In private equity investment business, when an investment institution invests in a company it intends to invest in, in order to minimize its investment risks and ensure the predictability of its investment returns, it usually agrees on some special clauses with the target company, such as veto power, anti-dilution right, etc., and clearly stipulates them in the investment agreement between the two parties, which serves as the core legal document binding both the investor and the investee.

For different target companies, the key points that investment institutions focus on vary. In practice, the common special clauses adopted by investment institutions when making investments are as follows:

(I) Clauses Guaranteeing the Investment Institution's Operation and Management Rights

A company's financing activities often involve multiple rounds. If the early-invested institutions fail to take effective measures, their equity ratio or share in the company will be gradually diluted with the company's financing activities. Therefore, when making investments, investment institutions generally negotiate and communicate with the target company on their preemptive subscription right and anti-dilution right to ensure the stability of their shareholding ratio, and clearly specify these rights in the relevant investment agreements.

1. Veto Power

In private equity investment business, investment institutions usually do not obtain control over the target company when making investments, and thus cannot exert an absolute influence on the operation and management of the invested company. However, given their large investment scale, to prevent the target company from misusing the funds and ensure that the corresponding funds are used for practical purposes rather than being transferred or misappropriated by the actual controller through transactions, investment institutions often include a veto power clause in the investment agreement with the target company.

The so-called veto power refers to the right of the investor to veto certain matters of the shareholders' meeting resolution of the target company or certain matters of the board of directors resolution of the target company by the director appointed by the investor, which cannot be passed without its consent. For example, veto power is often applied to matters related to the fundamental interests of the company (such as merger, division, change of main business) or unconventional matters of the company (such as external guarantee, major external financing, asset disposal, etc.).

2. Financial Right to Know

The shareholder's right to know is the right of shareholders to understand and obtain information such as the company's business and financial situation. It is a statutory and fundamental right of shareholders, but the Company Law stipulates it in a relatively abstract manner, only making principled and general provisions. Therefore, to better protect the shareholders' right to know and facilitate investment institutions to effectively track and manage the target company in a timely manner, investment institutions usually clearly require the target company to provide them with monthly, quarterly and annual financial statements and financial reports in the investment agreement; for some major investment projects, investment institutions may even dispatch corresponding financial personnel or financial responsible persons to the target company to ensure and implement their financial right to know.

(II) Clauses Guaranteeing the Investment Institution's Investment Share and Investment Value

A company's financing activities often involve multiple rounds. If the early-invested institutions fail to take effective measures, their equity ratio or share in the company will be gradually diluted with the company's financing activities. Therefore, when making investments, investment institutions generally negotiate and communicate with the target company on their preemptive subscription right and anti-dilution right to ensure the stability of their shareholding ratio, and clearly specify these rights in the relevant investment agreements.

1. Preemptive Subscription Right

The so-called preemptive subscription right refers to the right of existing shareholders of the company to have priority in subscribing for capital contributions or shares when the company increases its registered capital. Investors' exercise of preemptive subscription right can effectively prevent the risk of a reduction in their equity ratio in the company due to the issuance of new shares by the company, and it is one of the anti-dilution measures for investors.

2. Anti-dilution Right

This clause is mainly designed to prevent the target company from raising funds at a price lower than that of the investor, which indirectly harms the investor's investment rights and interests. Anti-dilution mainly means that after the investment institution completes its investment, if the company raises funds at a reduced price in the future, the investment institution has the right to require the company or others to provide compensation to prevent the value of its held equity from being diluted.

(III) Clauses Guaranteeing the Investment Institution's Investment Income

For investment institutions, the main purpose of making equity investments is to obtain investment returns, realize wealth appreciation, and ensure the profitability of investments. Therefore, when making investments, investment institutions mostly take the realization of investment returns as their primary consideration, and clearly specify relevant clauses in the agreement to protect their investment income, mainly including the following types of clauses:

1. Preferential Dividend Right

Preferential dividend right mainly refers to the right of investors to distribute the company's net profit prior to other shareholders. Through this clause, on the one hand, it can ensure that investment institutions can recover their investments in the form of dividends; on the other hand, it can restrict the dividend distribution of the target company to prevent the original shareholders from cashing out and ensure that the funds are used for the company's operation.

2. Drag-Along Right

Drag-along right refers to the right that under certain conditions, if the investment institution agrees to sell the company's equity, other shareholders (including founding shareholders) shall also sell their equity. For investment institutions, the agreement on drag-along right, on the one hand, enables investment institutions to have a certain right to resell the company, adding an exit channel for investors; on the other hand, it can also increase the price bargaining chip for investment institutions to transfer equity, facilitating investment institutions to find other investors who intend to obtain control of the target company.

3. Liquidation Preference Right

Liquidation preference right refers to the right of investment institutions to distribute the remaining property of the company in accordance with the pre-agreed conditions prior to other shareholders when the company is liquidated. The agreement of this clause can ensure that investment institutions can recover part of the investment funds and reduce and control investment risks when the company's operation is poor or there is a major change in control right.

4. Performance Bet, Valuation Adjustment and Redemption Clauses

When investment institutions invest in the target company, they usually conduct an overall valuation of the company based on its current operating performance and future performance forecasts. To cope with and control the risk of valuation uncertainty, investment institutions generally conduct corresponding performance bets with the actual controllers or management of the target company, and adjust the valuation accordingly or trigger corresponding redemption or repurchase clauses according to the realization of future performance.