Private equity (PE) deals are gaining importance in the world’s capital markets. As deal complexity increases, risk increases and disputes become more probable. Arbitration is often a good way of resolving the disputes, because of the strong enforcement backbone (afforded by the New York Convention, which obliges around 150 countries to enforce arbitration awards made in another Convention country), the confidentiality of the arbitration process, and the ability to choose arbitrators who have the necessary sophistication in the industry.
Shareholders’ agreements and joint venture (JV) agreements form the backbone of many PE transactions. Dr Michael Pryles, chairman of the Singapore International Arbitration Centre (SIAC), says: “International arbitration is ideally suited to resolving private equity disputes. There are arbitrators who have considerable experience and expertise in hearing shareholder disputes in a broad range of transactions, including joint ventures, where analogous problems to those experienced by private equity investors arise.” Leading international arbitrator Michael Hwang, SC, points out: “Private equity presents certain specialised problems which require experts in finance and investment law to resolve, and arbitration gives parties the opportunity to choose such experts instead of depending on national courts where such expertise is hard to find.”
Disputes with a Chinese dimension
PE deals involving a Chinese party may be distinguished from other international PE deals, and the difference gives rise to unique risk profiles. Robert Woll, Beijing managing partner at WilmerHale, observes: “China deals present a number of unusual structural elements – onshore and offshore deal structures differ and these both affect available remedies and determine how and whether arbitral awards can be enforced. And disputes are becoming more complex, often involving undisclosed bank debt, liens and other fundamental problems with assets of the portfolio companies.” Anthony Zhao, Shanghai managing partner at Zhong Lun Law Firm, offers a China law perspective: “When a foreign private equity fund directly invests in a Chinese target company, the transaction should be governed by PRC law. Normally such a transaction is aimed for A-share listing, and it will be further subject to CSRC listing rules. Foreign private equity funds would find more restrictions under the PRC legal regime, and therefore the deal terms should be carefully reviewed. Also, for a pure offshore transaction with the target company’s business operations largely in China, while the transaction could be governed by a foreign law, it would be crucial to get at the assets in China for enforcement, if there is any dispute.”
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Arvin Lee is deputy head (China) and counsel at the Singapore International Arbitration Centre. He can be contacted at +65 6221 8833 or at email@example.com