Essential Terms of Private Investment Fund Contract

Preface

 

In accordance with Tenth Questions and Answers relating to Private Fund Registration and Filing (hereinafter referred to as “Q&A 10”) promulgated by Asset Management Association of China (hereinafter referred to as “AMAC”) on June 30, 2016, those qualified wholly foreign-owned and Sino-foreign securities fund management institutions will be able to operate private securities fund management business in domestic China upon the approval of China Securities Regulatory Commission (hereinafter referred to as “CSRC”) as well as being registered as private securities fund operator with AMAC. Given private equity fund management institutions have not been set any restrictions on shareholding ratio of foreign investors by China regulators before, the release of Q&A 10 means there shall be no any legal barriers for those qualified foreign financial institutions (hereinafter referred to as “QFFIs”) to enter into China’s Fund Industry as a whole.

 

It was promulgated by AMAC on April 18, 2016 three contract guidelines respectively for three kinds of private investment fund, namely contractual private investment fund, corporate private investment fund and partnership private investment fund (hereinafter referred to as “Fund Contract Guidelines”).  Such guidelines include those essential terms of three kinds of private investment fund contract which will be formally implemented on July 15, 2016.  Therefore, to better facilitate QFFIs to initiate their fund management business here in China, we intend to list down those key guidelines as well as essential terms hereunder.

 

1.      Guidelines for Contractual Private Investment Fund Contract

 

No.

Essential Terms

Brief Descriptions

1

Name of contract

including words such as “Private Fund” or “Private Investment Fund”

2

Trusteeship

trusteeship mode: 3-party contract signed by private fund operator, fund trustee and investors

non-trusteeship mode: measures to ensure safety of assets and dispute resolution terms clearly identified

3

Preface

purpose, basis and principle for conclusion of contract

4

Definitions

explanations and instructions on words/expressions with specific legal meanings

5

Representations and Warranties (in bold)

Private Fund Operator:

Registered private fund operator with code indicated; completion of risk reveal to and risk assessment of the investors; fund assets properly used in the principle of integrity, caution and diligence; no commitment made on profit/minimum benefit of the fund

6

Fund Trustee:

properly manage fund assets in the principle of integrity, caution and diligence

7

Fund Investors:

qualified investors; legal source and use of assets; fully understanding of the terms/rights/obligations of contract; willing to bear relevant investment risks; all information provided being true/complete/correct/legal without any material omission/ misunderstanding; aware of no commitment or guarantee on the profit of fund assets

8

Basic Information of Private Fund

name, operation method, planned total raising amount (if any), investment target and scope, term, original par value, structure (if any), trusteeship (if any), outsourcing (if any), etc.

9

Raising of Private Fund

institution, target, method and term of raising, subscription matters, cooling-off period of investment and returning visit, special account for fund raising and settling, etc.

10

Establishment and Filing of Private Fund

method of signing contract, conditions of establishment, management of failure of fund raising, forbidden to make investment before AMAC filing

11

Subscription, redemption and transfer of Private Fund

subscription and redemption: open day and time, method/price/process/confirmation/authority, amount limitation (with exception), costs, calculation method, recognition and management of large amount redemption, situations and management of rejection or stop;

Transfer (optional term): method/process, responsibilities of private fund operator, registration of transfer

12

Rights and obligations

name/registered address/contact person and address/telephone

number of contract parties; detailed rights and obligations of contract parties in accordance with Provisional Measures on Supervision and Administration of Privately-offered Investment Funds and relevant regulations

13

General meetings of fund-units holders and agency thereof

situations of convening general meetings of fund-units holders; authorities, appointment, personnel structure and change procedures of the agency of general meetings of fund-units holders; matters relating to general meetings of fund-units holders and agency thereof (convener and method of convening, time/content/method of meeting notice, relevant procedures, etc.)

14

Registration of fund units

all matters relating to registration of fund units

15

Investment of private fund

Investment target/scope/strategy/limitation, interest conflict and its management; performance benchmark (if any); financing/ securities lending and OTC securities businesses (if any)

16

Assets of private fund

Custody and disposition of fund assets, opening and management of relevant accounts of fund assets, safety measures and dispute resolution of fund assets under non-trusteeship mode

17

Arrangements on transaction and liquidation

procedures on the selection of securities and futures broker, arrangement on liquidation; check of capital; securities accounts and transaction records; capital liquidation of subscription or redemption; such matters relating to the investment orders of capital allocation and the receipt/settlement of the other payment under trusteeship mode only

18

Evaluation and accounting of fund assets

purpose, time, method, target, process, mistake management, suspension situation of evaluation; confirmation of the net value of fund units; management of special situations; accounting policies

19

Costs and taxation of private fund

Relevant matters of fund related costs; tax paying arrangement of contract parties

20

Income distribution of private fund

principle of income distribution; confirmation and notice of income distribution plan; execution method of income distribution

21

Information disclosure and report

variety, content, frequency and method of information disclosure; such information which is statutorily disclosed under Measures on Administration of Information Disclosure of Private-offered Investment funds; periodical disclosure to fund investors the net value of fund units reviewed by fund trustee; filing of disclosed information

22

Revelation of risks

potential risks during the management, operation or disposition of fund assets such as risks relating to delegated raising, outsourcing, hiring investment advisor, capital loss, fund operation, liquidity, failure of raising, investment target, taxing, etc.

