In Chinese investment law, an investment agreement is an arrangement between a Principal and a management company, wherein the Principal provides funding to the management company such as to ensure the company is adequately capitalized.

The Principal funds the management company either by providing a subordinated loan, purchasing equity, or paying off the management company’s existing debt obligations. Chinese investment agreements typically provide for a minimum capitalization level or financial targets to be achieved by the management company. If the capitalization level or financial targets are not achieved, the Principal is obligated to provide a fresh capital injection. The rights under an investment agreement are also assigned to the company’s lenders. Therefore, these investment agreements serve a dual purpose, providing both a direct investment and security.

Comparative Law

In the United States, a special kind of investor agreement known as a Cooperation Agreement is used to coordinate the activities of independent shareholders or investors in a business. There is no similar practice in China, and the language and cultural confusion has resulted in numerous lawsuits and even white-collar crime prosecutions, such as USA v. Huawei (where the term “cooperation” was fraudulent as to nature of Huawei’s investment in Skycom).
The Huawei prosecution indicates that if a China-related transaction prominently features the word “cooperate” in English, the transaction should be immediately halted. The Huawei prosecution indicates that if a China-related transaction has significant appearances of the word “cooperate” in English, the transaction should be immediately halted for thorough due diligence, as the English-speaking party’s misunderstandings of the facts could amount to the presence of fraud or unlawful money laundering in the transaction.

Further Reading

See our comprehensive resources on China’s Foreign Investment Law. and an overview of FDI regulation in our Foreign Investment Law FAQ.

Translation Guide

See: 投资协议