Defending foreign PE investments
| BY
clpstaff &clp articlesChina has become one of the most attractive markets for private equity firms. But when problems occur, what options do investors have to enforce their rights?
Foreign investors are pouring into China seeking opportunities to invest and get favourable returns. The supply of investors far outweighs the number of deals. This high pressure environment can lead to problems with investments.
A private equity investment in China involves foreign investors buying into a Cayman or British Virgin Islands (BVI) company, specifically incorporated for the purpose of the investment. Through a chain of wholly owned subsidiaries, the Cayman or BVI company controls the Chinese operating company by a controlling stake or controlling contracts. The length of the chain varies and typically comprises one or more offshore company, one or more Hong Kong company and a wholly foreign-owned enterprise (WFOE) in mainland China. All of these are shell companies for holding purposes.
Foreign investors rely on a series of contracts to protect their investment. The founders of the operating company, the management team and the chain of companies, all receive the investment and are contractually liable under certain circumstances.
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