**: Legal & Investment Public Platform
Introduction: Since the partnership type private placement naturally has the dual attributes of partnership and private placement, the statutory rights granted to limited partners by the Partnership Enterprise Law are also enjoyed by investors of this type. Specifically, the LP may have the right to file a lawsuit or arbitration against the project party in its own name for the benefit of the partnership based on the negligence of the executive partner (usually the manager or its affiliates) in exercising a specific exit right (such as the right to repurchase shares) from the underlying project.
In practice, after a problem arises in the underlying project, the executive partner of the partnership** is negligent in asserting rights against the underlying project party, which may be caused by various reasons. For example, the partnership** has no remaining funds to bear the costs of litigation or arbitration, and the executive partner and other LPs are unwilling to pay in advance; or the underlying project has been involved in many judicial cases and has been listed as a judgment defaulter, etc.
1. The legal basis of the "derivative lawsuit".
According to Article 68 (7) of the Partnership Enterprise Law, when the executive partner neglects to exercise its rights, the limited partners have the right to urge them to exercise their rights or file a lawsuit in their own name for the benefit of the enterprise.
Although the statute specifies that the procedure is "litigation", it does not expressly restrict the right of "derivative action" from being applicable to arbitral proceedings.
2. The initiating entity of the "derivative lawsuit".
The Partnership Enterprise Law does not specify that the subject of a "derivative lawsuit" must be all limited partners or any limited partner. However, from the perspective of judicial practice, LPs can initiate such litigation procedures alone.
It should be noted that in the case of multiple LPs, these LPs cannot jointly file a lawsuit or arbitration proceeding, but can only initiate legal proceedings separately.
In the case of multiple LPs, it may be considered that each LP may jointly entrust the main investor to file a "derivative lawsuit", and may jointly negotiate and share the litigation or arbitration costs, attorney fees, etc.
3. The object of the "derivative lawsuit".
Judging from the Partnership Enterprise Law and other legal provisions as well as judicial practice, if an LP files a "derivative lawsuit" against the underlying project party, the executive partner of the partnership may be listed as a co-defendant at the same time. However, it should be noted that due to the particularity of the arbitration procedure, the executive partner of the partnership** usually does not sign formal transaction documents with the underlying project party in its own name, so it will be difficult for the LP to add the executive partner of the partnership** as a co-respondent in the arbitration case.
However, in the case of LP's claims against the underlying project party in a "derivative lawsuit" (such as requiring the project party to pay the equity repurchase price to the partnership**), the adjudication authority will not normally support the joint and several liability of the executive partner to the partnership**, and may only order the GP to bear supplementary liability for direct expenses such as attorney's fees and litigation costs in individual cases. For details, please refer to this *** article: "The Way to Exit Investment: Can LP List GP as a Defendant and Hold Him Accountable in a "Derivative Lawsuit"? 》。
In addition, if a partnership** is actually FOF**, that is, the underlying investment mainly invests in other sub-projects, the object of the LP's "derivative lawsuit" of the partnership** in advance is mainly the relevant parties of the sub-**, such as the manager of the sub-**, which is significantly different from the "derivative lawsuit" directly filed with the underlying project party in terms of the basis of claims.
IV. Pre-litigation Preparation and Strategy: The Beneficiary Arrangement of "Derivative Litigation".
It should be noted that the "derivative lawsuit" ultimately takes the partnership ** as the beneficiary, that is, the project party needs to pay the repurchase money and other payments directly to the partnership**, but cannot pay directly to **, unless the parties reach a settlement or mediation in the case.
Therefore, it is recommended that before LP initiates such procedures, it should negotiate with the executive partner in advance and reach a written agreement that if the partnership** can finally obtain the payment, all of them shall be allocated to the LP on a priority basis (as well as the settlement of litigation fees, arbitration fees, attorney fees and other expenses paid by LP), and shall not be used to pay for partnership fees such as management fees; If ** custody is involved, the custodian should also be informed of such contractual arrangements, and if ** custody is not involved, consider whether a new partnership ** bank account controlled by LP should be established as a special account for future partnership ** collection; On this basis, LP will then consider paying the relevant expenses in advance to initiate the "derivative lawsuit" procedure. If the managing partner has "lost contact" or does not cooperate with the negotiation, the LP needs to consider the impact of the relevant provisions in the contract on the partnership after receiving the beneficiary payment.
In addition, if necessary, the LP should also consider removing and replacing the GP after initiating a "derivative lawsuit", so as to avoid misappropriation by the executive partner after the partner receives the beneficiary money, or the executive partner does not cooperate with the distribution of the money to the LP. (See below for details on the removal and replacement of GPs).
