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Shenzhen Capital Group Co., Ltd. (Shenzhen Capital) has launched numerous buyback lawsuits against its invested companies? The Paper has learned exclusively from relevant sources that this is a case of Shenzhen Capital seeking buybacks through legal channels for a small number of projects, mainly because the fund's operating period expires and it needs to exit.

On July 23, The Paper found on the Shenzhen Sunshine Procurement Platform that Shenzhen Capital Group has intensively increased the number of litigation legal service procurement bidding announcements in the past year. Starting from May 9, 2023, Shenzhen Capital Group has intensively issued dozens of litigation legal service procurement bidding invitations. According to incomplete statistics from The Paper, from May 9 to July 23, 2023, Shenzhen Capital Group added a total of 34 litigation legal service procurement biddings, of which 16 were added from May 9, 2023 to the end of 2023, and 18 were added from the beginning of 2024 to July 23. The Paper noted that among the 34 litigation legal service procurement biddings, 30 involved repurchase lawsuits between Shenzhen Capital Group and invested enterprises.

As for the dozens of newly added legal service procurement tenders, relevant sources revealed to The Paper that the procurement tender project was established for compliance management requirements and does not mean that actual litigation has occurred. Shenzhen Capital Group has been engaged in the venture capital industry for 25 years and has invested in more than 1,500 companies. This time, only a few projects have been launched for legal service procurement projects.The claim for repurchase through legal channels is usually due to the expiration of the fund's operating period, the fund investors (LPs) requesting to exit, and the fund managers performing their duties and responsibilities to claim repurchase and safeguard the rights and interests of fund investors. There are also individual companies that have serious violations that damage the rights and interests of shareholders, and the fund requests to exit in accordance with the agreement.”

Since April 2024, Shenzhen Capital Group has added a new invitation letter for bidding for litigation legal services procurement

Industry insiders said that repurchase clauses are common in equity investment agreements. Since most investments will sign repurchase agreements and the exit channels are not smooth, the number of equity repurchase disputes has increased in recent years. The usual conditions for triggering the repurchase right include the target company failing to meet the pre-set performance targets, the target company failing to successfully achieve an IPO within a period of time, and the target company encountering major events that lead to the transfer of actual control rights.

After sorting out, the reporter of The Paper noted that most of the repurchase lawsuits initiated by Shenzhen Capital Group were triggered by the failure of performance bets and listing bets. On July 22, Shenzhen Capital Group issued an "Invitation Letter for Procurement of Litigation Legal Services", stating that Shenzhen Capital Group invested 23 million yuan in the target company in 2020, and the repurchase clause was triggered because the company's combined net profit in 2020 and 2021 was significantly lower than the performance commitment, and the repurchase clause on listing was triggered at the end of 2023.

"In view of the fact that the company's performance has not met expectations for a long time, the repurchase obligor has not been able to provide a definite compensation or repurchase plan after the performance commitment and repurchase were triggered. Another investor shareholder of the company has initiated a repurchase lawsuit against the actual controller. We intend to protect our rights and interests through legal means." Shenzhen Capital Group wrote in the invitation letter for bidding.

On July 19, Shenzhen Capital Group issued an "Invitation Letter for Procurement of Litigation Legal Services". In the project overview, it was written that Shenzhen Capital Group invested 60 million yuan in the target company in December 2020. At present, the project has triggered a repurchase, the company's cash flow is extremely tight, and the performance bet with investors has been fully triggered. The content also shows that "we have communicated with the actual controller on the repurchase many times but have not reached an agreement. We intend to protect our rights and interests through litigation."

Litigation involving betting on listings is also similar. For example, on September 6, 2023, Shenzhen Capital Group's newly added "Invitation Letter for Procurement of Litigation Legal Services" disclosed that the purchaser (Shenzhen Capital Group) increased the capital of the target company twice in 2014 and 2017, and the agreed listing time of the target company was the end of 2020. During this period, the target company stated that it was preparing for an overall listing in Hong Kong, but there has been no progress so far. The target company has also raised funds many times in the past two years, but on the grounds of needing funds, it did not meet the purchaser's withdrawal requirements. During this period, the purchaser sent reminders many times to promote it but to no avail. After discussion by the team, it plans to file a lawsuit to promote the repurchase process through litigation.

The Paper noted that some projects have violated regulations that seriously damaged the interests of shareholders. For example, a new invitation letter for the purchase of litigation legal services on June 11 disclosed that due to the intentional acts of the founders and core team members of the invested companies, major internal control loopholes occurred, major violations of laws and regulations occurred, and major damages were caused to the invested companies and investors. There was a substantial triggering event of the repurchase right in the Shareholders Agreement. In order to protect its own rights and interests, Shenzhen Capital Group required the company and the main guarantor to repurchase all equity.

According to the official website, Shenzhen Capital Group was established in 1999 with investment from the Shenzhen Municipal Government and guidance from social capital. It currently has a registered capital of 10 billion yuan and manages a total of about 480.3 billion yuan in various funds. As of June 30, 2024, Shenzhen Capital Group leads the industry in the number of companies it has invested in and the number of companies it has listed on the stock exchange: it has invested in 1,822 venture capital projects (1,519 companies), with a cumulative investment amount of about 108.4 billion yuan, and has exited 599 investment companies (including IPOs). Among them, 268 investment companies are listed on 17 capital markets around the world (excluding the New Third Board). Shenzhen Capital Group currently manages 185 private equity funds, 16 mother funds, and 22 real estate funds.