Preferred Stock Structure: Theoretical and Practical Issues of Implementation in Chinese Foreign-invested Enterprises

China's new Company Law increased possibilities for the adoption of a “preferred stock” structure. Such adoption would provide more incentives for private equity investments. However, there is no explicit two-class stock structure under China's corporate law regime. Practices are expected to vary at different authorities regarding how much deference will be given to the preferred stock provisions in the agreements with investors. The authors of this article endeavour to explore the practicality of incorporating the two-class stock structure within China's corporate law doctrines and interplay with other relevant segments of laws.^1/2 (In this article, the different types of foreign-invested enterprises (FIEs), i.e. Sino-foreign Equity Joint Venture, Sino-foreign Cooperative Joint Venture and Wholly-Foreign-Owned Enterprise, will be referred to as respectively EJV, CJV and WFOE.)

Stockholder Status between Founders and venture capital funds in Portfolio Companies

In most jurisdictions, the issuance price of the stock purchased by an institutional investor reflects the investor's perceived value of the portfolio company. Accordingly, the founders and investors have the freedom to set their relative equity interests in the company on the basis of such perceived value. It is not unusual for the founders' early contribution to be incentivised by a majority equity interest in a start-up company, thus encouraging the founders to pursue private investments.