Ninth Civil Trial Conference", if the issuer and seller of financial products fail to fulfill their suitability obligations, resulting in financial consumers suffering losses in the process of purchasing financial products, financial consumers can request the issuer of financial products to assume the liability for compensation, or request the issuer and seller of financial products to assume t and several liability for compensation in accordance with Article 167 of the General Provisions of the Civil Law.
Although there is no written legal document confirming the existence of a relationship between the investor and the fund - sales agency, the fund - sales agency has essentially formed an entrusted financial - management legal relationship with the investor due to its behavior of promoting the fund to the investor. According to the above - mentioned provisions, when the sales agency violates its obligations: suitability obligation: recommending fund products that meet its risk assessment to qualified investors, the sales agency will assume corresponding obligations due to its breach of contract.
- Claims based on pre - contractual fault
According to the "Minutes of the Ninth Civil Trial Conference" and relevant judicial interpretations, the suitability obligation is clearly regarded as a pre - contractual obligation. The violation of this pre - contractual obligation may give rise to the right to claim pre - contractual fault. According to the "Ninth Ministerial Meeting Minutes", the responsible entities may be financial institutions, including fund managers, fund - sales agencies, consulting units, etc., and assume the liability for pre - contractual fault.
However, in practical theory, there are still some disputes about the nature of the suitability obligation: legal obligation, pre - contractual obligation and contractual obligation, and there are also different views on the liability arising from the violation of the suitability obligation.
The suitability obligation is the focus of current private - equity fund disputes. The author will focus on it in the next chapter. Therefore, it will not be expressed here for the time being.
- Claims based on tort
Judging from the standardized order of claim search, the order of tort claims is lower than that of contractual claims. It can also be seen from the judicial judgment data that investors mainly file lawsuits in court for breach of contract, but the specific choice of the type of claim to protect rights still needs to be comprehensively judged based on the actual situation and evidence.
According to Article 1165 of the Civil Code, if the actor causes damage to the civil rights and interests of others due to fault, he shall bear tort liability.
As a tort action, a tort - damage - compensation action should comply with the provisions of tort law on the constitutive elements of tort. The constitutive elements of tort - damage - compensation are: illegal act, damage fact, causal relationship and subjective fault.
In the case of a tort action, the tort - feasors may be fund managers, sales agencies or even fund custodians.
For the above - mentioned subjects, their tortious acts vary according to the subject.
- Tortious acts of fund managers: Such as failure to invest, failure to disclose information, failure to file, etc.;
- Tortious acts of sales agencies: Such as failure to fulfill suitability obligations and sales personnel recommending fund products in violation of regulations;
- Tortious acts of fund custodians**: Such as failure to perform the duty of supervision, etc.;
- Comparison between tort actions and actions for damages for breach of contract or pre - contractual fault
From the perspective of the scope of compensation, tort liability generally only covers direct property damage, but does not include indirect property damage (loss of expected benefits), while liability for breach of contract covers various actual property losses. Multiple judgments support fund managers to compensate investors. The principal also supports bank - deposit interest and even the expected income stipulated in the fund contract for the same period.
From the perspective of the burden of proof, for example, according to Article 75 of the "Minutes of the Ninth Civil Trial Conference", the burden of proof should be borne by a financial institution such as the manager or the sales agency. However, the "Minutes of the Ninth Civil Trial Conference" indicates that the cause of action is an entrusted financial - management contract. There are doubts about whether it applies to tort - liability damages. Some courts require investors to provide evidence to prove the existence of fault.
However, tort actions still have their unique advantages: fund custodians can be listed as t tort - feasors and t defendants.
(2) Summary
Different claims require different legal bases, impose different legal requirements on investors and also have different legal effects. When parties encounter private - equity fund disputes, they must finally choose which claim to be based on the reality. Based on the reality, this article summarizes and concludes an "investment - right - protection roadmap" sui for investors facing private - equity fund disputes, which can help investors choose appropriate right - protection weapons in different situations.
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