The new Partnership Law was passed on August 27th, 2006, and will be implemented on June 1 2007. The most important amendments to the new law are reflected in four aspects: clarifying that legal persons can participate in partnership enterprises, establishing limited partnership system, increasing limited liability partnership system and increasing bankruptcy clauses of partnership enterprises. The revision of the new Partnership Enterprise Law will help to break many legal obstacles that hinder the development of venture capital in China, and will play an important role in supporting and promoting the development of venture capital in China. Based on the lawyer's practical operation, this paper discusses the risk impact of some provisions of the new law on venture capital activities and its countermeasures from the standpoint of limited partners and venture capital institutions.
First, legal persons and institutions are allowed to participate in the partnership, and the risk impact of partnership bankruptcy is allowed.
1. Shell enterprise: invincible soft armor of general partner?
The old partnership enterprise law does not allow enterprise legal persons to be partners, and the partnership enterprise shall not go bankrupt. The new "Partnership Enterprise Law" expands the establishment subject of partnership enterprises from natural persons to include natural persons, legal persons, institutions, social organizations and other organizations. These subjects can be general partners or limited partners according to law. The general partners are jointly and severally liable for the debts of the partnership, and the limited partners are liable for the debts of the partnership to the extent of their subscribed capital contributions (see Articles 2 and 3 of the New Law above). If the partnership goes bankrupt according to law, the general partner still needs to bear unlimited joint and several liability for the debts of the partnership (see Article 92 of the new law).
The limited partnership system is intended to build a platform for "capable people to dance with the rich". The rich (investors, venture capital institutions and "capitalists") are limited partners and bear limited responsibilities within the scope of capital contribution; Capable people (operators, "knowledgeable people") participate in enterprise management as general partners and bear unlimited joint liability for partnership debts. Under the framework of this system, because the general partner has unlimited joint and several liability for the debts of the partnership, it can avoid or reduce the common moral hazard problems of managers in corporate governance practice to some extent. According to the provisions of the new law that a legal person can be a general partner and a partnership enterprise can go bankrupt according to law, it is assumed that a capable person (operator or "insider") is not a natural person, but a shell company or another shell limited partnership enterprise is established as a general partner, or even the only general partner in the partnership enterprise. Then, when the partnership goes bankrupt, a capable person (operator or "knowledgeable person"). Obviously, this is not what limited partners and venture capital institutions want to see.
Therefore, if investors intend to set up venture capital institutions as limited partners in the form of limited partnerships, or venture capital institutions intend to invest in projects (start-ups) in the form of limited partnerships, they should require operators to directly serve as general partners as natural persons, rather than by setting up "shell enterprises" as general partners.
2. Conflicts of interest between limited partners and legal persons as general partners: whose directors are directors?
In foreign countries, legal person (company) as the only general partner has become a typical form of limited partnership at this stage. In this mode, the control of limited partnership is nominally in the hands of the legal person (company) as the general partner, but the manager of the legal person (company) may actually be part of the limited partner. Such a limited partnership has almost become a complete limited liability entity. On the one hand, the promoters are responsible for managing the company and then managing the partnership affairs, on the other hand, they enjoy the protection of limited liability as limited partners. This will not only help enterprises to avoid double taxation and fully enjoy the tax benefits of partnership enterprises, but also make full use of the limited liability protection provided by law for limited partners (see Liao Fan's "A Preliminary Study of American Non-corporate Limited Liability Enterprises"). (Annex I: Tax Preferences for Partnership Enterprises)
However, when the legal person (company) is the only general partner, there may be potential conflicts of interest between the legal person (company) and the limited partnership, because the shareholders of the company and the limited partners sometimes do not completely overlap. The resulting question is, should the directors and managers of legal person (company) give priority to the interests of shareholders of legal person (company) or limited partners? At first glance, the fiduciary duty of directors and managers to the company and its shareholders is not directly related to the fiduciary duty of the company to the limited partnership and its shareholders, and it is not clearly stipulated in our laws. However, foreign cases point out that directors and managers of a company not only have fiduciary duties to limited partnerships and limited partners, but also have higher fiduciary duties to shareholders of the company. When there is a conflict of interest between them, directors and managers must give priority to the interests of limited partnerships and limited partners.
When establishing a company (legal person) as the sole general partner, if the limited partner or venture capital institution is only one of the many shareholders of the company, it is necessary to clearly stipulate through the company's articles of association and partnership agreement that "the directors and managers of the company must give priority to the interests of the limited partnership enterprise and the limited partner", so as to provide a basis for properly solving the potential conflicts of interest between the legal person and the partnership enterprise in the future.
