CHINA Trends and Developments Contributed by: Ping Zhang, Xining Dai and Moxi Zhang, Zhong Lun Law Firm
• a duty for the board to demand unpaid capital contributions from shareholders; • joint and several liability of directors for share - holder withdrawals of capital; • liability for directors involved in illegal capital reductions; and • compensation liability for third parties where directors act with intent or gross negligence in performing their duties. These provisions increase the legal exposure of fund-appointed directors on portfolio company boards, prompting investment funds to nego - tiate board seats more cautiously. Protective measures such as director indemnity letters and directors’ and officers’ (D&O) liability insurance are likely to become more prevalent. Accelerated maturity of capital contributions Under the new Company Law, if a company cannot repay due debts, creditors are entitled to demand the accelerated maturity of unpaid capital contributions. This enhancement of cred - itor protections imposes stricter operational and technical requirements on PE funds involved in the acquisition and restructuring of distressed enterprises. The new Company Law reflects a clear shift towards stricter oversight, enhanced creditor rights and more robust governance. For PE funds, this necessitates more sophisticated legal, operational and risk-management strat - egies to navigate the evolving regulatory land - scape. Impact of the 2024 Guidelines on the Operation of Private Securities Investment Funds On 30 April 2024, the AMAC issued the Guide- lines for the Operation of Private Securities Investment Funds (the “Operation Guidelines”).
These guidelines aim to establish a unique operational framework for private securities investment funds within the regulatory structure introduced by the Regulation on the Supervision and Administration of Private Investment Funds (2023). Distinct from public securities funds and PE funds, the guidelines are tailored to the charac - teristics of private securities investment funds. The following highlight the key impacts of the Operation Guidelines. Redemption restrictions Unlike public securities funds, private securities investment funds cannot offer daily redemption. Instead, they must impose a minimum three- month lock-up period for fund shares or include a short-term redemption fee arrangement tied to the holding period, as stipulated in the fund agreement. Diversification requirements Private securities funds are generally required to adopt diversified investment strategies. For instance, a single fund’s investment in any single asset must not exceed 25% of its net assets. However, funds meeting specific conditions may be exempt from these limits. Leverage and derivative transactions The total assets of a private securities fund can - not exceed 200% of its net assets. Funds are prohibited from using over-the-coun - ter (OTC) derivatives or other instruments to cir - cumvent leverage restrictions or engage in OTC margin financing. The Operation Guidelines introduce detailed and practical requirements for private securities funds engaging in OTC derivative transactions.
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