23

Effectiveness, revision, cancellation and termination of fund contract

effective date; term; conditions and procedures of revision; situations of cancellation and termination

24

Liquidation of private fund

composition and responsibilities of liquidation team; procedures of liquidation; source and payment method of liquidation fee; distribution of remaining assets; notice arrangement of liquidation report; keeping of account books and files of liquidation; write-off of relevant accounts

25

Breach of contract

liabilities of the breaching party

26

Dispute resolution

negotiation; arbitration/litigation

27

Other matters

other necessary matters under fund contract

 

2.      Guidelines for Corporate Private Investment Fund Contract

 

No.

Essential Terms of Article of Associations

Brief Descriptions

1

Representations and Warranties (in bold)

Private Fund Operator:

Registered private fund operator with code indicated; completion of risk reveal to and risk assessment of the investors; fund assets properly used in the principle of integrity, caution and diligence; no commitment made on profit/minimum benefit of the fund

 

Fund Investors:

qualified investors; legal source and use of assets; fully understanding of the terms/rights/obligations of contract; willing to bear relevant investment risks; all information provided being true/complete/correct/legal without any material omission/ misunderstanding

2

Basic information

Name; registered address; registered capital; term; scope of business (including words such as “fund management”, “investment management”, “asset management”, “equity investment”, “venture investment”, etc.); name/address/legal representative of shareholder(s); conditions on the revision of such information

3

Contribution of shareholder(s)

method, amount, ratio and term of contribution

4

Rights and obligations of shareholder(s)

basic rights and obligations of shareholder(s); ways to exercise the right to know

5

Investment, withdrawal and equity transfer

Conditions and procedures on capital increase and decrease, investment, withdrawal and equity transfer

6

Shareholders meeting/General meeting of shareholders

Duties, procedures of convene and convention rules thereunder

7

Senior management

methods, duties, procedures of convene, term of office and convention rules of board of directors/executive director, board of supervisors/supervisor(s) and the other senior management personnel

8

Investment matters

scope/strategy/operation/method/limitation of investment; decision-making procedures; identification criteria of affiliates; evading system relating to investment of affiliates; sustained post-investment supervision/investment risk prevention/investment exit of invested enterprise

9

Management method

management structure and investment strategy procedures under self-management mode; name of operator, limitation of management, calculation and payment method of management fee under delegated management mode

10

Trusteeship

name of trustee or authorization scope on the trusteeship made by all shareholders to board of directors/executive director under trusteeship mode; safety measures for fund assets and dispute resolution mechanism under non-trusteeship mode

11

Income distribution and loss allocation

principle and execution method thereof

12

Tax assumption

relevant matters thereof

13

Costs and expenses

Standard and accrual method of relevant costs (including tax), remuneration of delegated operator and trustee

14

Financial and accounting rules

bookkeeping, fiscal year, annual financial report audited by accounting firm, basic situation of yearly investment and operation, draft and submission of important events, conditions for access to accounting book

15

Information disclosure

content, method and frequency thereof

16

Termination, dissolution and liquidation

procedures thereof

17

Revision of Article of Associations

causes and procedures thereof

18

Conformity

prevailing of content of Article of Associations in case of its inconformity with content of contribution agreement between/among shareholders or the other documents; prevailing of content of filed Article of Associations in case of inconformity between/among different versions of Article of Associations

19

Backup of fund units information

fund units information being backed up by fund operator, fund units registration authority or the other fund units registration obligators

20

Report of disclosed information

disclosed information being backed up by fund operator or the other information disclosure obligators

 

3.      Guidelines for Partnership Private Investment Fund Contract

 

No.