5. Pre-litigation preparation and strategy: supervise the GP to perform its duties
An important precondition for initiating a "derivative action" procedure is that the managing partner is negligent in exercising the relevant rights. Therefore, if LP plans to initiate a "derivative lawsuit", it needs to first urge the executive partner of the partnership to exercise the right to withdraw from the underlying project invested by **, including sending a letter to the underlying project party and initiating relevant legal procedures.
Although in a case, if the executive partner fails to initiate the relevant litigation or arbitration proceedings in a timely manner, the adjudication authority may find that the managing partner is negligent in exercising its rights, for the sake of prudence, it is still recommended that the investor first send a written letter to form a written record urging the executive partner to exercise the relevant rights within the grace period. If the managing partner does not take follow-up action, the investor will consider initiating a "derivative lawsuit".
For example, in a case consulted by a regular law client, a private equity ** invested in 4 foreign projects, and the conditions for the project party to repurchase equity were triggered according to the relevant investment transaction documents; Although the project companies have all replied that they are unable to perform the repurchase obligations, the authors believe that this does not prove that the founders of the project companies and other repurchase obligors have also lost their ability to perform. Moreover, when the case has expired, the manager did not take the initiative to claim any rights against the project party, and it was not until the investor made a request to the project party that the manager sent a letter to the project party, and no litigation or arbitration proceedings have been initiated so far. Therefore, the author suggests that the ** investor should send a letter to the ** manager before initiating the "derivative lawsuit".
6. Pre-litigation preparation and strategy: Obtain the underlying project information
Since the "derivative lawsuit" filed by LP against the underlying project party actually involves the legal relationship between the partnership** and the underlying party. Therefore, for the purpose of subsequently initiating relevant litigation or arbitration, LPs need to grasp the investment documents and materials of the underlying project of the partnership** investment in advance, especially the shareholders' agreement and supplementary agreement, external payment vouchers and other rights basis documents. If there is still a good relationship between the LP and the GP, the LP should ask the GP for relevant information as much as possible.
In the event of a "thunderstorm" or "loss of contact" of the private equity manager, LPs may also consider collecting information from the custodian bank. Due to the need to execute investment orders, etc., the custodian bank may have a lot of ** investment information. According to the contract or escrow agreement, LP may try to require the custodian to disclose the transaction documents of the foreign investment and the payment details of the escrow account.
This also has an enlightenment for LPs, that is, it should be noted in advance that it is clearly stipulated in the ** contract and other documents that the GP has the obligation to disclose to LP in a timely manner the relevant agreements and other materials related to the underlying project of the partnership** investment, so as to prepare for the needs of LP's future "derivative lawsuits".
7. The issue of the choice of strategy to initiate a "derivative lawsuit" or to directly claim compensation from the manager first to the underlying project
On the one hand, "derivative litigation" naturally has the following disadvantages, which need to be carefully considered by LPs when choosing a specific litigation strategy:
1) The beneficiary is the partnership** itself, not the limited partner itself;
2) If there are many underlying projects invested by the partnership, LP needs to initiate a separate legal procedure of "derivative lawsuit" for each underlying project, which is time-consuming and laborious;
3) LP needs to collect the investment documents and other evidence materials of the partnership** for the underlying project, and if the manager GP or custodian does not cooperate in providing them, it will affect the LP's initiation process and evidence;
4) LPs are required to pay the relevant litigation or arbitration fees, attorney fees, preservation fees and other expenses in advance.
On the other hand, if LP initiates legal proceedings against the underlying project party first, it may affect LP's claim against the ** administrator GP at the same time. Because, if LP files a claim at the same time, the ** manager GP can argue that the underlying project involved in the lawsuit has not yet been concluded, and the loss of the partnership cannot be determined, let alone the actual loss of the ** investor.
Of course, filing a "derivative lawsuit" first will also have the following advantages:
First, if it is finally determined that the project party has no property available for enforcement or that the project company has gone bankrupt and liquidated through the "derivative lawsuit" procedure, these facts can in turn be used to prove that the investor's actual losses have objectively occurred. At this time, LP will file a claim against the ** administrator GP, which will have more advantages in determining the actual loss.
Second, the manager's own financial strength may be limited, and there are fewer fixed assets or other assets available for execution compared with the underlying project, and even if the LP claims first, the final manager may not be able to pay the huge amount of claims; If the underlying project still has assets such as land, real estate, and equipment, it may have the opportunity to obtain the payment through the auction of assets in the specific implementation stage.
Therefore, it is recommended that investors consider whether to file a "derivative lawsuit" first, or to claim compensation from the ** manager GP first, or wait for the implementation result of the "derivative lawsuit" to be clear before filing a claim lawsuit.
end-For more practical content, please pay attention to the "Law and Investment" public platform.