3. The risk that the limited partnership enterprise is not registered or established according to law.
According to Article 3 of the new Partnership Enterprise Law, wholly state-owned companies, state-owned enterprises, listed companies, public welfare institutions and social organizations may not become general partners. The practical problems are: first, it is not easy to distinguish which institutions and social organizations are "public welfare". If defined according to the scope of "public welfare undertakings" listed in the Public Welfare Donation Law, most public institutions and social organizations can be classified as "public welfare" units (see Article 3 of the Public Welfare Donation Law). Second, the new company law and Fuyi have different definitions of "wholly state-owned company". According to the new Company Law, "a wholly state-owned company" refers to a company whose sole shareholder is the state-owned assets supervision and administration commission (commonly known as "SASAC"); Under the husband's jurisdiction, the scope of "wholly state-owned companies" is wider, including companies established by state-authorized investment institutions or state-authorized departments. So, is it a "wholly state-owned company" under the new company law or can't Fu Yi become a general partner? If the above-mentioned unit becomes a general partner or even the only general partner in violation of regulations, what legal consequences will it lead to? Is limited partnership therefore not legally established? If the enterprise registration is wrong, or the limited partnership is not established according to law, and the limited partner mistakenly thinks that the limited partnership has been established, or mistakenly thinks that he is a limited partner, who will be responsible for the third party when dealing with the partnership? Wait, will limited partners or venture capital institutions be dragged into litigation by this series of ambiguous problems?
The way to cut the gordian knot is that investors and venture capital institutions, as limited partners, should suggest wholly state-owned companies, institutions and social organizations to join as limited partners. At the same time, limited partners and venture capital institutions should strengthen the supervision of enterprises when handling industrial and commercial registration.
Two, some legal issues about the provisions of limited partnership
1. Trust and dormant partnership: How can a limited partnership raise private equity within the upper limit of 50 partners?
In foreign countries, in order to meet the development needs of private equity funds, the scale of limited partnership has been greatly expanded at this stage, with dozens or even hundreds of limited partners at every turn, which is essentially different from the early manual workshop limited partnership. China's new "Partnership Enterprise Law" does not limit the number of partners for general partnerships, but for limited partnerships, the maximum number of partners shall not exceed 50, of which the general partner shall not be less than 1 person. If there are only limited partners, the enterprise shall be dissolved (see Articles 6 1 and 75 of the new law for the above provisions). The new law limits the number of partners in limited partnerships to prevent large-scale illegal fund-raising in disguise, but the adverse effect of this provision is that venture capital institutions will not be able to carry out large-scale private fund-raising activities. Then, can venture capital institutions effectively conduct large-scale private placement within the framework stipulated in Article 6 1 of the new law?
Because the new law does not limit the number of partners in general partnership, although venture capital institutions can establish limited partnership B by attracting investors to join general partnership A first, and then general partnership A as one of the limited partners, this scheme requires investors to bear unlimited joint liability for general partnership A first, which is obviously not attractive to investors. If investors first set up several limited partnerships with less than 50 employees, and then these enterprises set up a limited partnership together, the effectiveness of the "tax warehouse" of the limited partnership will be greatly reduced because of too many enterprise levels.
The solution to this problem is the trust method. According to China's trust law, the client can entrust his property rights to the trustee, who will manage or dispose of it in the name of the trustee according to the wishes of the client, for the benefit of the beneficiary or for a specific purpose. There are no more provisions on the qualifications of the trustee except that the trustee must comply with the relevant regulations of the State Council when engaging in trust activities in the form of a trust institution. Any natural person or legal person with full capacity for civil conduct can become the trustee as stipulated in the Trust Law (see Articles 2, 4, 19 and 24 of the Trust Law above). There is no limit on the number of clients in the trust law (but in practice, for specific trust matters, the trustee will generally take the initiative to limit the number of clients to less than 200). Another advantage of adopting the trust method is that once the property is trusted, it obtains independent legal characteristics, which is different from other properties of the client and the inherent property of the trustee. Except for a few limited circumstances, the trust property does not belong to the estate or liquidation property of the trustor or trustee, so it cannot be enforced, which makes the legal protection of the trust property much higher than that of other properties (see Trust Law 65438+ above). Therefore, venture capital institutions can conduct private placement of funds in the form of trust, and let other investors act as the trustor and entrust their funds to venture capital institutions for management and punishment.
The second solution is "anonymous cooperation". A dormant partnership refers to a contract in which both parties agree that one party will invest in the business operated by the other party in order to share its operating benefits and losses. Theoretically, dormant partnership is essentially a financing contract relationship, not a commercial subject. As long as the two parties reach an agreement, it can be established without registration, and the limited partnership is the commercial subject, which can be effectively established after registration. The similarity between dormant partnership and limited partnership lies in that both sleeping partner and limited partner are liable for the debts of the partnership only to the extent of their capital contribution, and neither of them enjoys the right of external representation and transaction execution. A dormant shareholder in a company can become a prominent shareholder by changing the industrial and commercial registration under certain conditions, but sleeping partner in a partnership cannot be required to become a prominent partner. Although the law of our country does not confirm the way of anonymous partnership, the above characteristics of anonymous partnership enable venture capital institutions to adopt the way of anonymous partnership, with a few investors as limited partners and other investors as "sleeping partners" to carry out large-scale private equity funds.
