The Enforceability of Anti-Dilution Provisions in Private Placement Transactions in China

The execution and enforcement of anti-dilution provisions rely theoretically on a corporate legal regime that is capable of accommodating the issuance of preferred shares. To date, no Chinese legislative document, judicial interpretation or court ruling has provided explicit guidance on how a company could issue multiple classes of shares, including preferred shares, to different groups of shareholders. The concept of anti-dilution provisions, common in the western legal context, thus remains unfamiliar and largely without a secure legal foundation in Chinese law. However, anti-dilution provisions have been negotiated and adopted by founder shareholders and investors in many private placement transactions in China. Yet the lack of a secure legal foundation for these provisions casts considerable doubt on their enforceability. This article examines the most popular anti-dilution provisions used in China and considers several high-profile deals. It also analyzes the validity and enforceability of anti-dilution provisions under PRC law and proposes several courses of action to minimize the uncertainty of enforcing anti-dilution provisions in China