Authored by Jeremy Dai (, George Zhang (

QWhat are the typical post-investment disputes in China?

AIn our experience, post-investment disputes in China could be classified as the following categories:


Type of Disputes

Reasons for the Dispute

Fight for Control

Ÿ  Fight between Founders and InvestorsGome Vs. Bain Capital, SAIF Vs. NVC Lighting

Ÿ  Fight among Founders

Ÿ  Fight within Founder FamilyZKungfu and Tudou case

Performance Adjustment and Redemption

Ÿ  Validity of Domestic Performance Adjustment Clause

Ÿ  Triggering Events of Performance Adjustment and Redemption

Ÿ  Obligor of Performance Adjustment and Redemption

Ÿ  Suspension of Performance Adjustment and Redemption Clauses for IPO purposes

Ÿ  Method of Payment and Collateral Arrangement

VIE Structure Controversy

Ÿ  Compliance Issue of VIE Structure

Ÿ  Effectiveness of VIE Structure (Alipay controversy

Other Dispute Types

Ÿ  Criminal activities of Founder

Ÿ  Change in Law resulting in material adverse impact

Ÿ  Nominee shareholder dispute

Ÿ  Breach of reps and warranties

QWhat are the reasons for disputes related to performance adjustment and redemption clauses? How to solve such disputes?

ADisputes could arise with respect to the validity of performance adjustment and redemption clauses, as well as their implementation.

  • In the Haifu Investment case, the PRC Supreme Court upheld the validity of the performance adjustment clause between founders and investors, but nevertheless invalidated the same clause between the invested company and investors by citing potential negative harm to the interest of other shareholders and creditors. In reality, performance adjustment may not be implemented due to founders’ lack of sufficient assets. Moreover, if a founder is required to gift transfer certain shares to the investors, such change in equity interest could cause unstable shareholding structure in the company and hence could negatively affect the company’s IPO. In an onshore investment structure, investors are typically required to waive or suspend their performance adjustment rights pending the company’s A share IPO. In case the IPO does not go through, it remains uncertain whether the investors’ performance adjustment rights could be restored.
  • Redemption would typically be triggered in case of failure of a qualified IPO or a material breach of definitive agreements by the company and/or the founders.  A domestic company redemption, however, is subject to various restrictions under the PRC Company Law and could face the burdensome procedures related to capital reduction.  A founder redemption could be commercially unfair to the founder if the founder is required to redeem all the shares of the investors giving the fact the founder only holds a certain percentage of shares in the company. A redemption could also be affected if either the company or the founder does not have sufficient cash to finance the redemption. In such case investors may need to consider an installment payment and certain collateral arrangement to secure such redemption payment.

QWhat kind of risks would a foreign investor face under VIE structure? How to avoid such risks?


  • The primary risk for a VIE structure is its compliance issue although the PRC authorities’ attitude remains vague at this stage. In practice, we have seen arbitration awards invalidating the enforceability of various control agreements under and VIE structure.
  • A VIE structure could also negatively affect the invested company’s IPO initiative. For purposes of Hong Kong IPO, HKEx has exercised much more stringent review standards towards a VIE structure IPO listing by adopting the so-called “HKEx Listing Decision (HKEx-LD43-3)”. Rumors have spread that China’s securities regulatory watchdog, CSRC, may impose fresh approval requirements over offshore IPO of applicants using a VIE structure.
  • A VIE structure may not guarantee foreign investors’ sufficient control over the domestic operating company. Under a VIE structure, typically investors do not have direct equity interest in domestic operating company or the WFOE, and they are not legal representatives of these onshore companies, nor would they hold the company seal, conseq