2. Safe Harbor Rule: How long can a limited partner reach out?
According to the traditional theory, as the consideration for enjoying the limited liability treatment, the limited partner shall not participate in the operation and management of the limited partnership enterprise, execute the enterprise affairs or represent the enterprise externally. However, with the emergence of thousands of limited partners and complex financing arrangements for large-scale limited partnerships operating across States, the legislation of some countries has also kept pace with the times. For example, the United States has successively added the "safe harbor rule" on the basis of the control theory, which makes it more difficult for creditors to prove that "limited partners control the operation of enterprises". Then, 200 1 legislation clearly stipulates that limited partners will not bear unlimited responsibilities when they participate in the management and control of partnership affairs, and so on, which gives limited partners more management rights to the partnership, making the rights of limited partners to partnership affairs closer to the rights of shareholders of the company.
Article 68 of the new "Partnership Enterprise Law" stipulates that a limited partner shall not represent a limited partnership enterprise without performing partnership affairs. Article 76 stipulates that if a third party has reason to believe that a limited partner is a general partner and makes a transaction with him, the limited partner shall bear the same responsibilities as the general partner for the transaction. At the same time, Article 68 lists eight categories of matters as "safe harbor" clauses. As long as the limited partner's behavior is not beyond the scope of these eight categories of matters, there will be no danger of assuming unlimited liability. It can be seen that China's laws strictly prohibit limited partners from participating in the internal management of enterprises, and the provisions in the "safe haven rule" are stricter than those in the United States. Then, in China, is there any way for limited partners to participate in the management of partnership affairs to a higher degree?
Although the new company law stipulates the system of denying corporate personality (that is, if shareholders abuse the independent status of corporate and evade debts with limited liability, which seriously damages the interests of creditors of the company, they shall be jointly and severally liable for corporate debts. See Article 20 of the new Company Law. In theory, it is also called "unveiling the corporate veil"), but this system is only applicable to corporate legal persons, and there is no such provision for partnership enterprises in law. Because China's legal system tends to the civil law system, and the written law is the tradition of the civil law system, the legislature makes laws, and judges use the so-called "syllogism" logical reasoning process to solve disputes according to the law, which strictly limits the judge's discretion and requires that disputes be solved in strict accordance with the existing rules. Therefore, under the civil law system, the creativity of judges is strictly restricted, and judges have no right to create before the law is amended. That is to say, before the partnership enterprise law formally establishes the "disregard system of corporate personality of partnership enterprises", theoretically speaking, judges cannot extend the "disregard system of corporate personality" in the company law to partnership enterprises.
Therefore, the author believes that if investors or venture capital institutions as limited partners want to participate in the management of partnership affairs to a higher degree, the relatively feasible way at present may be that the limited partners make full use of the provisions of the new law on allowing legal persons to participate in partnership enterprises and set up a "shell company" as one of the general partners to participate in the management of partnership affairs together with other general partners. At the same time, a detailed and clear agreement should be made in the partnership agreement on the exercise of the general partner's voting rights, stipulating that the partnership affairs can only be passed with the consent of the limited partner or the "shell company" controlled by the venture capital institution as the general partner.
Two, some legal issues about the provisions of limited partnership
3. Trust relationship: the standard to define the internal relationship between general partners and limited partners.
Generally speaking, the law of common law system thinks that the relationship between general partner and limited partner is a trust relationship. The general partner is in the position of trustee, and the limited partner is in the position of principal and beneficiary. As the party who controls, manages and dominates all the assets of the partnership, the general partner bears the fiduciary obligation to the limited partner, which is embodied in two basic obligations: loyalty obligation and care obligation, from which other specific obligations are derived. Under the framework of fiduciary duty, it is generally difficult for general partners to engage in activities that harm the interests of partnership enterprises or limited partners by designing complex legal forms or adopting other opportunistic behaviors (see Zhu Xiaochuan's Brief Analysis of Partner Relationship in Limited Partnership-Focusing on Trust Relationship in Anglo-American Legal System).
China's new Partnership Enterprise Law stipulates the responsibilities of partners (including general partners and limited partners) and partnership enterprises to the outside and to the third party, as well as the relationship between limited partners and partnership enterprises. However, the internal relations of partners are lacking except that general partners are not allowed to occupy positions, handle positions beyond their authority, prohibit competition or engage in illegal transactions (see Articles 96, 97 and 99 of the new law).
Due to the lack of strict restrictions on the behavior of general partners in the new Partnership Enterprise Law and the narrowness and limitation of the "safe haven rule" that limited partners can rely on in the new law, general partners can use their brains a little and adopt various uncomplicated ways, such as adopting "shell companies" as general partners; Conduct related party transactions; To provide guarantee for its related transactions with the partnership; Take this partnership as a partner of other partnerships; "Flying orders", deliberately giving up profit opportunities, and so on, damage, plunder, hollow out the interests of partnerships and limited partners, and evade their legal responsibilities.
In this regard, investors as limited partners or venture capital institutions as limited partners should learn from the provisions of the loyalty and care obligations of the general partners in the Anglo-American legal system, attach great importance to preventive measures in advance through the partnership agreement, specify and list the behaviors and matters that the general partners are not allowed to engage in as detailed as possible in the partnership agreement, and stipulate that when the general partners commit such illegal acts, the limited partners have the right to request to quit the partnership or ask the general partners to buy their share of property.