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【 Investor Education 】 Analysis of the Legal Regulations for LP to Exit Partnership Private Equity Funds

2023/08/24

With the continuous development of China's private equity fund business, the exit mode of private equity fund limited partners (hereinafter referred to as LPs) has attracted increasing attention. The exit of LPs from private equity funds is divided into two ways: transfer of partnership shares and direct withdrawal, and this article briefly analyzes the key points in the exit process of limited partners of partnership private equity funds based on relevant laws and regulations.

Transfer of limited partner property shares

(1) General provisions on the transfer of limited partners

In the daily operation of partnership private equity funds, one of the main ways for LPs to exit the partnership is to transfer the property shares of the partnership. The provisions of the Partnership Law on the transfer of LP property shares are mostly expressed in principle, so the provisions of the limited partnership agreement often determine the specific arrangements and procedures in practice.

According to Article 73 of the Partnership Law, "a limited partner may transfer its share of property in a limited partnership to a person other than the partner in accordance with the provisions of the partnership agreement, provided that the other partners are notified <> days in advance." It can be seen that, unless otherwise agreed in the partnership agreement, the limited partner does not need the consent of the other partners to transfer their shares, but the other partners should be notified <> days in advance.

(2) Relevant provisions on the transfer of state-owned LP shares

1. Decree No. 32 stipulates the share of state-owned LPs

In June 2016, the State-owned Assets Supervision and Administration Commission (SASAC) issued the Measures for the Supervision and Administration of State-owned Asset Transactions of Enterprises (hereinafter referred to as Order No. 6), which is the most important external requirement in state-owned asset transactions. In April 32, the State-owned Assets Supervision and Administration Commission (SASAC) responded to the question on its website, "Does a wholly state-owned company have to enter the market to transfer its share of private equity funds?" The reply was that "the "Measures for the Supervision and Administration of State-owned Assets Transactions of Enterprises" regulates the situation of corporate enterprises. The disposal of the shares of the limited partnership held by state-owned enterprises is not within the scope of Order No. 2022, and it is recommended that the working procedures such as decision-making approval and asset appraisal and filing be carried out in accordance with the internal management system of the enterprise. Therefore, Order No. 4 does not mandate the transfer of partnership shares of private equity funds held by state-owned enterprises to be carried out in accordance with the general state-owned asset transaction procedures, giving certain flexibility in handling.

2. The funds invested by state-owned LPs are shareholders of listed companies

According to Article 36 of the Measures for the Supervision and Administration of State-owned Equity of Listed Companies (hereinafter referred to as Order No. 78), "a limited partnership funded by a state is not recognized as a state-owned shareholder, and the supervision and administration of the shares of the listed company held by it shall be stipulated separately." "It can be made clear that limited partnership funds are not recognized as state-owned shareholders of listed companies. State-funded limited partnerships are not recognized as state-owned shareholders of listed companies, so some industry views believe that until the relevant regulations or detailed rules of the regulatory authorities are promulgated, the transfer of state-owned LP shares of relevant partnerships is still based on internal management regulations such as the Partnership Agreement.

3. State-owned LPs are government asset industry funds

According to Article 21 of the Interim Administrative Measures for Government Investment Funds, "when government capital is withdrawn from an investment fund, it shall be withdrawn in accordance with the conditions stipulated in the charter; If there is no provision in the articles of association, a qualified asset appraisal institution shall be hired to evaluate the capital contribution rights and interests as the basis for determining the exit price of the investment fund." At present, there are different views in the industry on whether the above 21 articles can be applied to the transfer of property shares of partnership industrial funds, and if so, the transfer of shares of such government assets industry funds by LPs can be carried out in accordance with the relevant provisions of the partnership agreement of the fund.

(3) Special requirements for the transfer of shares of state-owned private equity funds in the new regulations in Beijing, Shanghai and other places

In June 2021, the Beijing Municipal Financial Regulatory Bureau and other departments jointly issued the Guiding Opinions on Promoting the Pilot Work of Equity Investment and Venture Capital Share Transfer (hereinafter referred to as the "Beijing Pilot Opinions"), becoming the first guiding opinions on fund share transfer transactions in China, and using the Beijing Equity Exchange Center as a trading venue to support the transfer of various state-owned fund shares. In February 6, the Shanghai Municipal State-owned Assets Supervision and Administration Commission (SASAC) issued the Measures for the Supervision and Administration of the Transfer of Shares of State-owned Private Equity and Venture Capital Funds in Shanghai (Trial) (hereinafter referred to as the "Shanghai Pilot Opinions"), using the Shanghai Equity Custody and Exchange Center (hereinafter referred to as the Shanghai Equity Exchange Center) as a transfer venue for the transfer of state-owned fund shares. The implementation of the pilot transfer of state-owned LP shares of private equity funds in Beijing and Shanghai is of great reference significance.

Paragraph 2 of Article 3 of the Beijing Pilot Opinions stipulates that "support the shares of various state-owned assets related funds (including but not limited to the shares of funds contributed by state-funded enterprises and their subsidiaries at all levels with actual control, and the shares of funds contributed by government investment funds at all levels) through the pilot transfer of shares of the Beijing Equity Exchange Center." For the shares formed by the capital contribution of the government investment fund that has not expired but has reached the expected target, after examination and approval by the competent department of the fund industry, the share transfer transaction can be carried out in the Beijing Equity Exchange Center. Where fund establishment agreements and other such have clear provisions or agreements on the transfer of fund shares, those provisions or agreements shall prevail. The Shanghai Pilot Opinions clarify the requirements for the transfer of state-owned shares within the supervision of the Shanghai SASAC, that is, the transfer of shares held by state-owned enterprises under the Shanghai SASAC system needs to be traded through the Shanghai Stock Exchange Center.

