The causes of legal risks usually include violation of relevant laws and regulations, breach of contract, infringement, failure to exercise the legal rights of the company, etc. Specific risks include debt default, contract fraud, blind guarantee, softening of corporate governance structure, weak supervision and failure to demonstrate the legal feasibility of investment. There are countless potential legal risks and economic losses.
First, the risk of legal status
There are two kinds of private placement, one is private equity investment and the other is private equity investment. The former refers to the non-public offering of investment in corporate equity, as opposed to the "public offering" of stocks; The latter refers to investing non-publicly raised funds in the secondary securities market. Private equity investment funds are relative to funds issued to investors (such as open-end funds).
Objectively speaking, the word "private placement" of "private equity investment fund" does give people a feeling of being illegal or wandering on the edge of the law, but in fact, private equity investment and financing only shows that it is an act of raising funds outside the open market, and it is not illegal or its legal status is unclear. Completely legal, recognized and supported by the regulatory authorities.
"Private fund" refers to "private securities investment fund", not "private equity investment fund". For domestic private equity investment funds, Securities Law, Company Law and Partnership Enterprise Law provide legal basis for their establishment, but the existing laws and regulations are still insufficient. In order to attract customers, most underground private equity funds have private commitments to customers, such as the security of deposits and the guarantee of annual returns, which are neither partnerships nor investments.
Second, the legal risk of the contract
Management contracts or other similar investment agreements signed between private equity investment funds and investors often contain provisions that are not protected by law, such as security of deposit and guaranteed rate of return.
In addition, the invalidation and improper conclusion of private equity investment agreements and the protection of trade secrets may also bring contract legal risks. The core result of negotiation between private equity investment fund and target enterprise is the conclusion of investment agreement, which is the basic legal document to determine the direction of private equity investment fund and the rights and obligations of both parties.
This process may involve three risks: first, the legal risk of failing to conclude a contract; The second is to keep the legal risks of trade secrets such as technical achievements involved in the negotiation process; The third is the legal risk of improper contracting. Strictly speaking, these risks are not contractual legal risks, but legal risks caused by incidental obligations.
Third, operational risk.
There are three main forms of private equity investment funds under the existing legal framework in China: one is contractual private equity investment funds formed through trust plans; Second, the enterprise industrial fund specially approved by the National Development and Reform Commission; Third, all kinds of investment institutions that appear in the name of investment companies and operate in the same way as private equity funds are in a state of lack of regulatory laws.
Although the operation of private equity funds in China does not conflict with the existing laws, there are no specific laws and regulations in the implementation process, which leads to the lack of unified views and practices between regulators and investors. Some bad private equity investment funds or fund managers violate the contract or the obligations of good managers, such as black-box operation, excessive trading, reverse operation, etc., which will seriously infringe on the interests of investors.
Four. Legal risks of intellectual property rights
If the project selected by private equity investment fund focuses on the core technology of the target enterprise, we should pay attention to whether there is legal risk in the intellectual property rights of the core technology. Legal risks related to intellectual property rights may exist in the following aspects:
1. All trademarks, service marks, trade names, copyrights, patents and other intellectual property rights owned or used by the target company and its affiliates;
2. List of authors, suppliers, independent contractors and employees involved in special technology development and relevant employment development agreement documents;
3. Non-patented proprietary products that do not apply for patents to ensure proprietary secrets;
4. The company's intellectual property registration documents, including domestic intellectual property registration certificate, provincial registration certificate and foreign registration certificate;
5. Trademarks, service marks, copyrights, patents and other documents that are being applied to the relevant intellectual property registration authority for registration;
6. Intellectual property documents that are being challenged or revoked by the intellectual property registration authority;
7. Intellectual property documents that need to be extended to the intellectual property registration authority;
8. Documents applying for cancellation, objection and reexamination of registered trademarks, service trademarks, copyrights, patents and other intellectual property rights;
9. Claims for refusal to register trademarks and service marks at home and abroad, including legal proceedings;
10, other agreements that affect the trademarks, service marks, copyrights, know-how or other intellectual property rights of the target enterprise or its affiliated companies;
The transfer of all trade secrets, know-how secrets and service inventions or other agreements to which the target enterprise and its affiliates are a party and which are binding on them, as well as agreements related to the intellectual property rights of the target enterprise or its affiliates or third parties.
