Fund contract overview
A fund contract is a contract or agreement between parties to a fund with equal status to regulate the rights and obligations between them in the fund's activities. The fund contract is one of the sources of law of the Securities Investment Fund Law, as it is binding on the parties involved.
The fund contract is a written document entered into by the fund manager, the fund custodian and the fund promoter to establish an investment fund and to clarify the rights and obligations of the parties to the fund. The fund contract is established when the investor pays for the subscription of fund shares, which indicates his or her acknowledgement and acceptance of the fund contract.
Main contents of the fund contract
The main contents of the fund contract shall include, at least.
(i) The rights and obligations of the fund shareholder, the fund manager and the fund custodian.
(ii) The procedures and rules for convening, conducting and voting at general meetings of fund shareholders.
(iii) The grounds and procedures for the dissolution and termination of the fund contract.
(iv) The manner of dispute resolution.
(v) The place where the fund contract is deposited and the manner in which investors may obtain the fund contract.
Formation of the fund contract
The fund contract is a form contract, the terms of which are drawn up by the fund manager and the fund custodian for the approval of the security’s regulatory authority under the State Council, and are not terms negotiated with the purchasers of fund shares. When raising a fund, the fund manager publishes the terms of the contract to the public and invites potential investors to join. In turn, investors need to go through three stages to purchase fund shares, namely subscription, confirmation and payment. Subscription refers to the act of the investor applying to the fund share issuer to purchase fund shares; confirmation refers to the act of the fund share issuer agreeing to the investor's purchase of fund shares; and payment refers to the act of the investor paying the money for the fund shares subscribed. According to the Contract Law, a contract is formed when a promise is made. A promise is an expression of the offeree's consent to the offer. For the purpose of a fund contract, the act of the fund manager publicly recruiting fund shares is an invitation to offer, the act of the investor requesting to purchase fund shares is an offer, the act of the fund share issuer confirming the investor's request to purchase is a new offer, and the act of the investor paying the sum of money for the fund shares subscribed is a promise. Accordingly, this article stipulates that the fund contract is formed when the investor pays the money for subscribing to the fund shares.
Entry into force of the fund contract
According to the provisions of the Contract Law, a contract established in accordance with the law shall take effect upon its formation. Where laws or administrative regulations provide that approval, registration and other procedures should be carried out to make it effective, they shall be in accordance with their provisions. The parties may agree to attach conditions to the validity of the contract. Contracts subject to conditions shall take effect upon the fulfilment of the conditions. If the fund raising period expires and the total amount of fund shares raised by closed-end funds reaches more than 80% of the approved size, or the total amount of fund shares raised by open-end funds exceeds the approved minimum total amount of fund shares raised, and the number of fund shareholders complies with the regulations of the securities regulatory authority under the State Council, the fund manager shall, within 10 days from the date of expiry of the fund raising period, engage a statutory capital verification institution to verify the capital, and within 10 days from the date of receipt of the capital verification Within 10 days from the date of receipt of the capital verification report, the fund manager shall submit the capital verification report to the securities regulatory authority under the State Council for fund filing and shall make an announcement. This indicates that, unlike ordinary contracts, the fund contract does not take effect when it is established. The requirements to be met by the fund raising as set out in the fund contract in accordance with this Law and the regulations of the security’s regulatory authority under the State Council are the conditions for the fund contract to become effective, while the fund filing procedure is a necessary procedure for the fund contract to become effective. Therefore, the fund contract can only enter into force if the fund offering meets the statutory requirements and the fund manager has gone through the fund filing procedures with the security’s regulatory authority under the State Council in accordance with the provisions of Article 44 of this Law. When a fund contract enters into force, it becomes legally binding and the parties to the fund contract shall enjoy rights, perform obligations and assume responsibilities in accordance with the agreement of the fund contract.
