1955 Capital wins case against Chinese anchor LP
Cross-border technology investor 1955 Capital has emerged victorious in a legal battle with its Chinese anchor LP after a US court upheld an earlier arbitration ruling that the LP had no grounds for withdrawing from the fund.
1955, which was founded by Andrew Chung, formerly a general partner at Khosla Ventures, invests in US and Europe-based companies that address challenges faced by developing countries relating to energy, healthcare, food, agriculture, education and sustainable manufacturing. Establishing strategic partnerships in China is a common theme, following a playbook Chung devised while at Khosla.
The firm reached a first close of $200 million on its debut fund in late 2015, with Global Industrial Investment (GIIL), a subsidiary of Shanghai-listed property developer China Fortune Land Development (CFLD) putting up all the capital. Court documents indicate that GIIL agreed to commit the capital to two funds managed by 1955. Chung became acquainted with Wenxue Wang, CFLD's chairman, during his time at Khosla.
1955 immediately received a deposit of $80 million in escrow and started making investments. Portfolio companies to date include energy storage developer Gridtential, sustainable agrochemicals developer Crop Enhancement, and edible protein specialist Sustainable Bioproducts. Twelve months on from the first close, the firm was preparing for a second close when CFLD demanded that the funds be liquidated and its undeployed capital returned, citing breach of fiduciary duty by Chung.
Chung denied any wrongdoing. 1955 said in a statement on its website that CFLD's reasons for trying to pull out of the fund are still unclear. The firm speculated that CFLD needed the cash because it was facing a liquidity crunch. During that time, a number of Chinese LPs reneged on US fund commitments to redeploy foreign currency reserves in overseas projects as Beijing began to place restrictions on currency outflows.
With the sides unable to reach a resolution, and CFLD having defaulted on a subsequent escrow deposit, 1955 took the matter to arbitration in mid-2017. Given the circumstances, the second close on the fund never happened and the firm has spent the last three years augmenting its existing reserves with deal-by-deal co-investments from other institutional backers to build support for its portfolio, according to sources familiar with the situation.
The court documents list areas in which CFLD claim Chung fell short of his duties. These include failing to honor an agreement to invest in companies that would relocate to CFLD's industrial parks and making unauthorized changes to the limited partnership agreement. 1955 is alleged to have altered the default remedies in a way that would potentially see CFLD forfeit its entire fund interest in the event of a default. The LPA was signed on CFLD's behalf – as agreed – but not returned until nearly a year later.
In ruling that the investment contracts were still binding, the arbitrator vindicated Chung on all but one of the accusations of improper conduct. The changes to the LPA constituted a technical breach – though CFLD suffered no damages nor did the GPs benefit as a result of it – and 1955 had to pay $100 in damages. CFLD was ordered to pay 1955 around $9.3 million in costs and found to have acted in bad faith. Its obligation to invest the remaining $120 million of the $200 million commitment stands.
The Chinese company challenged the verdict, claiming the arbitrators "exceeded their powers," but it was upheld. CFLD is also seeking arbitration over claims Chung exceeded a remit that restricted 1955 to investments in mobile software and services and it has sued Chung and his wife in China for fraud. Chung denies these allegations. 1955 has asserted new arbitration claims of its own, citing CFLD's continued bad faith conduct in trying to impede the fund, violating confidentiality obligations, and interfering in 1955's relations with existing and prospective portfolio companies.
"Our portfolio companies have progressed well, and despite all of CFLD's efforts to frustrate our operations, we expect the funds' performance to be strong. Because we called a significant portion of investor capital into escrow upfront and have secured other LPs who continue to support us, we have ample funds with which to move forward," Chung said in a statement.
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