In addition, the labor relationship between the entrepreneur and the original unit, the confidentiality of the original unit's proprietary technology and business secrets, and the agreement to abide by the prohibition of horizontal competition may all lead to intellectual property disputes.
Verb (abbreviation of verb) Legal risk of false investigation or wrong legal opinion by lawyers.
Once the private equity investment fund determines the target enterprise, it should hire professionals to conduct legal investigation on the target enterprise.
Because in the process of investment, the two sides are in the position of asymmetric information, so the role of legal investigation is to let investors know as much as possible about the real situation of the target enterprise before the start of investment, find out all the shares or assets of the target enterprise, and confirm whether the important information they have accurately reflects the assets and liabilities of the target enterprise, so as to avoid investment damage.
In private equity investment, the target enterprise is not listed, and the degree of information disclosure is very low. If investors want to master the detailed information of the target enterprise, they must conduct legal investigation to balance the unequal degree of information mastery between the two parties and clarify the risks and legal problems existing in the merger and acquisition.
In this way, the two sides can negotiate related risks and legal issues. The legal risks caused by false investigation by lawyers or errors in legal opinions in private equity investment are the legal risks faced by law firms, investment institutions, start-ups and other institutions as intermediaries.
If the due diligence is untrue, the intermediary agency will bear the corresponding legal responsibility; Investment institutions may suffer corresponding losses; And start-ups may bear corresponding legal responsibilities because the information provided is untrue.
Six, the legal risks of private equity investment funds after entering the enterprise.
Risks in daily operation: contract risk, illegal operation risk, and risks caused by excessive concentration of creditor's rights.
Legal risks caused by management: decision-making risk caused by defects in governance structure, accidental injury risk of employees, moral hazard of employees caused by imperfect rules and regulations, and debt risk caused by lax management of company seals.
The use of funds causes legal risks: investment cooperation risk, branch risk, lending risk and guarantee risk.
Seven. Legal Risks in Withdrawal Mechanism
The stock issuance and listing of the target company is usually the highest goal pursued by private equity funds. After the stock is listed, investors, as sponsors, can sell their shares in the enterprise or gradually sell them in proportion after a lock-up period, thus gaining great value and successfully withdrawing. There are two main ways of listing: one is direct listing, and the other is shell listing. The standard of direct listing is still relatively high for enterprises, so China enterprises are keen on backdoor listing. On the surface, listing by buying a shell can achieve the listing goal in a short time, without going through the formalities of restructuring and listing, and even avoid financial disclosure, tax payment and other supervision to a certain extent. However, from the actual situation, most of the shell resources of listed companies in China are "unclean", with many debt or guarantee traps and heavy burden of employee placement. If the shell buyer doesn't fully understand the history of the "shell" company, if he doesn't fully investigate the creditor's demand for debt, repayment date and part of the debt guaranteed by the listed company, there will be the risk that the creditor will acquire the assets of the listed company through legal means or split the equity acquired by the acquirer, and the enterprise will lose control. The exit mode of repurchase (mainly referring to the repurchase management of the original shareholders) is actually a special form of equity transfer, that is, the transferee is the original shareholder of the target enterprise. Sometimes, the management of an enterprise receives the equity of an investor, which is called "management buyback". Repurchase withdrawal of original shareholders and management is an investment guarantee for investors, which also makes venture capital integrate the characteristics of creditor's rights investment while investing in equity, that is, investors enjoy the equity in the enterprise after investment, and at the same time get creditor's rights protection from management or original shareholders. Repurchase failure is also the main legal risk of private equity investment fund withdrawal. The performance is as follows: the repurchase clause in the investment agreement is illegal when the private equity investment fund enters or the repurchase operation violates the Company Law and other laws and regulations.
For failed investment projects, liquidation is the only way for private equity investment funds to withdraw, and early liquidation helps investors recover all or part of their investment principal. However, there are still many legal risks in the bankruptcy liquidation procedure, including asset declaration, false examination, priority, exemption right, joint claims and debts, etc.