Legal consequences of a fund contract not coming into effect
Although the investors have paid for the subscription of fund shares and the fund contract has been established, the fund contract does not become legally binding on the parties to the fund contract when it cannot take effect because the fund-raising period has expired and the fund raising has not met the conditions stipulated in Article 44 of this Law and the fund filing procedures cannot be completed. The non-validity of the fund contract shall not be legally binding on the parties, but the parties concerned shall still bear the legal consequences of the non-validity of the fund contract. As the non-validity of the fund contract indicates the failure of the fund-raising act, which is an active act of the fund administrator, the legal consequences of the non-validity of the fund contract should not be borne by the purchaser of fund shares, i.e. the investor, but by the offeror of fund shares, i.e. the fund administrator. These consequences include
1,Bearing the costs of collection. The debts and expenses incurred as a result of the act of fund raising are not borne by the investors who purchased the fund shares, but are borne in their entirety by the fund manager with its inherent property. The debts and expenses referred to here include the fees for the approval of the fund offering application, the fees for hiring intermediaries such as accounting firms and law firms, the sales fees of the offering institution, the publicity and promotion fees, etc., as well as the debts borrowed to cover the above expenses.
2, Return of subscription monies and payment of corresponding interest. The fund manager shall, within 30 days after the expiry of the fund-raising period, return the actual amount paid by the investors for the subscription of fund shares in full, and shall also pay to the investors the interest loss on the paid amount, i.e. the interest on the deposit of the same period in the bank.
Termination of the Fund Contract
The fund contract is an agreement that stipulates the rights and obligations of the parties to the fund and may be terminated in the event of statutory circumstances or circumstances agreed by the parties. In accordance with the provisions of this article, the fund contract shall terminate if any of the following circumstances apply.
1,The fund contract term expires without extension The fund raising is a civil legal act, adopting the principle of autonomy of meaning, and the rights and obligations of the fund manager, the fund custodian and the fund share holders are agreed in the fund contract in accordance with the law. The duration of the fund contract is one of the elements that can be agreed by the parties to the fund contract according to the needs of the fund operation. When the duration of the fund as agreed in the fund contract expires and the parties to the contract do not extend the duration, the fund contract is terminated.
2, The termination of the fund contract decided by the general meeting of fund shareholders is a major matter involving the interests of all fund shareholders, and must allow the wishes of fund shareholders to be fully expressed, so the termination of the fund contract shall be decided by the general meeting of fund shareholders. In accordance with the relevant provisions of Article 71 of this Law, the early termination of the fund contract shall be considered and decided by convening a general meeting of the fund's shareholders. Article 75 of the Law further provides that a general meeting of fund shareholders shall be convened only with the participation of holders representing more than 50% of the fund shares; and that the early termination of the fund contract shall be approved by at least 2/3 of the votes held by the fund shareholders participating in the general meeting. Accordingly, the Fund Contract shall be terminated if the General Meeting of Fund Shareholders decides to terminate it.
3,If the duties of the fund manager or fund custodian are terminated and there is no new fund manager or new fund custodian to take over within 6 months In accordance with the relevant provisions of Articles 23 and 34 of this Law, if the duties of the fund manager or fund custodian are terminated, the general meeting of fund shareholders shall elect a new fund manager or new fund custodian within 6 months. If the General Meeting of Fund Shareholders fails to convene or elect a new Fund Manager or new Fund Custodian within 6 months, i.e. if no new Fund Manager or new Fund Custodian takes over within 6 months, then objectively the Fund will not be able to operate normally and in this case the Fund Contract will be terminated.
4, Other circumstances agreed in the fund contract This refers to the other circumstances of termination that can be agreed in the fund contract, in addition to the previous three statutory circumstances of termination of the fund contract. According to the principle of voluntary contract, the parties to the fund contract enjoy the right to voluntarily terminate the contract within the scope of the law, i.e. the parties to the fund contract can agree in the fund contract that the fund contract will be terminated when certain circumstances occur or certain conditions are fulfilled in the course of the contract performance. This is the case, for example, if the fund contract stipulates that the number of shareholders does not reach a certain number for a certain number of consecutive business days during the life of the fund, or that the net asset value of the fund falls below a certain amount for a certain number of consecutive business days. Therefore, the fund contract also terminates in other circumstances as agreed in the fund contract