Combined with the strategic direction of the pilot experiments in Beijing and Shanghai, it can be found that: first, compared with Order No. 32, the pilot projects in the two places clarify the state-owned asset transaction procedures for the transfer of state-owned LP shares of private equity investment funds; Second, in terms of mandatory entry, it has evolved from the Beijing pilot in 2021 to the Shanghai pilot in 2022, where the shares of LPs held by enterprises supervised by the State-owned Assets Supervision and Administration Commission in Shanghai must enter the market.

(4) Other precautions for transfer

It is worth noting that the LP transfer process may face specific requirements in terms of business registration in practice. In some regions, the administrative departments for industry and commerce require that the industrial and commercial change registration document recording such changes need to be signed by the partners of the partnership enterprise (such as the partnership agreement, withdrawal agreement, confirmation of capital subscription, etc.) due to changes in the transfer of partnership shares. If other partners do not cooperate in signing the industrial and commercial change documents, there is a risk that the partnership will not be able to complete its industrial and commercial change registration. Therefore, for the transfer of LP shares, it is also necessary to confirm whether the other partners can cooperate in signing the relevant documents for industrial and commercial changes, otherwise the partnership may not be able to complete the industrial and commercial changes of the transfer of shares in a timely manner.

The limited partner withdrew directly

During the normal operation period of the fund, in addition to the transfer of shares, there are also statutory withdrawal (Article 45 of the Partnership Law) and ex officio withdrawal (Article 48 of the Partnership Law). In practice, the above withdrawal methods have certain difficulties in the actual operation process, which deserves attention.

(1) Statutory withdrawal

Article 45 of the Partnership Law stipulates that "if the term of the partnership is stipulated in the partnership agreement, the partners may withdraw from the partnership under any of the following circumstances during the period of existence of the partnership:

1. The reason for withdrawal stipulated in the partnership agreement appears;

2. With the unanimous consent of all partners;

3. The reason why it is difficult for the partner to continue to participate in the partnership;

4. Other partners seriously violate their obligations under the partnership agreement.

In the case of Xu Guobing's withdrawal dispute with Huzhou Yiya Investment Management Partnership and Zhejiang Sitai Holdings Co., Ltd. heard by the People's Court of Deqing County, Zhejiang Province, the court held that the executive partner failed to perform relevant obligations to the partner, harmed the legitimate rights and interests of the partner, and should respect the choice of the retiring partner when the partner lost trust in him, lost confidence in continuing the partnership and proposed to withdraw from the partnership, so it supported the LP's withdrawal appeal.

In the above case, the successful withdrawal of the LP was based on the judicial determination, and the expression of the trigger conditions for the withdrawal in the law is easy to cause disputes among other partners. In practice, GPs may have greater disputes with LPs over whether the conditions for withdrawal are met, so in more cases, it is still necessary to clarify the specific circumstances in the partnership agreement to reduce disputes in the enforcement process.

It is worth noting that according to Article 159 of the Civil Code, "a conditional civil legal act that improperly prevents the fulfilment of the condition for his own benefit shall be deemed to have been fulfilled". If the investor's exit conditions are not fully met due to the manager's conduct, the court generally finds that the agreed exit conditions have been fulfilled and orders the parties to perform the relevant exit matters in accordance with the agreement. For example, in the case of Deng Zijun and Zhuhai Hengqin Lanjin Fund Management Co., Ltd. (GP) and Shanghai Zhang Chuangyuanyou Asset Management Co., Ltd. in a dispute over a debt assignment contract, the court held: "Although the conditions for the entry into force stipulated in Article <> of the Agreement are 'After this Agreement is signed by Parties A and B, it shall be submitted to Party C for approval and sealing. Bank of Shanghai then changed the registration procedures', but since the defendant GP, as the fund manager and the counterparty to the agreement, had agreed to the transfer of shares between the plaintiff and the defendant in the agreement, but did not take the initiative to go through the fund change registration procedures with the fund custodian, its behavior was 'the party unjustly prevented the achievement of the conditions for its own interests' as stipulated by law, and should be regarded as having fulfilled the conditions. If the managing partner fails to perform its due diligence obligations or duties as manager, the LP shall be allowed to withdraw from the partnership. ”

(2) Withdraw from the partnership ex officio

Article 48 of the Partnership Law stipulates that "a partner shall withdraw from the partnership under any of the following circumstances:

1. The natural person who is a partner dies or is declared dead according to law;

2. The individual is insolvent;

3. The legal person or other organization as a partner is revoked its business license, ordered to close down, revoked, or declared bankrupt in accordance with the law;

4. The law stipulates that the partner must have relevant qualifications and lose the qualification;

5. The entire property share of the partners in the partnership enterprise is enforced by the people's court.

In the case of a partnership contract between Wei Pu and Beijing Beishang Investment Fund Management Co., Ltd. heard by the Chaoyang District People's Court in Beijing, the Partnership Agreement stipulates that if the partner must have relevant qualifications as prescribed by law or agreed upon by the partners, and if the partner loses the qualification, the partner will of course withdraw from the partnership. In this case, the GP was disqualified as a private equity fund manager by the Asset Management Association, in accordance with the provisions in the Partnership Agreement, and the court held that the LP could withdraw from the partnership in accordance with the agreement.

Combined with the legal provisions and the above cases, it can be seen that of course, the expression of the conditions for partners to trigger the withdrawal of partners in the relevant laws of withdrawal is clearer and clearer than that of statutory withdrawal.

In practice, for limited partnership private equity funds, the Partnership Agreement and related provisions should be specific and clear, "starting with the end", and clearly stipulate the agreed conditions for the transfer and withdrawal of partnership shares in advance, so as to better protect their own rights and interests.

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