Disputes over fundraising failures of PE funds

If a private equity fund is not incepted due to a fundraising failure, or for any other reason at the subscription stage, disputes over upfront costs or any other issues may arise between interested parties, of which there may be some concern about how the deposit is dealt with, and how the fundraising costs are shared, following the fundraising failure. This article will provide a brief analysis on these disputes by looking into two cases.

REFUND OF THE DEPOSIT

Case 1: A contract dispute between Lingshui Haifu Industrial (Haifu) and Nanjing Jianxin Industrial Investment Enterprise (Jianxin).

The facts: Haifu and Jianxin signed an investment co-operation agreement in connection with project financing, pursuant to which Jianxin would raise RMB150 million (US$23.8 million) as construction funding for a project of Haifu, and Haifu would have the right to terminate the co-operation if Jianxin failed to obtain the funding agreed for Haifu within 60 days.

All upfront costs, including costs incurred for gaining access to fundraising channels, were agreed to be paid by Jianxin as out-of-pocket costs on behalf of Haifu, provided that Haifu paid a deposit to Jianxin upon execution of the agreement. When it happened that Jianxin failed to obtain the funding within 60 days, disputes arose between the parties. Apart from liability for breach, the parties disagreed about whether Jianxin should refund the deposit, and if so, how much should be refunded.

Liu Hui is a partner and Wang Yubi is a paralegal at Boss & Young