Essential Terms of Partnership Agreement

Brief Descriptions

1

Representations and Warranties (in bold)

Private Fund Operator:

Registered private fund operator with code indicated; completion of risk reveal to and risk assessment of the investors; fund assets properly used in the principle of integrity, caution and diligence; no commitment made on profit/minimum benefit of the fund

 

Fund Investors:

qualified investors; legal source and use of assets; fully understanding of the terms/rights/obligations of contract; willing to bear relevant investment risks; all information provided being true/complete/correct/legal without any material omission/ misunderstanding

2

Basic information

name (including the word of “partnership”); main business premise; term; scope of business (including words such as “fund management”, “investment management”, “asset management”, “equity investment”, “venture investment”, etc.); conditions on the revision of such information

3

Partners and their Contribution

name and address of general partner(s) and limited partner(s); method, amount, ratio and term of contribution; procedures of change of such information

4

Rights and obligations of partners

basic rights and obligations of general partner(s) and limited partner(s)

5

Executive partner(s)

general partner(s) being executive partner(s) to make investment of, manage, utilize, dispose partnership assets under the supervision of the other general partner(s) and limited partner(s); qualification, selection procedure, extent of power, breaching treatment, removal conditions and change procedure of executive partner(s)

6

Limited partner(s)

 

no directly/indirectly involvement in implementation of partnership affairs except for the eight kinds of behaviors under Article Sixty-eight of Partnership Enterprise Law of P.R.C

7

Partners’ meeting

convening conditions, procedures and voting methods thereof

8

Management method

fund operator (can be executive partner or any other delegated private fund management institution); management method; extent of power of fund operator; calculation and payment method of management fee

9

Trusteeship

name of trustee or authorization scope on the trusteeship made by all partners to executive partner(s) under trusteeship mode; safety measures for fund assets and dispute resolution mechanism under non-trusteeship mode

10

Participation and withdrawal, transfer of partnership interest and identity change

Conditions, procedures and relevant responsibilities of participation and withdrawal, transfer of partnership interest and identity change; procedures on interconversion between limited partner(s) and general partner(s)

11

Investment matters

scope/operation method/limitation/decision-making procedures of investment; identification criteria of affiliates; evading system relating to investment of affiliates; sustained post-investment supervision/investment risk prevention/investment exit of invested enterprise; guarantee measures/leverage/guarantee limitations on invested enterprise

12

Income distribution and loss allocation

principle and execution method thereof

13

Tax assumption

relevant matters thereof

14

Costs and expenses

accrual principles, scope of expenses borne, calculation and payment method of expenses thereof partnership enterprise as well as such expenses to be borne by general partner(s)

15

Financial and accounting rules

bookkeeping, fiscal year, audit, annual financial report, conditions for access to accounting book, etc.

16

Information disclosure

content, method and frequency thereof

17

Termination, dissolution and liquidation

conditions of termination and dissolution; liquidation procedures; liquidator and condition of its appointment; repayment and distribution

18

Revision of partnership agreement

causes and procedures thereof

19

Dispute resolution

Methods of dispute resolution

20

Conformity

prevailing of content of partnership agreement in case of its inconformity with content of the other agreement(s) or documents among partners; prevailing of content of filed partnership agreement in case of inconformity between/among different versions of partnership agreements

21

Backup of fund units information

fund units information being backed up by fund operator, fund units registration authority or the other fund units registration obligators

22

Report of disclosed information

disclosed information being backed up by fund operator or the other information disclosure obligators

 

 

Closing

 

With China’s easing away of legal barriers on foreign-invested private fund management entities and with the formal implementation of Fund Contract Guidelines, we firmly believe that more and more overseas financial institutions will grab China’s Private Fund Management Market which may boost relevant industries. Meanwhile, with the formal implementation of Administrative Measures for the Fundraising by Private Investment Funds on July 15, 2016, it can be expected that more relevant feasible laws and regulations will be continuously published to better regulate private fund industry of China. Therefore, it will be of vital importance for such overseas financial institutions to pay close attention to the latest laws and regulations for more smooth and efficient investment in China.

 

 

Chambers Yang  chambers.yang@dentons.cn

 

Senior partner at Dentons Shanghai with more than 20 years of professional experiences. Chambers has been award as “Recommended Lawyer” by Asia Pacific Legal 500 and Asia Law Profiles for many years, and has been shortlisted for Finance Monthly’s 2016 Award on Corporate Lawyer of China. In addition, he is Qualified Independent Director for listing company, Off-campus Supervisor of Law School of Fudan University and Off-campus Post-graduate Supervisor of East China University of Politics & Law. Chambers specializes in Corporate, Investment, M&A, PE/VC, Real Estate and Construction, TMT, Intellectual Property and Dispute Resolution of the aforesaid fields.

 

Laura Sun  sun.zhen@dentons.cn

 

Lawyer at Dentons Shanghai with more than 10 years of experiences on business operation before becoming a lawyer. She is proficient in bilingual communication and coordination and has acquired very rich knowledges and experiences on business operations. Laura specializes in Investment, M&A, PE/VC and Capital Market.

 

Dentons   www.dentons.com

 

Dentons is the world‘s first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index. The merger with Dacheng formed the world’s biggest law firm. Dentons’ global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in 141 locations serving 58 countries.

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