CHINA Trends and Developments Contributed by: Catherine Chen and Shaun Gao, Zhong Lun Law Firm
Creditor protections Stringent creditor notification requirements dur - ing capital reduction processes may further delay repurchase transactions, creating potential conflicts with the statutory six-month comple - tion deadline. The 2024 Company Law represents a para - digm shift in China’s corporate legal framework, emphasising enhanced creditor protection and increased shareholder accountability. For PE/ VC investors, proactive adjustments to due dili - gence protocols, transaction terms and portfolio management strategies are essential to mitigate emerging risks and capitalise on new opportu - nities, particularly regarding class shares and streamlined exit mechanisms. The Enforceability of Redemption Rights in China Unlike in other jurisdictions, redemption rights in China’s PE/VC investment transactions have emerged as a distinctive and contentious fea - ture, reflecting the unique challenges and regu - latory landscape of the domestic market. The following analysis examines their prevalence, implications and recent judicial developments. Market characteristics and structural features High prevalence and distinctive design Approximately 90% of Chinese PE/VC transac - tions incorporate redemption rights, with a sub - stantial proportion (up to two thirds) imposing joint and personal liability on founders through “put option” mechanisms. This contrasts mark - edly with US practice, where redemption rights primarily address liquidity concerns without imposing personal liability. Chinese redemption provisions typically require founders to person - ally repurchase investments with interest when companies fail to meet specified IPO or valua -
tion thresholds that trigger investors’ enforce - ment rights. Severe consequences for founders The enforcement of redemption rights has precipitated a significant increase in litigation against founders, with over 90% of cases nam - ing both the portfolio company and individual entrepreneurs as defendants. Many founders subsequently face asset preservation orders, travel restrictions and inclusion in China’s nation - al credit blacklist system, effectively precluding them from future entrepreneurial endeavours. Market drivers and systemic pressures IPO constraints and exit challenges The periodic suspension of domestic IPO approvals and increasingly stringent regula - tory scrutiny has left numerous start-ups with - out viable exit pathways, compelling investors to rely more heavily on contractual redemption mechanisms. Capital reallocation and policy imperatives With foreign investment declining substantially and increasing State influence over domestic fund allocation, PE/VC investors face mount - ing pressure to prioritise policy-aligned returns, often to the detriment of founders. Legal framework deficiencies The absence of comprehensive personal bank - ruptcy legislation in China exacerbates risks for founders, who cannot discharge investment- related liabilities through bankruptcy proceed - ings. Recent judicial developments In December 2025, a Justice of the Supreme People’s Court articulated that redemption rights or put options in PE/VC agreements must be exercised within six months following the occur -
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