Based on the operational needs of private funds and the requirements of laws, private equity investment funds organized as partnerships (private funds) have various decision-making bodies or mechanisms in the form of “meetings” or “committees” that are used to wield certain functions and powers relating to the offering of, investment by, management of, divestment by and day-to-day operations of the fund, or, as a deliberation mechanism, used to discuss relevant matters of the fund and serve as the basis or reference for the decisions by the manager or general partner. This article takes a brief look at the necessity, form, functions, powers and objectives of the various meetings or committees commonly seen in private funds.
Commonly seen fund meetings. The meetings or committees of private funds mainly include the partners’ meeting, the investment committee and the advisory committee. Certain funds will have an external advisory committee (used to invite senior persons in the industry to serve as members and provide advice to the manager on the investments and operations of the fund. This is not a common arrangement in renminbi funds, and so is not included in this column).
With the exception of the partners’ committee that, pursuant to the Partnership Law and the Guidelines for Private Investment Fund Contracts No. 3 (Guidelines for the Mandatory Terms of Partnership Agreements), a partnership is required to have, the other committee and meeting mechanisms among the meetings mentioned above are not mandatory. Accordingly, with the exception of the partners’ meeting, the general partner and/or the manager of each private fund will decide whether to establish other meeting/committee mechanisms for the fund based on its business arrangements, and a decision not to establish such meeting/committee mechanisms does not affect the private fund’s statutory completeness, or the validity of its qualifications as an entity.
Partners’ meeting. The partners’ meeting is mandatory for a private fund. Pursuant to the above-mentioned guidelines, the conditions for the holding of, the procedures for, and the method of voting at partners’ meetings are to be specified in the partnership agreement. Although, in a private fund, it is the manager that exercises the fund management functions and powers, and the executive partner that exercises the functions and powers relating to executive partner matters, the partners’ meeting is not a mechanism that lacks the right to make decisions or to speak. Generally speaking, its existence is significant in the following three ways:
(1) As the means by which the partners are apprised of the operations of the private fund, the manager and executive partner will report to and exchange information with the limited partners on the operations and investments of the partnership through regular partners’ meetings.
(2) As the mechanism that makes the decisions on the private fund’s fundamental and basic matters (e.g., partnership objectives, term of operation, material adjustments to the investment strategy, adjustment of the private fund’s structure, conflicts of interest and connected transactions, taking out loans from, or providing security for, third parties, change or surpassing of investment limits, etc.), the general partner and/or manager will, for the sake of prudence and self-protection, generally present such matters to the partners’ meeting for a decision, given that such matters have a material connection with, and impact on, the investment objectives and interests of the private fund and the partners.
(3) In a crisis, as the partners’ means of self-protection, for example, in the event that the general partner or manager deliberately or out of gross negligence harms the rights and interests of the private fund and other limited partners, the partners other than the general partner can dismiss the general partner or replace the manager through the partners’ meeting so as to protect the fund’s and their own rights and interests.
Investment committee. The investment committee of a fund is generally comprised of the key persons of the management team and serves as the highest decision-making body that deliberates on the external investments and divestments by the funds under its management.
Generally, the manager will formulate relatively detailed rules of procedure for the investment committee, but the approach to disclosing the same in the partnership agreement of different funds varies quite substantially. Some managers opt to disclose the names of the members of the investment committee and its rules of procedure in great detail in the partnership agreement to reflect the transparency of its investment decision-making process.
Other managers opt not to reveal the investment committee mechanism or the specific rules of procedure of the investment committee in the partnership agreement, mainly on the following two considerations:
(1) During the life of the fund, there is a possibility that the manager will, for internal reasons, adjust the makeup of the investment committee or revise its rules of procedures, and if the investment committee’s members and rules of procedure are not specified in the partnership agreement, there is then no need to amend this agreement, thus maintaining the stability of the agreement; and
(2) The investment committee mechanism has a certain trade secret value, so the manager does not wish to include the same in the partnership agreement so as to not disclose the same to any other entity.
The above-mentioned disclosure approaches are mainly rooted in the style and preferences of the manager, and neither is better or worse than the other.
Advisory committee. Called the “limited partners’ representative committee” in some funds, the committee’s seats are generally allotted to the limited partners selected by the general partner at its own discretion (the main factors considered being capital contribution amount, importance, etc.).
Compared with the partners’ meeting, the advisory committee has fewer members, making it easier to convene and take decisions, with the attending members themselves being able to represent the opinions of the majority of the important limited partners and generally having extensive experience in the private fund field and being highly professional. Accordingly, some funds will opt to establish an advisory committee and assign certain matters that would normally be deliberated on by the partners’ meeting to the advisory committee for deliberation so as to enhance the private fund’s decision-making efficiency.
Chen Fang is a partner and Yang Xiaorui is an associate at Zhong Lun Law Firm
Zhong Lun Law Firm
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